Will second homes derail property prices?

Nearly one in four second-homeowners could sell up in the current financial downturn, prompting even more dramatic house-price falls, according to new report.

Until now many financial commentators had thought but-to-let could be the weak point that topples the market, but the research from consultancy Capital Economics suggests the second home market is where the danger may indeed lie.

It points out that the number of second homes fell by about 25% in the housing slump of the early 1990s and expects a similar decline this time round.
The sell-off will be exacerbated by the government’s changes to capital-gains tax in April, which reduced the amount that second homeowners pay on their gains from a minimum of 24% for a higher rate taxpayer to just 18% now.

The southwest is likely to be the hardest hit because it has the highest proportion of second homes. There is already evidence that second homeowners are putting their homes on the market, but are having to let instead because there are so few buyers around.

The Royal Institution of Chartered Surveyors (Rics) reported a strong rise in the new instructions to let properties in April, which it suggested was because vendors were struggling to sell. The sharpest jump in instructions was in the southwest, where more than half of all surveyors reported an increase.

Many economist are now predicting falls of about 20% in 2008 and 2009, with many diverging on what happens in 2010. Capital Economics would not rule out further falls while estate agent Knight Frank thinks prices will pick up by 4% in 2010.

There are currently about 240,000 English households with second homes that are not rented out on a but-to-let basis. Figures show that around four in 10 second home-owners purchased another residence for investment purposes – in other words, in expectation of future price expectation.

Economists still insist that the downturn will not be as painful as it was in the early 1990s. Fewer buyers invested in flats or houses at the top of the market and most put down larger deposits.

For those hoping to move within the next year or so, however, the question is whether to hang on in the hope of a market recovery, or just get out.