Santander

Whilst the Spanish economy struggles with unemployment approaching 20% and a painful housing boom and bust, its major bank – Santander has made great strides in capturing market share in the UK.

Many of the large UK banks have been seeking to improve their balance sheets and have held back from lending new mortgages. Santander is one of the few banks which has been actively seeking new business – taking advantage of market conditions to increase their share of the UK mortgage market.

Santander recently published figures which showed its net lending had reached £7.6bn in 2009. This is almost 50% of the new market for mortgages. It gives the bank a market share of 20%.

It’s relatively new brand image on the UK high street seems to have been a blessing in disguise. With uncertainty over existing British banks, Santander has benefitted from £14.9bn of new savings.

Santander is in the process of rebranding Bradford & Bingley and Abbey branches with the distinctive red logo.

Santander are currently offering a  rate of 4.39% on their, no fee, two year fixed mortgage. This is better than by own mortgage company – Alliance & Leicester who recently offered me 4.99% for a three year fixed.

Related

• Guide to Mortgages
• Santander Mortgages

Source: B of E – Economic Recovery and Housing Market (pdf)

A few interesting questions in the current climate is:

- Why have UK house prices started to rise – despite house price to earnings ratios being above long term average?

- Why are UK house prices rising after only 18 months of decline – whearas after the 1990 crash, prices fell for four years?

- Why are UK house prices showing signs of recovery whearas Spain and US faced much longer and more persistent house price falls?

The above graph from the Bank of England goes someway to answering these questions. As house prices started to fall, homebuilders immediately started cutting back on new house builds.

Also, in the boom years (00-07), there wasn’t a boom in house building. There simply isn’t a large surplus of unsold housing stock that you see in the US, Spain or Ireland.

Strict UK Planning restrictions and shortage of land meant that when prices were accelerating there was no speculative bubble in house building.

In the 1980s, there was a greater rate of housebuilding that meant there was more unsold stock depressing prices through the 1990s.

There are still factors which will weigh down on UK House prices

• Threat of rising interest rates
• The fact house prices are still expensive for many in a climate of low real wage growth.
• Continued high unemployment.
• Recovery in market could attract more sellers who had been holding on.

Nor, is it necessarily a good thing if house prices rise sharply on the basis of very thin supply.

After the longest recession since the Great Depression (6 quarters of negative economic growth), the UK economy stuttered into action with a increase of 0.1% of GDP in the last quarter. Though technically this brings the UK economy out of recession, it may not feel like that for the majority of British consumers. Unemployment remains high with the prospect of rising further in 2010. Real incomes are likely to remain stagnant or even fall as the inflation rate (CPI 2.7%) exceeds weak wage growth.

Yet, despite the grim economic situation, the housing market continues to post house price increases. House prices increased by a seasonally adjusted 1.2 per cent during January, Nationwide figures showed today.

The latest increase, left the average UK home costing £163,481, a level last seen in August 2008. The annual house price inflation rate is now 8.6%.

The British Bankers association recently revealed that the number of mortgages increased in December. They suggested many were rushing to get a mortgage before the end of the stamp duty relief. However, the continued rise in house prices for January suggests there is a continuing imbalance between supply and demand.

After market experts were largely wrong footed by the unexpected house price rises in 2009, the consensus for 2010 was largely pessimistic (though with only small falls being predicted). Some like the Council of Mortgage Lenders stated they felt market too unpredictable to make forecasts. – Quite a sensible approach if not particularly helpful.

Perhaps more interesting than expert predictions is the expectations of ordinary consumers. If consumers are anything to go buy, the UK Housing market will be buoyed by an upswing in market sentiment, with a majority of respondents now expecting house prices to rise this year.

A survey by Rightmove, the property website, found that 53pc in the UK believe house prices will rise over the next 12 months, compared with just 10pc last year. That is quite a significant improvement in expectations and has important implications for housing market.

To some extent expectations of house prices can be self-fulfilling.

• If people expect prices to rise, it encourages people to buy, rather than wait for them to fall
• It encourages buy to let investors back into market.
• Prospect of rising house prices makes banks more keen to lend (and avoid negative equity of falling house prices)

Of course, consumer expectations of house prices can often be proved wrong. As the above data shows, only 10% of people expected house prices to rise in 2009, but, house prices did rise.

I doubt a majority of homeowners were expecting the slump in house prices until it actually occured.

Expectations of house prices are often based on past and current data. Thus if house prices have been falling, this strongly influences expectations, the fact house prices have risen recently has helped boost confidence.

There are factors which may make the present confidence appear misplaced – recovery is weak, prospect of fiscal tightening, house price to earnings ratios are still expensive. But, the improvement in confidence is an important factor in moving the housing market back to more normality.

It’s been a strange couple of years. The UK housing market is no stranger to booms and busts, but the recent credit crunch and recent recession has been one of the most testing experiences for the UK property market.

After falling 20% from their 2007 peak, house prices unexpectedly rose in 2009. – According to the Nationwide, house prices were 6% higher at the end of 2009 than the start. Many point to house price to earnings ratio’s and point out they are significantly higher than at the end of the last bust. This will certainly be a factor keeping house prices low; it will prevent any rapid increase in prices and could lead to a further downward correction. But, against this backdrop, there are some encouraging signs of a return to more normal lending conditions.

