In the post war period, rising affluence, enabled a marked rise in homeownership as more families could now afford to buy outright rather than rent.

In the 1980s, the Conservative government aggressively promoted the idea of a ‘home owning democracy’ – leading to a further growth in home ownership, helped in particular, by the policy of selling council houses cheaply to tenants.

source: CML – pdf

Home Ownership rates in UK

In 1953, the proportion of owner-occupiers in England was 32 per cent. In 1961 this was 43%

Homeownership rates peaked at just over 70% in 2000. As mentioned in post – ‘first time deposits’, they have now fallen to 68%.

Reasons for Home Ownership

Homeownership is the most popular form of living. The majority of people aspire to be a homeowner, even if they may not be able to afford one. The traditional benefits of homeownership include:

• Benefit from rising Prices and hence rising wealth – historically, house prices have exceeded inflation in UK.
• Potential of Living rent free during retirement years.
• Provides Greater Security, can’t be asked to move.

More: Benefits of buying own house.

However, there are also potential problems of this desire for home ownership.

• The 1980s, which saw a rapid rise in home ownership, also saw a boom and bust in house prices.
• In a bid to get ‘on the property ladder’ many people overstretched themselves getting mortgages several times income.
• Homes can be difficult to sell reducing labour market flexibility.
• Volatility in house prices can leave new buyers with negative equity
• Volatility in interest rates can make mortgage payments unaffordable – e.g. 1991, 1992 period.
• Increased wealth inequality between those who own property and those who don’t

More: Disadvantages of buying house

Homeownership per se is not a bad thing. But, the pursuit of ever increasing homeownership can be a problem when there is a shortage of housing and a volatile housing market. The UK, may well need to learn to lessen its obsession with home ownership.

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

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!

See article: Why are House prices in UK so expensive?

The volatility of house price growth

Affordability of Housing

It is interesting to note how low house price to earnings ratios fell in the mid 1990s at the end of the last crash. Also, how much house price to earnings rose by the peak of the 2007 bubble.

Just in case you need more evidence House prices are still expensive for first time buyers.

It is mortgage lending that drives demand for buying houses. But, the credit crunch is still hitting banks making them reluctant to lend.

Base Rates can’t fall any further. But, how long will they stay at 0% with house prices showing signs of recovery?

Housing Market stats at ONS

Copyright:

Note Graphs can be reproduced freely on other websites, with link back to www.housingmarket.org.uk/ – a sister site of mortgageguideuk.co.uk/

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.

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

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.

Sell to Lender

Rather than lose through having to repossess, many banks are encouraging struggling homeowners to transfer ownership. Basically, what this does is to wipe the slate clean. The bank bears the negative equity and takes care of the mortgage repayments. Homeowners are able to sell their house without suffering negative equity. It is also better for their credit rating. For the bank it is not good but, better than the costly drawnout process of repossession.

The housing slump is exacerbated by the number of unsold properties on the market. The boom in housing builds ended only after the market had begun to fall. The result is that even in a time of falling prices, there are still new homes coming on to the market. Faced with a slump in demand and glut in supply, it is not surprising many forecast prices to fall further. At least in the UK we do not have the same glut in supply – just a stagnant market with buyers extremely scarce.

Amidst all the statistics there are many individual cases illustrating the personal costs of the housing crisis. People who have seen the value of their homes drop by $40,000. People who have lost their home, lost their credit rating and left with negative equity. It is an ugly business and the sheer scale of house price falls has taken many by surprise. The question for many Americans is when will the housing slump end? With banks still nervous about lending predicting the end may not be so easy.

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.

Over Supply. The property boom caused an unparalleled building of new houses. In 2006, the number of new houses built in Spain reached a record 866,000 units (compare that to the 140,000 new houses built in the UK last year). Santiago Aguirre, chairman of property consultancy Aguirre Newman, said Spain had overproduction of up to 1.5 million homes and there had been a “spectacular” fall in sales so far this year, which he assessed at 85 percent. A fall in demand combined with an oversupply on this scale can only lead to a sharp fall in prices. At least the UK has only falling demand to contend with.

In Spain, the construction industry account for 10% of the workforce, compared to 6.5% in the US, this sector is facing a deep recession as demand for new homes dries up. The housing market fall in Spain will have a bigger impact on the economy because it is such an important aspect of the economy.

Although, Spain’s economy is currently expanding and house prices are yet to fall; investing in the Spanish housing market in current conditions seems inadvisable.

Why UK House prices are falling

Homeowners warned of house price crash in Spain

Is Spain heading for a crash at Economist

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.

Long Term House Price Predictions

In an ominous warning Steve Nickell, suggests that if the rate of homebuilding remains as low as it is now, house prices could rise to equal 10 times people’s earnings by 2020.

The importance of supply in determining house prices, is one reason why house price to incomes ratios are not necessarily a guide to whether house prices are overvalued. If the UK keeps having a growing population and restricted supply the ratio of house prices to earnings will definitely increase in the long term

Related 

• Why House Prices set to fall in short term
• National Housing and Planning Advice Bureau
• UK Housing Market

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

Disadvantages of Home reversion schemes

1. You will be able to leave less in your will.
2. If house prices rise, you will not benefit from the equity gains.

Checklist before Taking out a Home Reversion Scheme

• Do you need the equity withdrawal?
• Consider the impact on your inheritance
• Consider whether you would be able to afford care or live in an old person’s home.
• Consider other options to equity release, especially if not retired
• Take independent advice

More on Mortgage equity withdrawal

Effect of falling house prices 

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
4. Demand For Renting. With a shortage of supply and increasing population there is strong renting demand. Therefore incomes from renting will remain good.
5. Becoming an Expert Property Investor. Even in a stagnant market there are options for making capital gains out of property which is undervalued. Often property investment requires a good knowledge of local property markets and how to renovate housing.
6. According to some so called expert the Housing Market has been on the verge of collapse since 2002
   Buying new houses before they are put on the market. According to Inside Track 90% of new properties have been bought before they even hit the market.

Disdavantages of Investing In UK Property

• House prices may be set to fall
• Is 2008 A good time to buy?
• UK Housing Market