Entries Tagged 'house-prices' ↓

Readers Question: How can i compare and contrast the current UK Housing market with that of the 1990s. What are the key drivers for the markets and the outlook for prices?

The 1990s saw the end of a housing bubble and a serious house price crash in the year 1992.

Leading upto the housing market crash of 1992, there was a period of economic boom, and corresponding boom in house prices (especially in London and South East)

The difference in the late 80s and early 90s was that the Economy experience a real inflationary boom. Economic growth reached over 5%, but, at this rate the growth caused inflation to rise to 10%. Therefore, the government felt compelled to start reducing inflation.

They felt the best way to reduce inflation was to join the ERM (exchange rate Mechanism). To cut a long story short, the inflation of 10% and membership of the ERM required interest rates to rise very high to 15%. At 15% mortgages became incredibly expensive and so there was a record rise in defaults and home repossessions. People stopped buying and house prices fell by 15% (More in London and South East).

Eventually the UK left the ERM, but the damage was already done.

Since that period interest rates have been much lower and much more stable. Monetary policy was given to the Bank of England MPC. They have enabled low inflationary growth, which enables low interest rates. Continue reading →

House prices in the US are falling by over 4%. In some areas the rate is much higher.

Many of these factors remain relevant for the UK housing market except: rise in defaults and over supply.

Why US house prices are falling

1. Correction to large Increases in House prices

US house prices increased by 135% in the past 10 years. This meant that house prices grew faster than incomes and rent. Therefore, it reduces the long term affordability of houses and their attractiveness.

2. Rise in Mortgage Defaults.

The problem is that many mortgages were lent with a very cursory look at whether the homeowners could actually afford them. Mortgage salesman were encouraged to sell mortgages and not worry about long term affordability. A popular form of mortgage was a ‘balloon’ mortgage. Basically, this is a mortgage with a good introductory rate for the first 2 years. This encourages people to buy them. However, after 2 years, the interest rate increases dramatically. At these rates people often can’t afford to keep up with their mortgage defaults. This led to the significant increase in mortgage defaults that we see today.

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The Bad News

• House prices are now unequivocably falling. Surveys by the Chartered Surveyors also suggest falling prices in the future
• US House prices are falling even more. Evidence suggests the US Housing Crash is deepening even more. House prices could fall by 5-10% next year (Bloomberg) There is concern that the UK market could mirror the US market.
• Global Credit Crunch - Mortgage firms are struggling to raise finance on the global credit markets. This means the cost of mortgages is rising. e.g. the recent rate cut was rarely passed onto UK Homeowners.
• Fundamental Shortage of Supply. The shortage of supply means that the housing market struggles to deal with any changes in demand. Some people predict that long term house prices will continue to rise, because the shortage of supply creates

Good News on House Prices

• Falling House prices are good for first time buyers. It allows earnings to catch up with house prices making them more affordable.
• Falling house prices reduces inflationary pressure, making interest rate cuts more likely. This will reduce cost of mortgage interest payments.
• Mortgage arrears remain low. Unemployment in the UK recently fell to an all time low. - unemployment falls
• It always provides good conversation at a dinner party.
• the Predictions of experts are nearly always wrong. People have been predicting house price crashes for the past 10 years.

• Predictions for UK House prices 2008

House prices in the UK are probably one of the most popular topics of conversation. Partly this is due to the the fact house prices have nearly trebled since the mid 1990s. This has left a situation where homeowners have seen tremendous gains in wealth; Whereas those struggling to get on the property ladder have been left with a seemingly impossible task.

These are the key factors that determine house price. In particular, it explains why house prices are so expensive in the UK

Supply and Demand.

This is the basic determination of house prices. If demand increases faster than supply house prices go up. In the UK, the number of new houses being built is very low compared to the increase in demand. This is the fundamental reason for rising house prices. For house prices to fall, the demand would need to fall significantly.

Of course there are many factors that determine demand for houses.

Interest rates.

The bank of England set the base rate for the whole economy. If interest rates rise, mortgage lenders will increase the cost of variable mortgage payments. Therefore, with higher interest rates it is less attractive to buy a house and be lumbered with high mortgage interest payments.

