Entries Tagged 'housing' ↓

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

These graphs and statistics on the UK housing market put into perspective recent changes in the UK House prices. In particular it is interesting to note how the ratio of house price to earnings is still significantly higher than at the end of the last housing crash.

Long Term Trends In UK House Prices

The two  big house prices crashes seem mere blips in the long upward trend. It should be noted these prices are nominal not real (Inflation has not been taken into account). However, UK House prices have still risen much faster than inflation.
In 1952, average UK house prices were £1,811. If they had risen in line with inflation average house prices would be now £42,000…

Again the main feature here is the two crashes and spectacular growth in between. See article: Why are house prices so volatile

This suggests house prices have fallen back to trend growth levels. However, the trend in house prices is not a guarantee of what will happen in the future – just a reflection of what has happened in the past. See Japan or US for examples, of country where long term house price trend changes.

Even adjusted for inflation and even accounting for the two big house prices busts, house prices are still more expensive!

Continue reading →

Perhaps earlier than many thought, house prices have continued to stabilise. Halifax’s measure of the longer-term house price trend, which compares the past three months with the previous quarter, rose 0.8%, a positive rise for the first time since the autumn of 2007. House prices in July rose 1.1%. The Royal Institution of Chartered Surveyors have now changed their predictions for house prices. Instead of predicting a fall of 10-15% for 2009, they now expect house prices to be slightly higher.

From an economic perspective there are also growing signs of economic recovery. Manufacturing output increased, retail sales have nudged higher and forward looking indicators like purchasing indexes have showed improvements. Yet, despite, hopeful signs of economic recovery, many are still nervous about the fragility of the recovery. Bank lending remains close to record lows and consumers are still reluctant to spend on big ticket items.

These worries have encouraged the Bank of England to resume its policy of Quantitative Easing – creating another £50bn. The Bank are hoping this will lead to further lending and make the recovery more lasting.

Prospects for Future Housing Recovery.

Although house prices have fallen 25% since their peak, they are by no means cheap by historical standards. Price to earnings ratios are still much higher than their post 1990 crash level. It seems zero interest rates are encouraging homebuyers back into the market. House prices are also been kept high by the relative shortage of properties on the market. As the economy recovers in 2010, interest rates are likely to rise. Assuming a modest recovery, interest rates will not rise too rapidly and the gap between base rates and commercial rates may narrow again.

With concerns over falling house prices many people are worried about whether they should delay buying a house.

In 2007, The IMF recently suggested UK house prices are overvalued by 50%. For example, they point to the fact house prices have risen faster than incomes and rent. However, this doesn’t mean house prices will collapse by 50%. Part of the reason for the rise in house prices is the fundamental shortage in supply compared to demand.

Howeverm despite a shortage of supply prices are being pushed lower by

• Lack of mortgage finance
• Collapse in confidence
• No one wants to buy when prices are falling

Generally, when house prices are falling, it is best to wait. I would wait until prices have recovered and start to rise for at least 2 consecutive months.

Other Points to Bear in Mind

• If house prices do fall, it is not the end of the world. (Whatever headlines in the Daily Mail may say)
• A fall in house prices are not necessarily a problem for homeowners. If you buy a house to live in, a fall in house prices doesn’t effect the cost of mortgage repayments. In fact a fall in house prices will probably enable interest rates to fall and make mortgage payments cheaper.
• If house prices fall and you need to move, don’t forget over house prices will be cheaper to buy.

If you are buying a house as a property investment, it is of course a different matter. A stagnating or falling housing market is not a good time to buy a second house.It would be better to wait until the market has changed direction. At the moment it is difficult to get sufficient rentable income to pay 130% of the mortgage repayments.

My advice is if you want to buy a house rather than renting, don’t necessarily let a potential fall in house prices put you off. As long as you can afford a mortgage and you are not over-stretching yourself it makes sense to buy a house rather than renting. However, if you can wait until end of 2009, you will probably save yourself a lot of money.

Is 2009 A Good Time To buy A House

There seems no end in sight for the credit crunch. Therefore, with deteriorating conditions in the mortgage sector, it is best to wait before conditions regain normalcy. Furthermore, the housing market is being depressed by the rise in unemployment and deteriorating economic conditions.

If you are buying a house as an investment, I feel the best buying opportunities have passed. Nevertheless in the long term, it is possible the housing market will continue to be a good investment. I don’t see the government addressing the fundamental shortage in supply in the near future. This is the main reason why house prices are so expensive.

• Why House prices are so expensive in the UK

The American Dream Suffers a battering

America has had its fair share of bubbles and busts. The dot com boom and bust was spectacular, if relatively short lived. The response of the Fed – cutting interest rates helped to smooth over the problem. The US avoided a serious recession and for most people (unless they had invested their life savings in dot com firms) the issue was of little importance. Furthermore the rapid response of the Fed reassured markets that the monetary authorities were eager to avoid any economic downturn. It appeared that boom and busts were not to be feared.

Against a back drop of very low interest rates, economic growth and a very competitive credit market, there was a rapid expansion in the number of mortgage advances. This enabled a new generation of Americans to buy a house (especially first generation immigrants and people with bad credit histories). Buying a house seemed to be an excellent investment. Not only did you get to own your own house, but, also could enjoy rising wealth as house prices shot up.

Between 2000 – 2006, American House prices rose by 135% encouraging even more to try buying a house.

