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Cash Buyers in Driving Seat

May 2011

BOURNEMOUTH based property agents Bournecoast say that access to cash, rather than a lender, has become the key to buying a home

The market has seen a huge rise in the proportion of home buyers paying for their new homes in cash, compared to mortgaged.

The figures compiled by the Council of Mortgage Lenders (CML) show that in January 2011, nearly 40% of buyers did not need a loan to buy their home.

This means the proportion of cash buyers has more then doubled since 2005, when records began.

This in turn suggests the market is increasingly the domain of the cash-rich, with many other buyers shut out.

The BBC report that the number of cash deals being done in the housing market is historically high.

Simon Tebbutt, Property Investment Manager says, “In some regions, the proportion of cash buyers will be even higher.

"For example, in south-west England, I would say it is probably more like 50 to 55%.”

The people driving this trend are those who are downsizing and pocketing a profit from previous housing booms, divorcees benefiting from financial settlements, foreign settlers or expats returning to the UK," he says.

He believes cash buyers are investing in property because they see it as one of the few investments from which they can make money, whilst still using at the same time.

"Putting the money in a bank account may be safe, but with interest rates at such a low, you will realise a woeful return on it.” Simon says.

The CML compares its own lending figures with those from HM Revenue and Customs (HMRC), which records the total number of house sales over the same period.

Analysis of the two sources show that the total number of cash deals has been rising sharply since 2005.

Cash buyers have become an increasingly big force in the market, while lenders have tightened their loan criteria and asked for bigger deposits from borrowers.

At the end of the first quarter in 2005, when the figures begin, 16,457 homes were sold to cash buyers, equivalent to 15% of the market.  The beginning of this year, ie the latest figures, reveals there were 27,600 cash transactions, equivalent to nearly 40% of the market.

The Buy-to-let market is also booming.  The BBC give the example of a teaching assistant, aged 54, who paid £113,000 in cash for a two-bedroom apartment in Ashford, Kent as an investment.

She plans to rent the flat out so she has an income from it when she retires and is confident in her investment despite the recent fall in house prices.

Simon says the increase in cash transactions has both positive and negative implications.

"If there's cash coming in, no matter where it comes from, it will support the market," he says.

"Likewise, if you have a bigger slice of the market that's not dependent on debt, there's no risk of default on that 40%."

"The downside of this is that those without access to family money will be increasingly squeezed out of the market if this continues," he says.

The government says it recognises the problem and is taking steps to help by implementing the new First Buy scheme, under which they and house builders offer loans to help first-time buyers purchase newly built homes.

However, conflicting demands on lenders mean those looking to borrow to get on to the housing ladder are unlikely to see a significant easing any time soon.

There may be calls for increased mortgage availability but conversely, regulators are calling on lenders to hold more capital and be more risk-averse.

Simon highlights that, "A 90% loan requires lenders to hold around six to eight times more regulatory capital than a 60% loan; it therefore comes as no surprise that the rates of these are therefore much higher."

While the influence of cash buyers may be widening the gap between the classes, they are not just helping to prop up the housing market, but also the wider economy.

"It's not just estate and property agents who suffer when the housing market takes a downturn," Mr Tebbutt says.

"The housing market is often closely linked to the High Street economy as people use their increasing housing wealth to spend on white goods, second cars or home improvements.

"A healthy housing market makes for a happy High Street," he adds.

This in turn has led to a big increase in the private rented sector.  It would appear that we are heading in the same direction as the rest of Europe; ie. where we rent all our lives and people have their wealth tied up in investments other than their homes.

However, this raises the spectre of increased competition for the available rented properties, pushing up the level of rents.

"There is a desperate shortage of rental properties and the urgent need to build new housing in the UK," says Simon.

“Here at Bournecoast we have seen a shift in the amount of people wishing to rent. 

“We have many waiting tenants and several new properties ripe for investment, coming onto the market, which would be ideal for student lets and are suitable of netting approx £4,000 per month in rent.”

Bournecoast has been established for over 50 years and is still family run.  It prides itself in providing quality properties and recognising a good investment potential as they are also able to offer holiday lets on suitable properties to generate even more income. 

For more information on available investment opportunities and what makes a good investment, contact Bournecoast on 01202 437888 or www.bournecoast.co.uk.

Simon Tebbutt

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26 Southbourne Grove
Bournemouth
Dorset
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