Why the property credit crunch favours cash buyers

Priced-out buyers might be tempted to celebrate the slide in house prices. Agents such as Hamptons International and Blenkin & Co are reporting prices up to 15 per cent lower than the peaks reached last year, while both Halifax and Nationwide confirm that properties cost about 1per cent less than a year ago.

But just as the decline in the market has brought attractive properties such as the Grade II listed farmhouse in Minsterworth, near Gloucester, top, and the Surrey country house with staff quarters and a pool, bottom, within the reach of more buyers, the mortgage famine is forcing even the most creditworthy borrowers to reassess their ambitions. In just three months the number of mortgage products available to mainstream borrowers has slumped by half. With lenders no longer offering high multiples of annual earnings, and with large deposits demanded, 2008 is becoming the year of the cash buyer.

Such purchasers - who may have imported wealth from overseas, earned it in savvy real estate or business deals or done well from bonuses in years past - are among the few players in the market who are able to step in, negotiate hard and have what agents refer to as a “cheeky offer” accepted. It is thus almost exclusively the cash-rich who are able to take advantage of those 15 per cent price falls.

Most owners, who are slowly accepting that they can no longer command sky-high prices for their home, are choosing to stay put. Thus, those owners who are risking the adverse conditions are those who need to sell, according to Lucian Cook, director of research at Savills. With home loan applications now taking a month or more to process and fragile confidence boosting the proportion of failed transactions, sellers are well advised to go for a cash-rich buyer, even if their offer is meaner, just to secure a quick and easy completion. Mr Cook says: “These sellers want someone in a rock-solid position, and that is likely to be a cash buyer.”

Without the need to charm increasingly grumpy lenders, the wealthy can move swiftly. Noel de Keyzer, of Savills in Chelsea, says that in one recent hard-fought sale the buyer of a £13.5 million property was able to secure the deal by transferring a 10 per cent deposit within an hour and completing within two weeks.

It is in these higher reaches of the market that cash-rich buyers remain particularly active: it is thought that 70 per cent of buyers of homes worth £5million or more are cash buyers, which informs the predictions that such homes will hold their value best in this downturn. Louise Hewlett, a director of the Chelsea agency Ayleford International, says: “Anyone who is buying now is a cash buyer. In particular, Eastern Europeans are fuelling the top end of the market, while domestic buyers are sitting on the fence, aware that they could make more from their cash by investing it elsewhere.”

Robert Godfrey, head of country houses at Bidwells, says that the top end of the market in Northamptonshire is sustained by successful local entrepreneurs. He says: “It's often self-made wealth, whereas if you go into Oxfordshire you will find more inherited money.” Mr Godfrey says the regional market is less influenced by overseas money or dependent on the performance of the City, but some agents report some spillover. Tim Blenkin, of Blenkin & Co in York, says that cash-rich buyers tend to include those downsizers or young professionals who have sold substantial properties in the South and relocated. The cash-rich status of such regional buyers is largely undiminished for now, yet agents report that even those with substantial cash reserves are proving more frugal, and willing to back away from a deal, than in years past.

This reluctance to over-extend on the part of buyers, which now characterises the market in much of the UK, is causing many prospective purchasers to turn themselves into cash buyers. Property hunters are choosing to buy within the limits of their budget, Mr Godfrey says, often made up of the cash they have from the sale of their existing home.

But professional investors, who have a decade of buy-to-let experience behind them, are taking a braver approach. A few professional investors, with significant equity in their substantial portfolios, have emerged to snap up the more attractive auction properties, which includes new-build homes selling at an average discount of 26 per cent. Elsewhere, professionals with an eye on above-inflation rent increases are snapping up entire blocks of flats, which are being sold off by distressed developers.

As prices slide further, more of these professionals are emerging and taking advantage of their strong position, which allows them to strike advantageous deals with lenders. It is this easy access to credit that is one of the advantages that the cash-rich now share. Noel de Keyzer, of Savills, says: “A lot of people start off saying they are cash buyers but after they have completed, it turns out that they have borrowed some of the money. This is because they are able to borrow from lenders at not much more than the base rate of 5 per cent.”