Since 1991, there has been no rebanding. The effect is that many houses are incorrectly banded leading to a significant number of people paying too much council tax.

The easiest way to check is ask local neighbours what band they are in. If they are in a lower band you have a very good chance of not just getting a lower council tax bill, but getting a backdated rebate. A friend of mine recently was successful in getting a lower council tax band. He described it in more detail here – A Council Tax Reband could save you thousands

Other tips for Saving Money on Council Tax

• Students Don’t Pay council Tax
• If you live alone, you are entitled to get a 25% discount. Make sure you tell the council though.
• If there is one adult and several students, you are entitled to the 25% discount.
• Renovation. If the house is empty for renovation, you can claim an exemption for upto 12 months.

On a personal note, I really dislike the council tax, it is very regressive and takes a high % of my meagre teaching income. I would like to see a local income tax which would be fairer. The thing with the council tax is that it was rushed through because everyone despised the poll tax. But, the solution given was not the best.

Also see: Council Tax at Guardian

Other Extreme Council Tax Savings

• Live in an area where council tax rates are low.
• Live where council services are run on the basis of good value for tax payers money or where the government subsidy is high.
• ‘If you’re on a low income, whether you’re working or not, and need financial help to pay your Council Tax bill, you may be able to get Council Tax Benefit. Find out more, including who is eligible and information about the Second Adult Rebate’ from Directgov
• Beware of the potential ‘mansion tax’ beloved of the Libdems but also keep an evil eye on Eric Pickles

Read rhetoric or reality on Council Tax

Despite a set back in prices since late 2007, UK house prices have not fallen by as much as might be expected. For example, UK house prices have not fallen by a similar amount to US or Spain.

House Prices Since 1960

Real and Nominal House Prices

Real house prices take into account the effect of inflation. Despite two house price crashes in 1991 and 2008, housing remains a good investment offering a good return in real terms. (In addition to capital gains also income from renting)

real house prices – series 2 (Red)

Nominal house prices – series 1 (blue)

Annual Percentage Change in House Prices

• House price forecasts 2012

Many factors are pushing house prices down:

1. House prices fell for four years during last slump

2. Economic Recession The recession continues to worsen threatening more unemployment and therefore more home repossessions.

3. Lack of Funds for Mortgages. The Banking Sector is still fragile after more bad debts exposed from credit crunch. Lending conditions likely to remain tight.

4. House prices still expensive. House price to earnings still higher than long term averages

5. Lack of Confidence as falling prices and recession put people off.

• Why House prices are falling

Related

• Housing Market Statistics
• Historical house prices
• Nationwide house prices

Bad Lending Practices

• The high loan to valuation ratios 125% in some cases.
• The lack of stress testing of the borrowers ability to repay.
• Inadequate assessment and checking of borrowers income.
• Lax valuation criteria and lenders greed for a deal at all cost.
• Excessive interest only lending with no affirmation that plans were in place to repay the capital.
• Large number of creative and ‘flexible’ loan products often driven by fees chargeable.
• Wholesaling packages of debt and sub-prime debt as though this was a virtue.

Enter the FSA

The FSA wants to avoid history repeating itself and is proposing and consulting on three ‘new’ rules:
1. An affordability assessment must be carried out which includes verifying an individual or couple’s income. This was not always the case during the last boom.
2. Unavoidable bills such as utilities, council tax and spending on children must be taken into account.
3. All mortgage lenders must consider potential rises in interest rates and assess whether a borrower would be able to repay in such an eventuality.

Issues to Consider

• The onus will clearly be on the lender to ensure regular interest and capital payments are feasible.(When was it ever not their responsibility)
• Consumers need to be protected from bad lending practices that can lead to the distress of arrears and repossessions.
• Rules need to be practical and avoid unintended consequences for example consumers who could have afforded a mortgage might have to take out a smaller mortgage or delay their purchase.
• Bad lending has dramatically reduced with the ‘bungee rope effect’ of tightening all lending. These new rules when implemented in 2013 should cater for the next upturn in the lending cycle.
• Lenders need a clear and supportive regulatory framework to go about the business of funding the housing market
• Ideally the finally agreed rules ‘would take account of the European legislative proposals too, so that as far as possible the costs of regulatory duplication are avoided’.Council of Mortgage Lenders
• Some niche markets such as the over 50′s and self certifying borrowers may suffer unduly.

