Entries Tagged 'uk housing market' ↓

According to research by the Royal Institute of Chartered Surveyors, many estate agents are selling only one house per day. Mortgage approvals are down 71% on last year, pushing prices and home sales lower

I liked the cartoon by Matt in the Daily Telegraph today:

“If you want to move somewhere much cheaper have you thought about buying your own house?”

In a ray of good news, the Bank of England reported a slight easing in the cost of fixed mortgages. The cost of a 2 year 75% LTV mortgage fell from 6.6% to 6.3%. It is the first easing since February. However, the cost of mortgages is generally higher than 12 months ago - despite a cut in base rates. Banks have been boosting their profit margins by raising arrangement fees - bank profits rise

With House prices falling, the renting sector is becoming more expensive and is experiencing an almost mirror price change.

The cost of renting for students has increased by 20% in the past 4 years. Renting costs are rising because there is less supply of rented accommodation. Landlords are renting to more professional workers who can’t buy a house. The increase in cost of student renting is similar to the increased cost of general renting.

Regional Variations in Renting Costs

There is a huge disparity in the cost of renting throughout the country.

The highest cost of renting is predictably in London, where the weekly average is £102.

• Exeter rents are £78
• Leeds £62

The cheapest places to rent include:

Middlesbrough, Stoke, Wolverhampton, Crewe and Bradford. Here rents are less than £45 a week.

Students on a tight budget, would be advised to think carefully about where they study.

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 →

The Council of Mortgage Lenders reported a 41% rise in home repossessions in the first 6 months of this year.

18,900 homes were seized in the first 6 months of this year compared to 13,000 in the last 6 months of 2007.

The number of people in arrears by more than 3 months also rose by 29,000.

The Council of Mortgage lenders forecast a total of 45,000 repossessions by the end of the year.

Although the statistics (41% jump) are alarming, the % of homeowners defaulting is still relatively small. The vast majority still continue to meet mortgage payments However, homeowners have faced a tough 6 months, with disposable incomes squeezed by:

• Rising energy prices
• Rising petrol and diesel prices
• Increased cost of remortgaging, reflecting interest rate rises during 2007.

Negative Equity and Falling House Prices

• The Halifax reported further large falls in house prices in July. Prices fell by £3,000 in one month. The biggest monthly fall since 1983.
• House prices are have now dropped £22,000 from their peak.
• The Bank of England voted to keep interest rates constant at 5%

We regularly see headlines equating falling house prices to bad news. - Gloom in the housing market, House price collapse, housing slump slump.

From a casual glance at newspaper headlines it appears that the UK is heading for a Great Depressions style economic disaster. But, how bad are falling house prices?

Falling house prices are very damaging for those who bought at the peak (July 2007) and also face difficulty meeting mortgage repayments. Unemployment is likely to rise in the next months. Those made unemployed will struggle to pay mortgage repayments and will face negative equity. It is a toxic combination.

However for the majority of homeowners falling house prices is not the end of the world. If you want to move, falling house prices do not affect you that much. True, you will get less for your house, but, if you want to buy it will be cheaper as well. This housing slump is different to the last housing crash in that interest rates are low (4.75% as opposed to over 11%). As the economy declines, interest rates are likely to remain low. Yes, house prices are falling, but, the cost of mortgage payments is not going up significantly.

Most homeowners are still sitting on huge equity gains. House prices have fallen £15,000 since last year. But, if you bought a house in early 2000, you still would have made nearly £100,000 profit. (Historical house prices) Even if you bought in early 2006, your house has still not fallen in value (at least in most areas)

Affordability.

The fact house prices rose so much faster than both inflation and earnings meant first time buyers faced great difficulty in getting on the property ladder. Lower house prices make it more feasible for young people to buy a house without getting unconventional, risky and expensive mortgages. Falling house prices will also help reduce the intergenerational inequality which increased in the past decade.

True, first time buyers now face a new problem of getting mortgages. But, when the mortgage industry stabilises, buying a house will be more feasible.

Other problems with falling house prices

The other downside of falling house prices is that it will lead to lower consumers spending and lower consumer confidence. Combined with increased living costs, it is a potent mix of negative news for the economy.

Post war data suggests that periods of house price falls can last for upto 4 years.

The last major housing bust in the UK was between:

• 1989 Q3 when house prices peaked at: £62,782
• and 1993 Q1 when house prices reached a low of £50,128
• UK Historical House prices

Why Do Housing Busts tend to last 4 years?

Overvaluation in boom periods. Features of the housing market tend to make house prices volatile. Inelastic supply, and over optimism can push up prices quickly.

Time Delays in Supply. When prices are rising in a boom, firms respond by trying to increase supply of houses. However, from start to completion there can be a delay of two years. At the height of the boom, firms start building new houses. When house prices start to fall, there is still a large increase in new homes coming onto the market. This lagged supply leads to prices falling even more. This is particularly a problem in the US, which  has a large excess supply. It is less of a problem in the UK where the boom in new house builds was limited by planning restrictions. For this reason the fall in US house prices is likely to last longer than the fall in UK house prices.