The first positive sign is the improvement in housing transactions (admittedly from record lows). When housing transactions were very low, it meant changes in house prices were more a reflection of the unusually shortages of property on the market.

Banks gave 60,518 loans to buy homes, up from 57,718 in October, this is highest level since 2008. The amount of net mortgages rose to £1.5bn the most for nearly 11 months. Whilst there will be no return to the boom conditions of the naughties, there are signs banks are slowly expecting to increase the number of mortgages.

Disposable Income Spent on Mortgages

The proportion of disposable income spent on mortgage payments, by first time buyers has fallen from 50% of average earnings in June 2007, to 27 per cent by November 2009. This is below the long term average of 35% and will definitely encourage more into the market.

The stabilisation in house prices may well encourage people to sell who have been holding off. But, on the other hand, the end of dramatic falls may also encourage buyers back into the market.

How Long 0% Interest Rates?

Since we talk of returning to normal, we can’t expect interest rates to remain at 0% forever. Yet, forecasts for growth suggest the Bank of England has no plans to raise interest rates in the foreseeable future. It is likely in 2010 we will see an end to quantitative easing and efforts to reduce fiscal deficit. Both these will keep pressure on the Bank to maintain low interest rates.

Certainly, 0% interest rates have done wonders for avoiding repossessions. The number of repossessions is much lower in this recession than in the last. When the economy returns to normal growth, and interest rates rise to 5%, many who have been hanging on may suddenly start to struggle.

Overall Outlook

The overall outlook for 2010 looks for a period of consolidation. I think the most likelyhood for house prices is to remain static. They may go down a little, they may even go up. But, it is hard to see wild swings in house prices this year.

This stability is no bad thing. After the roller-coaster ride of the past couple of decades, a period of consolidation could be just what the housing market needs.

A review of 2009 and a look forward to what we might expect for UK economy in 2010

A look back at the past decade – The Economics of the Naughties

- A decade which brought us everything from NINJA mortgages to Quantitative easing and a new meaning of the phrase ‘economic stability’

UK House Prices 2007-09

Source: BBC – UK House Prices

The Council of Mortgage Lenders CML have stated that given the uncertainty surrounding the housing market they will not be making any predictions for house prices at the moment. Certainly, forecasting UK House prices can be a tricky issue.

The depth of the crash in 2007-08 caught many commentators by surprise. But, then few were predicting house prices would rise in 2009. And much to everyone’s surprise they have risen every month since spring 2009.

What Are The Prospects for House Prices in 2010

Low Interest Rates.

The cut in interest rates to 0.5%, is one of the main reason many homeowners have been able to hang onto their homes. It explains why mortgage defaults have been lower than in the last housing crash. Given state of the economy and the degree of spare capacity, interest rates are likely to remain low throughout 2010. (see: Interest rate predictions) If inflationary pressures do occur (and there is little sign of real inflation apart from cost push factors), taxes will rise rather than interest rates.

Also, more people will be coming to the end of fixed term mortgages so may be able to remortgage at lower rates than before. With low interest rates continuing in 2010, this should encourage buyers – at least those who are able to get a mortgage.

Mortgage Supply

Perhaps more important than house prices, is the number of property transactions. According to HMRC, the number of completed sales rose from a low of 40,000 in January to 90,000 in October. This suggest mortgage lending is slowly being relaxed, and buyers are slowly returning to the market.

Falling Prices and Confidence

The rise in house prices we have seen in 2009, may well encourage more people to put their property on the market, this increase in supply could depress prices, but, at the same time, the fact prices have stopped falling so sharply may mean banks are less strict about requiring very large deposits. If banks and consumers feel the worst of the crash is over, it will encourage more people to buy and more banks to lend. Many people are feeling now is a good time to buy.

Growth and Unemployment

This has been the longest recession (six quarters of negative growth) since the Great Depression, but, unemployment has risen less than expected (see: why is unemployment not higher?) This muted rise in unemployment has been a big factor in stabilising prices. 2010 should see a sluggish economic recovery, unemployment will take a long time to fall, but, if it does peak soon, that will definitely help the UK Housing market.

Long Term Fundamentals

House prices in the US, are still falling nearly 4 years since they first started to fall in 2006. Why should the UK be any different? Well one reason is the excess supply in US and the continued shortage of supply in UK. House price to income ratios are still above long term trends, but, there is also still a long term shortage of housing. Whilst this occurs, UK house prices will continue to be more expensive than other countries

In April 2008, I suggested despite short term factors, in the long run, house prices could well rise to £300,00 in the next 10 years. (see long run forecasts) This is not necessarily a good thing, but, it could well happen

In recent memory we have had two housing boom and busts. There are many similarities, but, also quite a few differences.

Differences in Housing Crashes:

1. Length of Time

The housing bust of 1990 lasted for nearly five years. By contrast, 2009 saw an unexpected rise in prices bringing an end to falling house prices after only two years. Some suggest this rebound in prices is premature and house prices will resume a downward fall in 2010. Nevertheless it is quite a significant rebound in prices (even based on very thin trading volumes, which might be distorting prices) If the current crash follows the last one, we might expect another two years of falling prices.