House prices fell at the beginning and through of 2011 and only started to stabilise towards the end of the year. New build companies managed to survive trying market conditions by moving their mix of properties to larger more upmarket plots. Some builders were able to supplying social packages of new housing but more needs to be done.

What will Happen to House Prices in 2012?

• There are three scenarios. A healthy rise in prices starting in spring, a static market bumping along the bottom for most of the year or a further slump in prices.
• There are serious downside risks on prices that could slump 5-10%. Lending is still not freely available. The Euro may collapse and drag confidence and markets down still further. The economy may fall into further recession and unemployment, already set to rise could leap out of bounds.
• To sustain a price rise there needs to be an increase in fundable demand. Hefty inflation can take some of the inflated house values out of the market place but it will be slow to take effect and will not impact on 2012.
• Perhaps a static market in pricing terms is the best we can expect for 2012. Interest rates need to remain low and forbearance high to avoid a jump in negative equity and repossessions.

What will Happen to Mortgages in 2012?

• Wholesale money markets are struggling with the Euro. They are also seeking higher rates of return and interest rates will be higher in 2012. This is true even if Bank Rate remains at the current 0.5%.
• Marginal mortgages will continue to be harder to find. Self certification mortgages for example may be regulated out of existence.
• The interest rate trend is up – fixed term deals are now more expensive and progressively harder to find.
• Demand for mortgages will probably fall in reaction to the economy, funding costs and lack of activity in the housing market. This battening down of the hatches and a return to saving may provide a breathing space the housing and mortgage market needs to get back on an even keel.

Exceptions for 2012

• As with 2011 some areas will escape the downside of the general market. Premium properties in London were still strong as foreign investors bought property. The continuation of this effect will depend on the relative situation with the Euro countries and the flight of capital from unstable areas but sterling based property may survive.
• The Olympics and gentrification in some London areas like Whitechapel, and Elephant and Castle will create pockets of increasing prices.
• The split of retail banking from investment banking has the potential to create great change but it is likely to be delayed in implementation and take effect only slowly.

Why are house prices so expensive?

1. Demand is greater than Supply.

A very simple economic truth: if demand increases faster than supply then prices will rise. This has, despite some short term fluctuations, been occurring since the end of the Second world war. It does beg the question why is demand increasing faster than supply.

2. Constraints on House Building.

Despite frequent talk of the necessity of building houses, we have a reluctance to build houses. House building is at its lowest level since the second world war. About 135,000 are being built a year. This is much less than the 250,000 the government feel is necessary to keep pace with a rising population. There are many constraints on the building of houses:

• In the most popular areas, there is a shortage of supply. It is difficult to find new land around greater London
• Environmental cost. The British have a strong attachment to preserving “greenbelt land” Many areas are protected from further housing development.
• Not In My back Yard. People are usually in favour of more homes being built, as long as they are not in their local area. Increasing supply of houses leads to more congestion, crowded amenities and loss of greenbelt land.
• Vested interests perhaps most importantly increased supply reduces the value of your existing home. Therefore, existing homeowners have a vested interest in keeping the supply as low as possible in their area.
• Lack of Social Housing. Since Mrs Thatcher encouraged the sale of council housing, the number of new social housing (a euphemism for council housing) has been very low.

3. Rising Population

The population of the UK has been rising, partly due to immigration, this increases the demand of housing

4. Rising number of households.

The number of households has been increasing faster than the population. This is because social factors have decreased the average number of people in a household. For example, divorce rates, and the fact people get married later in life, have increased the number of single people. There are more old people living alone.

