Former BBC reporter Evan Davis has admitted that the media may be to blame for fostering the boom and bust of the UK housing market. Media to blame

Davis says that one factor which may have contributed to an unsustainable boom  was the way the BBC reported on every house price survey which showed rising house prices. The effect, he says was to create a powerful wave of optimism about the housing market, which was unjustified.

Davis said, he began giving warning about the housing boom as early as 2002.

However, as commendable as the statement of Davis is, can the media be really blamed for stocking up a housing boom?

• It is true people want to hear good news; it is also true, that house price statistics can be misleading. But prices were mainly rising because of market conditions. To blame the media is to give them far more influence than they actually had. It was not the media who were offering a range of mortgages, low interest rates and a shortage of supply.
• If the media exaggerated the boom in house prices, you could also equally argue they are exaggerating the ‘collapse’ in house prices. As Davis notes, he began warning that house prices could go down as well as up. But, It is worth remembering, despite recent falls, house prices are still £79,158 higher than in the start of 2002 (that is an 85% increase) source: Historical house price index

Recent data suggests that the UK’s long record of unbroken economic growth may, at last, be coming to an end. The latest snapshot of the UK economy presents a relatively good economic situation; however, this mask a variety of data suggesting the economic situation is sharply deteriorating.

The Bad News on the UK Economy

• Falling disposable incomes due to rising oil and energy prices
• Falling house prices. Falling house prices reduce consumer wealth, consumer confidence and the ability to remortgage. Rising house prices have long sustained UK economic growth, but, now prices are falling, the opposite is occurring.
• High Street Sales slumping. M&S has reported a series of disastrous results. Food sales fell by 4.2%, clothes sales by 6%. The problems of M&S are revealing because M&S targets the luxury end of the food market. It appears that price is becoming the important factor in consumer shopping. The likes of Netto and Aldi are likely to do fine in a recession as they target the best value, rather than selling the most expensive organic food at any price.
• Rising Mortgage Costs, despite base rates staying the same. The credit crunch is forcing up the cost of fixed rate mortgages.
• Rising inflation could even force the MPC to increase interest rates, a sure way to make the downturn worse.
• High Levels of Consumer Debt. For several years we have benefitted from high consumer confidence which has encouraged record levels of consumer debt both secured and unsecured. As confidence in the economy falls, consumers are likely to try and increase their savings ratio, leading to a fall in consumer spending.
• Government Borrowing is likely to increase to £60 billion, well above the governments target, leaving no room for expansionary fiscal policy.

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Interesting data from the Council of mortgage lenders shows how volatile the importance of mortgage payments as a % of income are. see: Mortgage Payments as % of Income

Currently first time buyers are spending just less than 20% of their income on mortgage payments. However, this isn’t significantly more than figures in the 1970s and 1980s.

For example:

• 1974 -  16.3 % of income
• 1985 - 19.2 %
• 1990 - 27%

This shows that by historical standards mortgage payments are not as unaffordable as often is suggested. It reinforces the idea that if only people could get mortgages, buying a house is still relatively attractive compared to renting.

People often focus on house price to incomes ratios. But, living standards depend primarily on what % of income goes on mortgage payments. And here the key factor is often base interest rates. For example, 1990 was a bad year for homeowners because interest rates were so high.

However, it is worth bearing in mind.

• Many First Time buyers with low incomes are excluded, because in the current climate they simply can’t get a deposit and sufficient mortgage. If low income first time buyers could get a mortgage, the % would rise. Continue reading →

House prices fell for the 9th month in a row, with prices 7.3% off their peak. According to Nationwide Building society average house prices are now £172,415.

The main cause of falling prices is the slump in mortgage availability, mentioned recently.

Despite the falling house prices, there has been little increase in affordability. First time buyers are still struggling to get a mortgage and save a sufficient deposit. Fixed rate mortgages continue to become more expensive.

Home builders such as Taylor Wimpey have axed 900 jobs as the slump in the construction industry continues. The number of new builds has fallen by 27% to 147,000 the lowest levels since 1945. Continue reading →

It really is the best time to buy! - honest!

This sign caught my eye as I was cycling home. It was in the window of Connell’s estate agency Between Towns Road, Oxford.

Is this an example of irresponsible estate agents encouraging people to buy a house, when actually it makes a very bad decision? Or are there good reasons to buy now?

Why it is Not A Good Time To Buy

House Prices falling. Even the most optimistic forecasters expect moderate house price falls in the next 12 months. If there is a median prediction of house prices to fall by 12% in the next 12 months, why not wait until house prices have bottomed out? There seems no rush to get on the property ladder when you could wait and save potentially thousands. Continue reading →

The troubled UK mortgage sector continued to report more bad news. Last month, the Bank of England revealed only a depressing 42,000 mortgages were approved for home purchases. This is the lowest level since records began 15 years ago. The number of mortgage approvals is now 67% down on this time last year.

