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At which point is the ceiling price of a property not the ceiling price?


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Hey Hubbers, 

I have spent most of the lockdown trying to increase my knowledge of the property world in the aim to start my property adventure in the next couple of months. So please forgive any naive questions I am about to ask 🙂

A topic I came across while researching, was that most houses or streets have a 'ceiling price' whereby no matter how you improve the property there is a maximum it will sell for. So even if you added in a swimming pool at the back or a helipad on the roof (a bit over the top I know), the house will have a maximum price it can achieve. 

My dad owned a 2 bed terrace house many years ago, he’s always telling me how he made the mistake of selling the house as it is not worth almost 10 times as much as he paid back then. Which reflects what we know with property price increases. However, this house is in a typical ‘ceiling price’ street. 

So my question is, at which point does the value of a house exceed its ceiling price for it to grow in value? 

To start my property journey I am looking to flip properties to increase my cash pot so I can build a rental portfolio. As we know at the moment, the property market is very hot! So BMV deals are harder to come by, if not impossible, especially now the mainstream media have begun to talk about how property is the best thing since sliced bread. 

Would I be right in saying that it is in a strong market where the valuations of property break through their ceiling prices? So the aim of making money through a flip wouldn't be when you buy but when you sell? I appreciate this goes against everything else I have learnt about property buying, where you are taught you make money when you buy. 

Your thoughts on this would be invaluable.

Thanks

Mo

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Hi,

Ceiling prices are different to how prices go up through inflation over time, like your dad's would have.

Ceiling prices reflect what you can get at the current time.

It is always possible to go beyond the ceiling price, spec dependent, but the reason there is usually a ceiling price is due to matters not related to the house I.e. location, demographic of potential buyers, what is nearby etc. 

The ceiling price is a good indicator of your max return, if you spec it so it is 10/10... and if yours is the one that goes beyond the ceiling then great stuff, but base it on ceiling and if it is above then great stuff, it is extra you didn't account for.

Ps you definitely make your money when you buy... even in a hot market.

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11 hours ago, nicholas_b said:

Hi,

Ceiling prices are different to how prices go up through inflation over time, like your dad's would have.

Ceiling prices reflect what you can get at the current time.

It is always possible to go beyond the ceiling price, spec dependent, but the reason there is usually a ceiling price is due to matters not related to the house I.e. location, demographic of potential buyers, what is nearby etc. 

The ceiling price is a good indicator of your max return, if you spec it so it is 10/10... and if yours is the one that goes beyond the ceiling then great stuff, but base it on ceiling and if it is above then great stuff, it is extra you didn't account for.

Ps you definitely make your money when you buy... even in a hot market.

Hi Nicholas,

Thank you for this information, it is really useful! 👍

I get that with inflation the prices of assets such as property will rise over time. The bit I can't get my head around is, how is it exactly that a property ceiling price today is 100k then tomorrow it is 105k? I am guessing here, but is it that a when a ceiling price for a property is 100k for example, as inflation kicks in a buyer comes along and pays more than what the property is worth, say 105k due to the buyer having more 'cash' in their pocket to spend, which in turn increases the ceiling value of all the other properties on the street? 

In your post you mentioned if the price goes beyond the ceiling price then that is essentially a bonus. Is this how the new ceiling prices for the street are created? 

I have been searching the market recently for my first deal. I have come across a few streets where the ceiling price was 100k for example and there is one house which has recently been sold for 110k due to it being newly refurbished to a high standard. So when I am running the numbers, assuming I am aiming for similar spec of the newly refurbished house, should I go by the new higher price or the price of the rest of the street? I suppose the sensible thing to do would be to go by the established ceiling price and anything else would be a bonus, however I have also seen some streets now where there is an established price but there are 2-3 houses that have broken through that original ceiling price. 

I am hoping to be as accurate as possible with the numbers, but am I just overthinking it?!

Thanks again 🙂

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You are over thinking it a little, but you are right to question how it is determined.

Your assessment was spot on...previously it may have been 100k, and it may now be 105k, that is part spec but also part inflation, it just doesn't seem like inflation because the previous one at 100k sold relatively recently... but inflation isnt yearly in property, it is constant.

The house price growth is inflation in it's own right, so property inflation  could be 5% swing month to month, rather than 5% per annum.

If there has been no change in the housing market then the ceiling is the ceiling, but if the market is increasing like it is now, then the ceiling will increase on a regular basis.

Ceilings generally increase when asset classes increase which is what we are seeing now. Quantitative easing drives asset prices, and when you compound the amount of this QE that has gone to savings (because nobody could spend it) then there is more available for houses...to make it grow further you have immense demand pent up and a low stream of supply... so again this will contribute to an increase 

Lots of factors as you can see. But if you do your calcs based on the current ceiling at least your figures will be safe, and the calculations will give a clear indicator as to whether it is feasible as a deal.

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