5. Rising Incomes.

Incomes have risen by an average of 2.5% in real terms since the war. Furthermore people are willing to spend an increased % of their income on housing. This is because housing is seen as the best investment in the UK.

6. New Mortgages

Rising house prices have not deterred people from desiring to buy a house. In the boom years, higher prices merely led to people borrowing higher income multiples than before. The credit crunch led to a severe curtailing of mortgage availability. Tighter mortgage restrictions may yet diminish growth in house prices. Yet, many people are still benefiting from previous laxness in mortgage lending.

7. Parents helping their children.

Another reason that demand hasn’t fallen is that parents are using their equity gains to help their children get on the property ladder. See Parents and mortgages

8. Speculation

Despite the volatile nature of the housing market, housing has increasingly been seen as a good investment. The returns on buying a house have consistently outperformed the stock market. This has encouraged a new generation of buy to let investors, this has helped to increase demand further. In London, there has been a lot of demand from foreign nationals such as Russians and Arabs. Some argue this speculative increase in demand means the high house prices are unsustainable and are liable to fall. Why House prices are set to fall

9. Relatively Low Interest rates.

Since 1992 interest rates in the UK have fallen, making the cost of getting a mortgage relatively lower.

10. Renting is also expensive.

The alternative to buying a house is renting. But, the cost of renting has also risen faster than incomes. If you are paying £800 a month, it make sense to try and get a mortgage where you will be paying £900 a month, even if it means borrowing upto 6 or 7 times your income. The increased price of renting reflects the fundamental imbalance in demand and supply. It is true that the price of housing is now rising faster than renting, but it still makes economic sense to buy rather than rent. This means people are increasingly looking towards unconventional mortgages to help them buy a house.

• Factors which determine house prices
• UK Housing Market

Graph of Interest rates since 1979 – 2011

UK Base Rates

Base Rates and Commercial Rates

Bank of England Base Rates and Standard Variable Rates

This graph shows how commercial banks do not necessarily follow the base rate changes. The very low interest rates of 2009, gave many commercial banks an opportunity to increase their profit margins and improve their balance sheets. In reality, the banks were short of cash and so kept their standard variable rates higher than the Bank of England base rate.

Real Interest rates

• Real Interest rates take into account inflation.
• Real interest rate = nominal interest rate – inflation.

In the period of economic expansion from 1997 – 2007, base rates were significantly higher than CPI inflation. This is good news for savers because it means that the rate of return from saving in a bank is greater than the amount money reduces in value due to inflation.

After the credit crunch, there was the unusual situation of base rates being lower than inflation, leading to a negative real interest rate.

Base rates were cut to 0.5% in March 2007, this remains a record low for UK base rates.

Economic Impact of Interest Rates

The Bank of England set interest rates to try and meet the government’s inflation target of CPI = 2% +/-1. If inflation is above target, the Bank are likely to increase interest rates to reduce the growth of demand and therefore reduce demand-pull inflation.

However, as well as targeting low inflation, the Bank of England is also concerned about economic growth and unemployment. If the Bank of England fear the economy will contract and enter into a recession, they will want to keep interest rates low to boost spending and economic growth.

See also: The Economic effect of interest rates at economicshelp.org

Other links for Info on Past interest rate trends

• The Bank of England provide detailed interest rates since 1963 [B of E link]
• e.g. Official interest rates since 1975 at B of E
• Interest rates since 1991 at Guardian

International interest rates

G7 interest rates

US Interest Rates

• Mortgage interest rates explained
• Historical House prices

It is estimated the scheme could help 100,000 potential buyers, who are currently locked out of the housing market because of the difficulty in getting a sufficient deposit.

If the homeowner defaulted on the mortgage, they would first lose the 5% deposit, the rest of the loss would be split between the bank and government.

It will be known as the mortgage indemnity guarantee and will give creditworthy customers the chance to get a 95% mortgage on buying a new house.