With a fall in mortgage approvals, it is no surprise that the weakening demand is leading to lower prices. The only glimmer of hope was the increase in savings that building societies have been able to attract. Higher levels of savings may help to finance more mortgages in the future. Although, it is worth noting, most banks in the past have relied on borrowing from other banks to fill their mortgage lending.

Some economists predict house price falls of 20-25% from their peak last July.

Readers Question: as a first time buyer, is it worth to have a mortgage this time with a 6.67% interest rate for five years (ending 2013) from abbey, some are saying that houses are falling down but we don’t see the effect of that in having a mortgage this time and what if this economy crisis will be resolve within 3 years does it mean that interest rate will come down?, thanks

Firstly, I should say congratulations on getting a mortgage in the current climate!

I imagine as a first time buyer, you are buying a house to live in (as opposed to buying a house to let, hoping to make income from renting and capital gains). If you are buying now, falling house prices are not necessarily a reason to stop buying.

If you wait 2 years, it is likely that house prices will be lower and the cost of buying a house will be cheaper This will reduce the cost of your mortgage in the long term. 2 years may also give a chance to save a bigger deposit.

However, falling house prices are not a disaster. Suppose house prices do fall 20% and in the next 3 years time you want to sell your house. If you are moving to another house then you will get less for selling your house, but, it will also be cheaper to buy another house.

A problem could occur if house prices fall 20% and then you want to sell and switch to renting. This could leave you with a capital loss. However, most people who buy a house do not want to switch back to renting after 3 years.

Buying vs Renting

The other important issue is the alternative to buying which is renting. If you rented for the next 3 years, the cost of renting would probably be similar to the cost of paying a mortgage. The difference is that with paying a mortgage, you are working towards buying your house and being able to live ‘rent free’ in the future. In this regard the sooner you can buy and start paying off a mortgage the better. See: Abbey report which says buying is better than renting
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A study by the Abbey National states that buying a house can save you thousands of pounds in the long term. This is because in recent months, the cost of renting has risen relative to buying. On average the benefit of buying rather than renting has increased from £5,000 to £10,000 over a 25 year period.  The benefits of buying do vary considerably depending on the area. For example, the South East with high rents offers the best return for buying rather than renting. The Abbey say that buying in the South East can leave you £91,000 better off. [link]

Reasons to Buy a House

• Mortgage costs relatively lower than renting according to Abbey survey.
• Benefits of owning home rather than insecurity of renting
• The Abbey study looks at the benefits over a 25 year period. However, the real benefits of taking out a mortgage come when the mortgage is paid off - typically in 25-35 years. After this period buying a house enables you to live rent free. It is in your retirement that the real financial benefits of buying rather than renting will pay off.

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Population Forecasts in the UK. Source: ONS

Population forecasts are an inexact science. To a large extent they are based on past trends; therefore, they are always liable to be wrong. However, the Office of National Statistics makes a prediction that the population of the UK will increase to :

• 65 million in 2016
• 71 million in 2031

The average age of the population is also forecast to rise, leading to an ageing population. This will lead to an increase in the dependency ratio (more people receiving state benefits than paying income tax). The rise in the average age, is partly mitigated by migration, which tends to be of younger people.

The causes of population growth are equally split between:

• Higher birth rate than death rate
• Net Migration into the UK

Population Growth in the UK

Source: ONS
High birth rates are partly attributed to a large second generation immigrant population, who for cultural reasons tend to have higher birth rates. The UK’s population growth is also in marked contrast to many other western European countries such as Germany, France and Italy, which are experiencing falling populations.

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The Bank of England recently, forecast a fall of 10% in UK house prices over the next 12 months. This seems to be a reasonable prediction based on the following:

1. Availability of mortgages have plummeted, leading to a severe shortage of buyers.
2. The average number of property transactions has fallen to its lowest levels since the recession of 1991
3. With rising inflation, there is little prospect of a significant interest rate cut in the near future.
4. Rising oil prices are also causing a decline in living standards. There is expected to be a stagnation in real disposable income. Therefore, although prices are falling, there will be no quick readjustment in house price / income ratios.
5. Sentiment has changed. With fears of falling prices now firmly entrenched in people’s minds, there is no incentive to buy for property growth.

• Why House prices are falling - more reasons

Some people believe that the above factors mean that house prices could actually fall a long way upto 30% or even 50% in real terms. Economists predict 20% fall

A difficult question is when will house price stop falling and recover?
Continue reading →