• If people have a fixed rate mortgage interest rates, will have less effect. However, at the end of their fixed period they will have to remortgage to a deal reflecting new interest rates.
• Interest rates are a very important factor in the UK because many people have a variable mortgage. Mortgage payments are also a significant % of income. A small change in interest rates has a big impact on cost of mortgages.
• Interest rates sometimes have a delayed effect. E.g. interest rate increases last year have more of an effect now.

Demographics

Increasing levels of net migration are increasing demand for houses. In particular immigration from Eastern Europe, such as Poland and Romania are boosting the UK population. Therefore, causing rise in demand.

Another factor increasing the number of households is demographic changes such as number of people living alone. E.g. rising divorce rates have increased the number of single people living alone.
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A reader, Rob, offered an interesting comment about the relationship between house prices and consumer spending. From: drop in UK house prices

Why will a drop in house prices effect consumer spending, this has not occurred in the U.S. The only effect a house price drop will have is to stop consumers increasing their borrowing against their property to fund their spend. A recent survey for the BBC indicates a price drop will have little effect on the spending habits of consumers. I believe that most consumers understand that at some point they have to repay their mortgage.

I think the comment raises some interesting issues.

• It is true that so far American growth has been remarkably resilient despite falling house prices. (Growth is still at around 3% in the US). However, I doubt this growth is likely to last. People such as Warren Buffet suggest the US economy has a reasonably good chance of slipping into recession next year. - At the moment the weak dollar is boosting the US exporting sector and helping the US economy.
• Rising house prices have enabled an increase in mortgage equity withdrawal. This is when homeowners borrow against an increase in the value of their house. In 2006, Mortgage equity withdrawal totaled £49.7bn for 2006 as a whole, up from £36.6bn the previous year. If house prices fall, mortgage equity withdrawal will fall sharply. This will have an effect on reducing consumer spending. True it is a small % of total consumer spending, but, is important nevertheless. (source: BBC)
• The biggest effect of falling House prices is on consumer confidence. Many people subconsciously equate a depression in the housing market to a wider economic malaise. People may not feel there is any direct connection between house prices and spending. But, a fall in house prices would have the effect of reducing confidence and expectations, this would make borrowing less attractive. Savings ratio would rise and consumer spending fall (or at least grow at a slower rate)

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Nationwide Building Society released their latest figures from the state of the UK Housing Market. These statistics suggest that house prices fell by 0.8%. It is the largest monthly drop since June 1995

Combined with other statistics and reports, it shows there has been a fundamental shift in the prospects of the UK housing market.

There is increased expectation that interest rates may be cut soon. One of the members of the Bank of England Monetary Policy Committee Mr Blanchflower has expressed his concern at the state of the UK economy. He is the strongest voice for lower interest rates.

Yesterday, Mr Blanchflower, was in Birmingham stating that the worst was yet to come for house prices and the housing market. - UK House prices set to drop (at icBirmingham)

However,

The title of this post is slightly misleading. Monthly changes in house prices can be volatile. House prices are still higher than this time last year. see this post:

• Are House Prices falling?- a guide to the complexities of the housing market statistics

Also, are falling House prices a bad thing?

Yesterday, I wrote that 2008 can still be a good time to buy a house 

The Independent expressed similar sentiments in their article on the housing market here 

Many in the housing and mortgage industry are predicting house price falls for 2008. Therefore, many prospective house buyers may be worrying whether it is best to wait before buying. These are some of my thoughts about whether now is a good time to buy a house.

• Are you buying as an investment or are you buying to live in the House?

If you are buying as an investment then now is not a good time. It may take several years to see significant capital gains. However, ff you are buying to live in the house does it matter if house prices do fall? Suppose you have to move in 5 years. If your house has fallen in value, so will all the other houses. It is the same with rising house prices. People notice that house prices have increased in value, but, that doesn’t necessarily make them better off because it is more expensive to buy another house. Therefore, a potential fall in house prices shouldn’t preclude buying a house.

The main problem of falling house prices occurs if you get a 100% mortgage and hope that rising house prices will give you an effective deposit.

• Falling House prices could make mortgage payments cheaper.