Reasons for Scheme

1. House prices rising above inflation and faster than average earnings.
2. Mortgage availability much more limited
3. Housing market depressed due to lack of demand, stemming from shortages of mortgages
4. Demand for housing growing faster than supply

Limits of Scheme

• It only applies to new homes. These are often quite expensive so it doesn’t help those trying to get on the bottom of the ladder.
• It doesn’t deal with the fundamental problem of shortage of supply, which has kept UK house prices very high, leading to persistently high house price to income ratios. The UK needs an estimated 250,000 houses a year, this proposal adds only an extra 25,000.

Summary of Housing Proposal

• A new and innovative new build indemnity scheme led by the Home Builders Federation and Council of Mortgage Lenders to provide up to 95 per cent loan to value mortgages for new build properties in England, backed by a housebuilder indemnity fund
•  Helping first time buyers through First Buy
•  Releasing public sector land with the capacity for up to 100,000 new homes
• A new £400 million Get Britain Building investment fund, which will support firms in need of development finance. This will help to unlock progress on stalled sites which have planning permission and are otherwise shovel ready
• More discounts for right to buy council homes. This is good for council tenants, but doesn’t increase overall supply
• Tackling the problem of 700,000 empty homes

Laying The Foundations: A Housing Strategy For England (link at Community.gov)

To address the shortage of supply, (UK has seen lowest rates of homebuilding since war), the government announced £400m of funds to help kickstart housing projects which have stalled. However, this new money comes against a backdrop of cuts to the overall housing budget. Homebuilders welcomed the move, but it is insufficient to deal with the underlying problems in the housing market.

Overall

Though there are concerns that this will encourage people to over-extend themselves in taking on a bigger mortgage, I think it is a good step to help the mortgage market. However, it is only a limited solution and doesn’t deal with many of the key issues in the UK housing market.

Related

• Getting mortgage on low income
• Saving for Deposit
• First buy  – details on government scheme

London vs North

There has been a long discrepancy in house prices between the north and south. But, since 2008, this gap has widened. Even after a deep recession, house prices in London have bounced back to almost pre-boom levels. The rise in London house prices has been most marked in properties over £500,000.

Current average house prices Q3, 2011

• London £295,023
• North £116, 610
• UK average £166,596

Change in House Prices London v North v UK

UK house prices

Since 1993, London house prices have increased by 450%. For the North it is a 200% increase, for the rest of UK an average of 260%

First Time Buyer House Price to Earnings Ratios

First time buyer ratios

The cost of London house prices is shown by the very high ratios of house price to income ratios. It means the average London first time buyer faces house prices which are over 6 times average incomes. With banks being strict about not lending more than 3 times average earnings, it means most young London people are priced out of the property market.

Why Are London Prices So High?

• London has its own economy. A significant proportion of demand for houses in London is from overseeas investors who are less affected by a UK economic downturn. This is particularly noticeable in the higher end of the London Market. In London, 7 out of 10 homes over £5million are going to foreign nationals (this is London)
• Shortage of Supply. In London there is an acute shortage of spaces to build new houses.
• Strong economy. London still remains one of the most vibrant and desirable cities in Europe. Many key financial sector jobs are based in London, meaning there is plenty of demand for housing.

Related

• Historical house prices in UK

This is a simple guide to how the EU debt crisis came about.

Problems of European Debt Crisis

Recession. Markets are worried about size of debt in Eurozone economies, pushing up interest rates. This forces economies to pursue austerity measures, such as spending cuts. However, the size of these spending cuts are pushing countries back into recession. Falling GDP, actually makes it harder to reduce debt to GDP ratios. Thus austerity measures can often be self-defeating, leading to calls for more austerity and spending cuts. Therefore, as widely expected, the EU has downgraded growth prospects for 2012 to 0.5%. However, if the crisis continues to bite, this could be much worse and we could see a fall in GDP, and much higher unemployment.

Bank Exposure to Sovereign Government Debt. Greece was relatively small. But, Italy has debts of $2.2tn, or 120% of gross domestic product. If Italy defaults, the knock on effects will be much greater. It will cause many commercial banks and investment trusts to lose money. Banks can ill afford to write down more losses. Most banks are still recovering from the credit crunch. If there is another debt default, bank lending will once again be squeezed.