Mortgage Lending

In house price booms, mortgage lending tends to become more generous. Rising house prices make 100% mortgages seem more attractive. The recent US housing bubble was particularly characterised by lax lending criteria which encouraged more onto the property ladder. When house prices start to fall, the mortgage industry is hard hit. Rather than wanting to sell 100% mortgages, mortgage firms worry over negative equity and so ask for a much bigger deposit. In the UK, many mortgage lenders are charging a premium for any borrowers who have less than a 25% deposit. The result is that the number of people able to get a mortgage sharply falls. Thus the mortgage industry often reacts to market trends rather than encouraging stability.

Continue reading →

The difficulties in the Housing market have caused many home sales to fall through and not be completed. The Bank of England said that in some areas upto 40% of house sales were falling through. This is because:

• Mortgage offers being withdrawn by banks and lenders.
• Fears over falling house prices are causing buyers to back out.
• People unwilling to accept lower offers.

In times of rising house prices, the biggest problem facing homeowners is the possibility of getting gazumped (people coming in with a higher offer before contracts are exchanged). But, with house prices falling, the problem is now people dropping out.

The UK housing market has long suffered difficulties in completing house purchases. In today’s climate lengthy delays mean that house chains can easily fall through. It only takes one nervous buyer to pull out causing problems throughout the housing chain.

This is another reason to try and speed up the process of selling houses

The only good news if for landlords letting out houses to tenants. With demand for buying a house collapsing, demand for renting has soared by 38% in the past year.

The UK housing market has numerous problems:

1. Long Term shortage of Housing
2. Volatile Prices - Booms and Busts in prices. People get carried away in booms leading to painful periods of correction.
3. Shortage of Mortgage Lending.

Policies Which would Help.

1. Encouraging Use of Empty Homes. There are an estimated 1 million empty homes to help dealing with long term shortages without having to build unpopular ‘eco towns’. This could involve greater tax breaks for rennovating empty houses. It might involve higher taxes on empty property giving landlords an incentive to rent and make use of them. (see: problem of empty homes)

2. Increased Supply. In the long term the government still need to actively promote increased supply of both rented and owner occupied housing. The current crisis has led to a sharp fall in house builds, but, when the market recovers we may find again shortages of supply. The government need to look at high density housing in existing population conurbation’s. Without adressing the housing shortages, house prices and rents will remain very high reducing people’s living standards. (why is there a housing shortage?)

3. Mortgage Security. In the short term, the most pressing problem facing the housing market is how the mortgage sector has dried up, leading to a dramatic fall in housing sales. In the short term, there is a strong argument for the government to offer mortgage backed securities for new home buyers and the wider property market. This extra liquidity will hopefully help regain a sense of normalacy in the mortgage sector.
Continue reading →

Debt levels in the UK have been growing significantly for both:

1. National Debt (Government debt. The amount government spending exceeds tax revenues)
2. Personal debt (consumers, firms)

Personal debt levels in the UK

Personal debt includes both secured (usually mortgages, loans against value of home) and unsecured (personal loans, credit card debt). The level of both types of debt have increased in the past few years. Generally, secured debt is seen as less harmful, but, with falling property prices there is the prospect of more people facing negative equity and difficulties of repaying should they default.

• Consumer debt totals £1.4 trillion (about 80% of this debt is in the form of mortgage loans secured against property)
• Over 100,000 go insolvent each year
• UK has highest levels of consumer borrowing in Europe. (but less than US)
• In the past year borrowing has increased whilst saving has fallen. For every £1 saved. Britons borrow 69p (on loans, credit cards but excludes mortgages).  A year ago, this ratio was 29p borrowed for every pound spent.
• Falling house prices could make secured debt unsecured and leave people with negative equity
• According to National Consumer Council, about six million people are struggling to meet credit demands.
  

National Debt in UK

Government debt is the amount the government need to borrow from the private sector, usually in the form of selling bonds to investment trusts and pension funds.

• National debt in UK stands at £555bn in June 2008.
• As a % of GDP national debt has increased from 30% of GDP to a forecast 38% in 2009 (forecast is likely to be wrong and an underestimate)

Continue reading →

The number of loans approved for house purchases in June was just 21,118, a drop of 23pc compared to May, according to the British Bankers’ Association. Since June last year, mortgage approvals have dropped significantly (64% on last year. This slump in the mortgage sector reflects the current credit crunch, lack of confidence and concerns over falling house prices. Banks have tightened up their criteria for lending. In particular the amount of deposit required has increased alot.

• The number of remortgages have fallen by 13%
• The number of households using their house for equity withdrawal fell by 37%

The slump in mortgage lending has been a powerful influence on house prices. House prices have fallen 17% in past 12 months and further falls are likely with the housing market showing its quietest volumes since the early 1990s.

These figures will put pressure on Government to take further action to bolster  mortgage lending.

See: scheme to ease credit crunch