With house prices rising so quickly, Mortgage companies were willing to lend 100% mortgages and mortgages to people with bad credit history. Mortgage salesmen were encouraged to sell mortgages with little evaluation of ability to pay. In a period of rapidly rising house prices, it was easier to mask poor mortgage decisions.

The boom in house prices also caused an unprecedented boom in building. Housing was the new gold rush. Large homes were knocked down to build several apartments. In particular there was demand for new housing in affluent suburbs, outside of central cities, but, within commuting distance.

The collapse of the housing market and credit crunch have been well documented – see credit crunch explained. In short house prices fell and banks suffered from large scale losses as people simply defaulted on rising mortgage payments.

In many cases, people are simply posting the keys in the letterbox and walking off. Unable to pay mortgage payments and left with negative equity, people prefer to have the home repossessed than struggle to fight a losing battle. The problem is that home repossessions are expensive for banks. Typically, banks may get 40% less than the original loan. It is these loan write offs which are causing the Fed to have to bail out mortgage lenders like Freddie Mae and Fannie Mac. The concern is that with house prices falling and unemployment rising, there are future waves of mortgage defaults still to come.

Continue reading →

If you think things are bad in the UK property market, spare a thought for the Spanish Housing Market.

The Spanish Housing Market has seen a spectacular boom in the past decades. It hasn’t just been a boom in house prices, but also boom in new supply. Spanish house prices averaged £187,000 in December 2007 – twice as expensive as in 2000. Whereas the UK market struggles to build new houses, planning permission is much easier in Spain. In particular, new homes have been built in touristy areas – often for the British buyer. About 70,000 people in the UK own a property in Spain.

However, there are now signs that the Spanish Market faces a drop in house prices of upto 30%

Although, Spanish banks have been much more cautious about bad credit rating lending, the credit crunch is sill starting to hit the Spanish mortgage industry. Demand is falling from both domestic and foreign sources.

Continue reading →

Amidst all the talk of falling house prices, it is easy to forget that there is a shortage of new housing starts in the UK.

Recently, the Government’s key adviser on housebuilding, Steve Nickell expressed his concern about the disappointing level of new houses being built in the UK. Steve Nickell who chairs the government backed National housing and Planning Unit NHPAU, used to a be a member of the Bank of England policymaker committee.

In 2007, the number of new housing starts fell to just 166,820 new homes. This is a decrease of 11% on 2006.

Government’s Target for New Housing

Gordon Brown has made a promise to build 3 million new homes by 2020. This involves an annual rate of just under 250,000 a year. However, it is not clear where this extra houses are going to be built. At the current rate there is a shortfall of 70,000 houses a year. Currently, planning permissions for new houses is quite strict. There is the usual problem that people want new houses to be built, but, just not ‘in my backyard’

One guaranteed way for an increase in home building is for the government to restart a programme of building council funded houses. But, currently there seems little political will to make this investment.

Continue reading →

Home reversion schemes and plans allow homeowners to tap into the value of their house and live in it until their death.

A home reversion scheme means that you sell your house, usually at a discount to an equity release firm. In return they allow you to:

• Live in the home until your death.
• Give a % of the equity in the house, that you can use for your retirement.

At death, the house is sold to reimburse the lender, the remainder of the cash is then distributed to the heirs in the will.

The advantage of Home Reversion schemes

1. Low risk way to borrow money
2. Home value is secured.
3. Attractive in periods of falling house prices or stagnant house prices
4. You can choose between a lump sum and an annual income

Continue reading →

The recent gains in house prices over the past decade may indicate that the prospects for investors in the UK property market are pretty meagre. In fact some would argue investing in the UK property market would be a bad move because they are now overvalued and are set for a price correction. However, despite the most pessimistic house price predictions there are some reasons to indicate investing in the UK property market may be a good long term move.

Advantages of Investing in UK Property

1. The ratio of house price to incomes has increase, but, it is not completely unsustainable.
   Lower long term interest rates. Since independence of the Bank of England average base rates have been lower making borrowing relatively cheaper than previous decades. In the foreseeable future we are likely to see the continuation of low nominal interest rates
2. Historical Gains in the housing market. According to Nationwide statistics UK property prices have increased by 9.28% since 1953. This increase offers better returns than savings in a bank and investing in the stock market
3. Shortage of Supply. Although temporary demand side factors may reduce house price growth. Long term factors suggest the UK will continue to experience a shortage of supply. This will push up long term prices of homes in the UK Continue reading →

With house prices on both sides of the Atlantic falling, those wishing to sell their house are placed in a more difficult situation. Although, it is currently a buyers market there are some tactics that can be used to maximise your selling price.

Choose Right Valuation.

Just because house prices are falling, don’t despair and set a price that is undervalued. At the same time, avoid being greedy and setting a price that is too high. Take several valuations and choose one in the middle. You need to choose a fair price which will encourage others to come and view. If you get enough people viewing the competition may push up the prices.

Compare with Similar Properties.

The housing Market can be a highly localised affair. Sometimes, even though national house prices may be falling, certain areas can hold their value. Even, within one large city, house price valuations may be moving in different directions. Therefore, it is important to get an idea of the local market. To get a real feel for the local property market, take time visiting estate agents and even visit other houses on sale. Look at the valuation placed on other houses and judge a competitive price for your own. Looking at other properties will also give you a good idea about what works well for selling houses and what puts a prospective buyer off.

Increase Value of Your Own House as Much As Possible.

There are several things we can do to increase the selling value of the house. Many of these are common sense, but it can be surprising how many homeowners don’t take advantage of them. Continue reading →