No Credible Rescue Plan. Markets fear there is no solution to the debt crisis. The EFSF (bailout fund) doesn’t have unlimited funds. It is backed by money from countries like Italy. The ECB is not willing to act as lender of last resort.

How Crisis Will Affect UK

Slower Growth. UK growth is already anaemic, given spending cuts and low consumer confidence. A recession in Europe would definitely lead to lower exports and lower confidence; this combination would lead to lower growth in the UK – it could be the trigger which pushes UK into a second recession in the space of a couple of years.

Bank Lending. Bank lending is slowly starting to recover from the depths of the credit crunch. Although it is much lower than pre-crisis levels, there has been some recovery in mortgage lending which has helped to stabilise the UK housing market. But, a significant debt default in Europe, would lead to a second credit crunch with banks short of finance and unwilling to lend scarce funds.

UK Housing Market. The UK housing market is driven by several factors, however, a second recession and lower lending could push UK house prices 10% lower as demand dries up.  There will still be fundamental shortage of supply, but in the short term, the fall in demand could push down prices. It would probably have most impact in the London housing market. The London housing market has been the strongest to recover since fall in house prices. But,  a Euro debt crisis could impact on high income earners (wealthy foreigners and bankers the most)

To some extent the UK is more insulated from the debt crisis than Eurozone members. The UK

1. Has access to independent monetary policy. The Bank of England is willing to pursue quantitative easing to provide monetary stimulus during fiscal contraction

2. The UK has independent exchange rate. The devaluation of pound helped restore competitiveness providing boost to exports.

3. The UK has a lender of last resort (Bank of England willing to buy bonds if a liquidity shortage). This is one reason why UK bond yields have stayed low – despite UK having one of largest budget deficits in Europe.

Forecast for interest rates.

This new debt crisis does increase the likelihood of UK interest rates staying at low for considerably longer

Related

• Credit crunch explained
• Euro debt crisis explained

UK House prices have experienced a roller coaster in recent years. The economy is fundamentally weak, but house prices have often surprised analysts and proved remarkably resilient. The UK has a combination of rising number of households and limited supply which can push house prices higher, even during difficult economic times.

Arguments that house prices will fall substantially:

• House Prices increased faster than earnings. Despite the fall in house prices we saw after the credit crunch, the ratio of house price to incomes is still well above levels seen in the mid 1990s after the 1990s crash (House price to earnings ratios fell to 2.1 in 1995) See: House price to earnings ratios
• First Time buyers increasingly priced out of the market,
• Mortgage lending is becoming stricter since credit crisis. Banks have largely jettisoned previous unconventional mortgages; now buyers need to save a decent deposit and can only borrow a limited 3 times income.
• Fall in confidence in housing market.
• Although interest rates are currently very low, when the economy recovers and interest rates rise, we are likely to see a sharp rise in the cost of mortgage payments, meaning many more households will start to struggle to meet payments leading to fall in demand.

Why House Prices May not fall

Limited Supply.  There has been a disappointing number of houses built in the UK. Demand continues to outstrip supply. This limited supply has partly been due to weak economic factors. But, also it reflects the fundamental problems of getting planning permission. See also: number of new homes built in UK

See: House Prices set to drop for more details

Rising Number of Households The UK population is set to rise to 70 million by  2030. The rising population leads to rising demand for housing, but it is not clear whether the supply will be there to meet it. The number of households will also be boosted by demographic factors which lead to smaller household sizes.

Cheap Mortgages. For those with a variable mortgage, low interest rates are making mortgage payments more affordable, increasing demand for houses

I will shortly be writing about the economic and financial implications of falling house prices. But, I would be interested in your experience. Do you think UK house prices will fall substantially, or will they soon recover?

Please feel free to leave a comment below.

Picture by: T.Pettinger, Oxford, UK