2. Interest Rates.

The huge difference between the two housing busts is the level of interest rates. The 1990 bust was caused primarily because of the very high levels of interest rates (reaching 15% at their peak). This made mortgages very expensive causing record levels of mortgage default. By contrast, the current bust is against a backdrop of 0.5% interest rates. The low interest rates mean that mortgage defaults have been lower than last time. Less people have been having difficult with payments.

One consequence of this is that payment problems may merely delayed until later in the cycle when interest rates rise.

Housing Payments

Source: Financial report on British Households 2009 by NMG. pdf

This shows a much lower level of households are experiencing problems with housing payments than in 1991.

3. Credit Crunch

The current crash has led to a sharp reduction in the volume and number of mortgages available.

4. Depth of Recession

The current recession is much deeper than the 1991-92 recession. Currently, GDP  has fallen by 6% and lasted six consecutive quarters, which is a sharper and more long lasting fall than in 1991. However, despite the deeper recession, the housing crash (so far) has not been as sharp as in 1991. This suggests levels of interest rates are more important than economic growth in influencing nature of housing market.

5. Affordability

At the end of the crash in 1995 the ratio of house prices to earnings for FTB fell to just over 2.1. By contrast, the ratio of house prices to earnings for FTB is still over 4.0. Suggesting house prices are still overvalued.

The big question is whether 2009, really is the end of the housing crash or whether it is just a temporary pause before higher unemployment push prices much lower.

Related

• Historical house prices

Artificial hips help the ageing and infirm, but government Hips for property owners seem to help no one except the hips purveyors. Estate agents think they are discouraging sellers as they have to pay up front for a Hip and this ‘discourages the market testers who may have sold if the deal was right’.

Home Information Pack Contents

1. Energy performance certificate
2. A Property Information Questionnaire
3. Evidence of title
4. Local Authority searches
5. Drainage and water searches
6. Leasehold information
7. Sales particulars

Not included: all the legal documents a solicitor needs prior to exchanging contracts.

How Long Does A Hip Last?

A hip lasts until the house is sold. If it is taken off the market for less than 12 months and put back on, the same HIP may be used. But, if it is taken off for 12 months or more you will need a new one.

Who Needs a Hip?

Anyone marketing a house in England and Wales (Scotland Excluded). e.g. if you sell to a family member directly there is no need to get a HIP. But, if you put a for sale sign in window, you need to commission one.

Problems with Hips

1. It takes time to prepare a Hip and whilst some aspects can be done in parallel in some areas you need to start 3 months before you want to sell.
2. The cost of a hip can vary from £200- £500 for a similar property. You do not need to buy your Hip from your high street estate agent. According to Which you should shop around for a better price.
3. You still need a solicitor to ensure you acquire clean title to the purchased property.
4. Buyers may still need to conduct extra searches on top of the Hip. This can reveal other issues with local authorities like parking regulation changes or lack of planning permissions for gardens.
5. Searches for Hips can go out of date before the property is sold.
6. Energy performance certificates seem to be disregarded by potential buyers.

The Future

Hips should speed up the selling process but that is still fraught with delays at your solicitor.

A new government may scrap the present scheme and bring in a more comprehensive but none compulsory‘ Ready Pack’ containing all the legal documents and draft contracts.

Sales that are currently excluded from HIP regulations including, sales that are not marketed, Right to buy schemes, mixed properties may be brought into a scheme.

For more information for Buyers, Sellers or the industry professionals read the Direct Gov web site

Mortgage lending is slowly recovering, though it is still a long way down on the pre-bust levels. Total net lending, which strips out redemptions and repayments, now stands at £3.1 billion pounds 4.6 percent higher than last year. According to, The British Bankers Association, 42,238 loans were approved for people buying a property in October. This is nearly double the number seen last year and the highest level since January 2008. The amount of net lending is subdued because many are taking the opportunity to overpay repayments.

The reality of low long term interest rates is helping fixed rate deals to come down. After peaking at 5.15% this summer, average two year fixed mortgage deals have fallen below 5% for the first time since the summer.

Remortgaging which was very popular during the boom years has fallen considerably. Many are now opting to stay on a lenders standard variable rate (which was often significantly higher than special discounted rates)

Although, lenders have tentatively started to raise LTV (reduced amount of deposit required), there is evidence, the number of mortgage products could remain limited even as the market recovers.

The UK Treasury have been looking to extend mortgage protection to mortgage lenders who sell mortgages on to third party. This comes after proposals to limit self-certification mortgages, and high income multiples.

It is hoped stronger regulation of mortgages will make it more difficult for the housing market to create a boom situation. However, it will mean first time buyers will need to save a larger deposit in the new climate of stricter mortgage lending.

On a personal note, I benefitted from loose mortgage rules which allowed me to get a mortgage a large income multiple in 2004, but, given the boom and bust we have seen, it does seem to make sense to create a more stable and closely regulated mortgage industry. I’m just glad I’m not trying to buy a house now…