Contact an Advisor
Request free Property Tutorial
Book a Seminar
Mortgage Quote
Property Valuation
Sell a property now
Ask a question

Sellers Packs, Much Needed Reform Or Unwelcome Interference?

HIP’S - Home Information packs or Sellers Packs as they are now called, are just around the corner. If everything goes to schedule then by June next year, in most cases, it will be illegal to sell a residential property without one. So what is a Sellers Pack, and why do we need them? And most importantly, what effect will their introduction have on the property market?

Before we answer with our opinion, one thing for certain is that the Sellers Pack will bring about a radical change to the market; according to most commentators out there, they will bring about some kind of crisis in at least the short term. The word crisis is an emotive one; on a comical level it conjures up images of Homer Simpson causing a China syndrome at the nuclear plant. On a more down to earth level, you may remember the terrible crisis that occurred when Mount St Helens blew her top in 1980, in a massive eruption that led to many people losing their lives and the devastation of the local landscape as these before and after pictures graphically illustrate.

The word crisis is indeed an emotive one so what does it actually mean?

The top part of the Chinese Ideogram for "Crisis" is the symbol for "Danger"

The bottom symbol represents "Opportunity".

So it could be said that Crisis = Danger + Opportunity. In the case of the Mount St Helens disaster there was immense human suffering which cannot be undone, but if you scrape beneath the surface there were also winners; for example one effect of the eruption was to uproot all the trees, strip them clean and send them into the river where they floated down to a local lumber yard who enjoyed the biggest bonanza in their history. The rebuilding process also created jobs and opportunities and two years after the eruption had taken place the area was enjoying an unprecedented economic revival. More recent disasters in New Orleans and the areas affected by the Tsunami have created devastation on a scale never seen in recent times but already it is possible to see regeneration taking place.

So how does this relate to the introduction of sellers pack? To answer this question, it’s useful to look at history of the property market, and anecdotally to other industries that have undergone change through regulation in the recent past. The property bubble of the mid-late 80’s is well documented, but less well known are the basic reasons why it occurred and how the market is fundamentally different now to the way it was then. The 80’s property bubble had its roots in the Rent Acts introduced by a Labour Government, which effectively ended the private rented sector and made it impossible for landlords to regain their properties from their tenants. Lenders would not lend and there was little or no interest in residential property as a long term investment. These acts were effectively reversed by the Housing Act of 1988 which introduced the Assured Shorthold Tenancy, allowing private landlords to once again buy property to let as an investment and regain possession of their property if needed. Initially this change went unnoticed because by then the 80’s bubble was in full swing, and prices were rocketing for pure supply and demand reasons; with no real rental market to fall back on, a growing population was left with no alternative other than to buy, strangers were getting together in groups to buy small flats, the prices of which spiralled out of control, and it was only a matter of time before it all ended in tears. All it needed was a catalyst to bring the whole house of cards down; that catalyst was the removal of double tax relief on mortgages for unmarried couples, a change that was advertised in advance, thereby giving a final boost to an already overheated market.

Of course once the market started to fall it kept going as we entered an economic recession; the by then growing rental market took up the slack of what was previously first time buyer demand. This great property party was paid for by the very people who were never invited, the first time buyers stuck in negative equity in small flats with growing families; it was only in the mid 90’s that lenders woke up to the fact that the only way to revive the market and release these people to move on was to allow them to keep their properties, rent them out and take out new mortgages on their next home. The recovery was underway, interest rates had fallen and would fall further, property prices were rising from a much more realistic starting point and most importantly of all there was now a pressure relief valve in place in the market, in the form of the private rented sector.

The lesson is that if you change the fundamentals of something then you change what it looks like as well, maybe not straight away, but if you understand the fundamentals then the relationship between cause and effect can be clearly seen. Another example of this is the regulation of the financial services industry as applied to the sale of savings plans, investments and pensions. Up to 1986 the pensions and insurance industry was unregulated, anyone could sell endowments and pensions without training, and at that time there were about 200000 people involved in the sale of these products working for nearly 200 insurance companies. Because of the high turnover of salespeople, the licensing and training regime imposed by the 1986 Act made it uneconomic to recruit new people into the industry, leading to the slow death of many of the companies and a catastrophic fall in the number of advisors. Nowadays there are only a handful of companies left in the market and only about 20000 active advisors.

