Entries Tagged 'uk housing market' ↓

UK House Prices 2007-09

Source: BBC – UK House Prices

The Council of Mortgage Lenders CML have stated that given the uncertainty surrounding the housing market they will not be making any predictions for house prices at the moment. Certainly, forecasting UK House prices can be a tricky issue.

The depth of the crash in 2007-08 caught many commentators by surprise. But, then few were predicting house prices would rise in 2009. And much to everyone’s surprise they have risen every month since spring 2009.

What Are The Prospects for House Prices in 2010

Low Interest Rates.

The cut in interest rates to 0.5%, is one of the main reason many homeowners have been able to hang onto their homes. It explains why mortgage defaults have been lower than in the last housing crash. Given state of the economy and the degree of spare capacity, interest rates are likely to remain low throughout 2010. (see: Interest rate predictions) If inflationary pressures do occur (and there is little sign of real inflation apart from cost push factors), taxes will rise rather than interest rates.

Also, more people will be coming to the end of fixed term mortgages so may be able to remortgage at lower rates than before. With low interest rates continuing in 2010, this should encourage buyers – at least those who are able to get a mortgage.

Mortgage Supply

Perhaps more important than house prices, is the number of property transactions. According to HMRC, the number of completed sales rose from a low of 40,000 in January to 90,000 in October. This suggest mortgage lending is slowly being relaxed, and buyers are slowly returning to the market.

Falling Prices and Confidence

The rise in house prices we have seen in 2009, may well encourage more people to put their property on the market, this increase in supply could depress prices, but, at the same time, the fact prices have stopped falling so sharply may mean banks are less strict about requiring very large deposits. If banks and consumers feel the worst of the crash is over, it will encourage more people to buy and more banks to lend. Many people are feeling now is a good time to buy.

Growth and Unemployment

This has been the longest recession (six quarters of negative growth) since the Great Depression, but, unemployment has risen less than expected (see: why is unemployment not higher?) This muted rise in unemployment has been a big factor in stabilising prices. 2010 should see a sluggish economic recovery, unemployment will take a long time to fall, but, if it does peak soon, that will definitely help the UK Housing market.

Long Term Fundamentals

House prices in the US, are still falling nearly 4 years since they first started to fall in 2006. Why should the UK be any different? Well one reason is the excess supply in US and the continued shortage of supply in UK. House price to income ratios are still above long term trends, but, there is also still a long term shortage of housing. Whilst this occurs, UK house prices will continue to be more expensive than other countries

In April 2008, I suggested despite short term factors, in the long run, house prices could well rise to £300,00 in the next 10 years. (see long run forecasts) This is not necessarily a good thing, but, it could well happen

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

Artificial hips help the ageing and infirm, but government Hips for property owners seem to help no one except the hips purveyors. Estate agents think they are discouraging sellers as they have to pay up front for a Hip and this ‘discourages the market testers who may have sold if the deal was right’.

Home Information Pack Contents

1. Energy performance certificate
2. A Property Information Questionnaire
3. Evidence of title
4. Local Authority searches
5. Drainage and water searches
6. Leasehold information
7. Sales particulars

Not included: all the legal documents a solicitor needs prior to exchanging contracts.

How Long Does A Hip Last?

A hip lasts until the house is sold. If it is taken off the market for less than 12 months and put back on, the same HIP may be used. But, if it is taken off for 12 months or more you will need a new one.

Who Needs a Hip?

Anyone marketing a house in England and Wales (Scotland Excluded). e.g. if you sell to a family member directly there is no need to get a HIP. But, if you put a for sale sign in window, you need to commission one.

Problems with Hips

1. It takes time to prepare a Hip and whilst some aspects can be done in parallel in some areas you need to start 3 months before you want to sell.
2. The cost of a hip can vary from £200- £500 for a similar property. You do not need to buy your Hip from your high street estate agent. According to Which you should shop around for a better price.
3. You still need a solicitor to ensure you acquire clean title to the purchased property.
4. Buyers may still need to conduct extra searches on top of the Hip. This can reveal other issues with local authorities like parking regulation changes or lack of planning permissions for gardens.
5. Searches for Hips can go out of date before the property is sold.
6. Energy performance certificates seem to be disregarded by potential buyers.

The Future

Hips should speed up the selling process but that is still fraught with delays at your solicitor.

A new government may scrap the present scheme and bring in a more comprehensive but none compulsory‘ Ready Pack’ containing all the legal documents and draft contracts.

Sales that are currently excluded from HIP regulations including, sales that are not marketed, Right to buy schemes, mixed properties may be brought into a scheme.

For more information for Buyers, Sellers or the industry professionals read the Direct Gov web site

2010/11 will be the first fiscal year for sometime to feature a top tax rate of 50%.  With national insurance the marginal rate will be as high as 61.5%. If you earn it you will expect to pay tax on it As ever top earners may be able to effect some changes that will help reduce the impact.

Tax Saving Tips

• Timing of financial decisions, using tax efficient saving vehicles and maximising allowances may help mitigate the cost.
• Aim for capital gains rather than income. The former is only taxed at 18% and you have an annual exemption allowance of £10,000 worth of gains.  Equalise gains between spouses to get 2 sets of relieves and lower rates.
• Consider cashing investments like treasury stock and some life assurance bonds in 2009/10 as the gain is treated as income.
• Discuss trust income arrangements with your advisers so complex new rules apply in the next tax year.
• Review your pension arrangements in terms of savings and income draw down to get the amounts in the right year.
• Some people may be able to bring income forward (like bankers bonuses) this may save tax but it will be payable early.
• Consider deferring capital allowances and reclaiming  tax losses until next year.
• Avoid being too creative as a new team has been set up by HRMC aimed at evasion and particularly income generating foreign assets.