If house prices do fall in 2008, I would predict that interest rates will be able to fall by upto 1%. This is because a fall in house prices will reduce consumer spending. In turn, this will reduce inflationary pressures, therefore, the MPC is able to cut interest rates without stoking up inflationary pressures. Therefore, if house prices do fall it is likely that monthly mortgage payments will become cheaper. To most homeowners the monthly repayments have more immediate impact than the value of the house.

• Buying a House is Better than Renting.

A mortgage payment is fixed for 30 years (apart from fluctuations in interest rates). Therefore, if you pay £700 now, 30 years from now, the mortgage will also be £700 (assuming long term interest rates stay the same - It could be more or less). However, if you rent for £700, the cost of renting is likely to go up by at least the rate of inflation. Therefore, if renting costs £700 now, 30 years from now you could be paying double that. Furthermore, after 30 years or whatever your mortgage term is, you will not have to pay anything. This is a big investment for the future. The sooner you buy a house, the sooner you will be able to live rent free in the future. See buying a house as a similar investment to getting a pension.

• House Prices were predicted to fall in 2002

Many people have been predicting the imminent collapse of house prices since at least 2003. Since then house price have doubled. Don’t forget the main reason for house prices rising in the UK is a shortage of supply and rising demand. This economic fundamental is unlikely to change in the near future.

Are you a first time buyer, wondering whether to buy? We would be interested in your views about whether now is a good time to buy.

Related

• Are UK House prices set to drop?

I have just been watching a BBC programme - ‘Open House’ Basically, it suggests ways for people to increase the value of their house, through making minor changes. This article looks at the simple changes you can make to maximise your home’s selling price.

First Impressions Count.

Make sure the pathway to the house is free of litter, clean and welcoming. Make sure your front door is immaculate; people often judge a house just from the state of its front door.

Neighbours

If your neighbours have litter in their garden, perhaps you could ask them to remove it or you could just go in and clean it up yourself (they can hardly complain). Untidy neighbours will definitely count against you. People subconsciously think that if people leave litter in the road, or front garden then they are more likely to be troublesome neighbours.

Clear The Clutter.

During the period of selling a house, it is essential that you put the requirements of your prospective buyers above yours. The first thing to do is to remove unnecessary clutter. This is one of the most significant factors in determining how the house looks. If necessary store some of your clutter in the atic, with neighbours or even in a storage space.

Decorations

Choose tasteful and neutral decorations. You may get great joy from draping a Manchester United flag in your front room, but, your taste in ‘fine art’ is unlikely to be matched by other people. It might be a good idea to remove personal family photos. The main thing is to decorate the house in a way that is enticing for everybody.

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There are many different predictions for UK House prices floating around. One of the most reliable predictions is said to come from the forecast of city bankers. House prices can be predicted using a new tradeable derivatives contracts, which in effect is trying to predict future house prices.

These are not just ideal speculations, if tradeable contracts are expected to fall by 7%, this means that bankers are putting their money where their mouth is, so to speak. There has been a big increase in trading of these tradeable forecasts in recent years.

Other forecasts for House Prices include:

• Nationwide House price forecast 0%
• Capital Economics 3% fall
• Johnathan Davis of House Price Crash -35% ( )
• Nadeem Walayat of Market Oracle -15%

• Why House prices may fall
• Why House prices may not fall

Interesting article in the New Statesman, written by housepricecrash.co.uk spokesman Jonathan Davis; - House prices set to Tumble

Basically, the article argues that house prices are set to collapse. The arguments for this collapse in house prices are:

• House prices increased faster than incomes and inflation. They have increased by more than the long run trend rate
• Interest rates have increased 5 times since August last year and 9 times since 2003
• A significant part of the house price increase is due to buy to let speculation. Therefore, as the market turns, many of these buy to let investors will look to offload onto other buy to let investors. Jonathan suggests this is a classic example of the Greater Fool Theory of Investing - “where the buyer believes there will always be an even more stupid person around the corner.”
• Global Credit crunch leading to shortage of funds for lending. (Note yesterday saw a particularly bad day for the stock market, with the FTSE-100 falling 170 points on fears of further credit shortages.) see stock market falls in independent.
• Increased number of home repossessions - forecast between 44,000 and 55,000
• High levels of personal debt and low savings ratio (under 6%)
• UK may follow US house prices downward.
• See also: why house prices are set to fall

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