One contemporary legend which has become almost accepted wisdom is that the pension crisis can be blamed on the Government, who somehow took away our pensions, and dishonest salespeople who ripped us off. This legend is a fallacy, the truth is a lot less popular and it’s this; apart from a few workers who spent their careers with one big company or the civil service, most people never had adequate pension provision. The wonderful final salary schemes you hear about that are being dismantled left right and centre were never able to afford their commitments based on today’s rules. When they were conceived they were able to pay for the huge benefits of the small numbers of people who stayed 40 years, by penalising the vast number of early leavers who didn’t, and who upon leaving received a tiny fraction of the benefits they would have been entitled to. The game was actually up on this strategy in the late 70’s when an EU directive made it clear that early leaver benefits had to be re-valued in line with inflation. This huge extra burden on final salary schemes was always going to be unaffordable in the long run; a fact that was disguised for a while by a booming stock market. However, as the markets tumbled the fundamentals had to be faced. There we are again, that word fundamentals, it just keeps cropping up, doesn’t it? Lucky for the Government there is always a scapegoat around and commission salespeople are always handy scapegoats whether they’re selling endowments, pensions or houses. The truth is out there but its made no easier to find by a press much more interested in sensationalism than the facts, and it makes a much better story to blame the Government and commission hungry salesmen for a crisis which really has nothing to do with either. It is really due to the age old problem of not being able to get a pint out of a half pint pot, or as a wise but down to earth financial advisor once put it ‘the peanuts in peanuts out’ theory of pension planning.

The thing about history is, it’s all in the past - so what about the future? What about Sellers Packs? Do they represent a dangerous opportunity, a brilliant and insightful reform or a highly compromised solution to a problem that is no longer really there? We believe it’s a combination of all these things; it won’t be the first time our lords and masters have shut the stable door firmly after the horse has bolted either. It happened in 1991 when the estate agency orders of that year, in an attempt to stamp out unfair estate agents contracts which had been abandoned in the previous two years, managed to re-introduce them as standard industry practice. When it comes to sellers packs we are supposed to believe that providing buyers with information up front will somehow speed up the sales process; it might well do so if it were not for the fact that most buyers need mortgages and it’s the mortgage that normally takes the longest time to come through. If you are buying in a chain it won’t matter if your buyer is ready, if you haven’t found a property to buy yourself; and to cap it all most of the information contained in the pack is now available online at the touch of a button.

Never mind, there is always the new home inspection report to fall back on; the buyer will be able to see a kind of survey on the property, and that will save time, won’t it? Probably not, as it is not yet clear if lenders will rely on this report and if they don’t the buyer will need their own survey anyway. What a waste of time! And even if the lender doesn’t want a survey, will buyers be happy to proceed on the basis of a report prepared for the seller? This speed issue also falls down because in the current system there are plenty of Surveyors around to carry out surveys at the drop of a hat, but not so with the new home inspectors. There are nowhere near enough of them and even if there were, the logistics of getting these reports prepared on time, before a property can be marketed, will be a nightmare. All very incisive and insightful we hear you thinking, but what does it all mean? Should I buy or sell, or wait and see; will prices rise or fall? For goodness sake, where is the opportunity?

OK, OK, we have to admit to our limitations - we really don’t know what will happen, it all looks a bit chaotic, but we can do a bit of speculating just for fun, based on the fundamentals. Let’s start with human nature - there are a lot of people out there who will work out that if they put their property on the market before next June and sell before the 31st October next year (this being the deadline by which if they are still on the market they will have to cough up anyway) it will cost them nothing up front, whereas after June they will end up paying between £600- £1000. It doesn’t take Einstein to work out that on that basis there will be an enormous number of properties coming onto the market in the lead up to the deadline. Uh oh, supply and demand warning - if supply suddenly increases and demand stays the same, then what happens to the prices? They fall, right? So better keep out of the market? Well, maybe and maybe not, as you have to track this argument through a bit more before you get the whole picture. After the deadline, as everyone who was thinking of selling will have either sold or be on the market, new instructions, i.e. supply, will dry up. Estate agents will immediately panic and be seen visibly weeping behind the wheels of their leased BMW’S, with much wailing and gnashing of teeth. In the meantime, as the property stock dwindles and demand remains level, prices will start to rise. Obvious, isn’t it? But here’s the point - if its obvious to us then its also going to be obvious to everyone else, which means at the point that supply increases in the run up to the deadline, so will demand as people anticipate the rise in price and try and get in early. In the long run, because unlike pensions which are a no demand market people have to move, the property market will therefore eventually stabilise and adapt to the new environment.

That is if it all even happens, and we are far from convinced that it will. You see we think that fundamentally nothing will have changed after the implementation of the Sellers Packs, and although there will be an effect in the short run, in the long run we should keep our eye on the real fundamentals such as economic growth, population growth, demographic changes, local regeneration projects, interest rates and inflation; these are the things which will determine the performance of property and other investments far more than short term tinkering, no matter how irritating it happens to be at the time.

However the conspiracy theorists among you should consider this – it’s been suggested that the Government are not being totally honest about their motivation and apparent commitment to what most commentators see as at best irrelevant, and at worst an expensive and dangerous reform. It seems that the Government has committed itself to having the entire countries residential property stock environmentally surveyed, so perhaps not a coincidence then that part of the home condition report which forms part of the Sellers pack provides for that environmental survey. This means the Government gets the job done for free and to hell with the consequences; and one last thing to think about - buy to let property is exempt. Figure that one out……

Yours sincerely

Choices Acquisitions and Investments
01342 840000