Much to many people’s surprise, we have seen a recovery in house prices this year. But, it is a recovery lacking conviction or any enthusiasm. A majority of economists still expect house prices to fall in 2010.

As we have often mentioned, the price rises have been mainly due to the shortage of supply on the market, rather than rising demand. This shortage of housing means prices have been squeezed higher by a small number of buyers.

However, the shortage of supply is not the only reason behind the recovery.

• Low interest rates has prevented many mortgage defaults
• Banks are keen to avoid repossession because they want to avoid the bad debts on their books.
• There have been some signs of economic recovery, with improvements in consumer confidence (though official statistics still show we are in recession)
• A feeling that the worst of the house price falls may be over

The economic recovery is, like the housing market, very uncertain and lacking in conviction. Whilst many feel GDP statistics are wrong, and the economy is actually recovering, few expect a recovery to be anything other than weak.

In particular, firms, banks and consumers are all trying to rectify their balance sheets – pay off debt and increase savings. This will depress spending and the housing market into next year.

After falling 25% since the late 2007 peak, UK house prices have made a steady growth during 2009. The increased price has taken a few commentators by surprise. But, behind the figures of rising house prices, it is clear we have not witnessed a return to a thriving property market.

Hometrack stated that UK house prices rose for the third consecutive month, and Nationwide reported the first year on year increase since the credit crunch.

Hometrack report that property sellers are receiving 92.9% of the asking price up from a couple of months ago. However, like other agencies, they report the rise in prices is occuring despite a dearth of buyers. The main thing pushing prices higher is a shortage of supply.

Some factors that will influence the Property Market in the coming months

The price recovery will encourage more property owners to put their property on the market; many have been holding back during the house price falls. However, at the same time, many buyers were put off buying because of the rapid falls in prices. If people feel the worst of the house price falls are over, then more may be tempted back into the market.

Interest rates will rise sometime. At the moment, interest rates of 0.5% are making mortgage payments cheaper and preventing many having to sell. But, economic recovery could lead to higher interest rates. However, the recovery may be muted and interest rates could remain low for a considerable time. Also, unless people are on tracker mortgages, many banks haven’t passed the full rate cut onto homeowners so some will not see the full rate increase when it comes.

Unemployment likely to remain high during 2010 and 2011. The depth of the UK recession is depressing. It has now lasted 6 quarters – one of the longest on records. This will lead to a muted housing market.

• Problems facing UK Economy

The Nationwide reported the fastest rise in house prices since Dec 2006. In July house prices rose 1.6% to £160,244. The 12 month house price change is now only -2.2%

The rise in prices occured because of the continued low interest rates and shortage of houses for sale.

However, the upturn in the market may encourage many homeowners to start putting their houses on the market. There is a considerable number of homeowners who have been holding off putting their house on the market waiting for market to turn. These homes are known as a shadow inventory. Now, prices have risen for a couple of months, we could see an increase in houses on the market which will moderate price rises and prices could fall if interest rates start to rise again.

Mortgage approvals continue to show signs of recovery with data expected to show further improvement.

Quoted 2 Year Fixed Rate Mortgage Rates

The fall in base interest rates to 0.5% has yet to be reflected in fixed rate mortgages. Despite continued base rates of 0.5%, commercial banks are already  raising their fixed rate mortgages.

Commercial banks have been claiming that the cost of borrowing is going up for them. However, looking at the three month libor (interbank rate) this is not the case. Libor rates have actually come down quite sharply.

3 Month Libor

Note 600 base points is the equivalent to 6.0%. Current Libor rates are just above 1%

Commercial banks may also argue, interest rates are likely to rise in the future. But, as we mentioned in latest interest rate predictions, the Bank of England feels interest rates will stay low for a considerable time.

Why are Fixed Rate Mortgage deals remaining High?

• Less competition in the banking sector following merger between HBOS and Lloyds
• Banks desperate to recoup losses from bad debts and tracker mortgages with 0%
• Stagnant Housing market, making banks less willing to lend mortgages except with good profit margin

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In looking at tips to get on the property ladder One option is to part rent part buy. The most popular avenue for this scheme is the governments New Home Build Scheme which is targetted at certain areas of the country and at certain key workers.

Who Can Get Funding?

Household incomes must be less than £60,000 a year

• You must be a first time buyer or a previous home owner who can no longer afford it
• Or a housing association or council tenant
• Also you must be a ‘key worker’ (a key public sector worker, like a nurse or teacher)

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With house prices around 25% lower than recent peaks, now is becoming a good time to get on the property ladder.

The problem is that despite the house price falls, UK house prices still remain relatively high. However, given shortage of supply in UK, it would be inadvisable to wait for property prices to fall significantly more. – It might simply never happen.

These are some tips for Getting on the Property Ladder

Saving Discipline.

More tips for saving for your first mortgage deposit

Borrow From Parents.

The CML found nearly 80% of first time homeowners under 30 were borrowing from their parents. This shows how reliant young people are becoming on their parents to get on the property ladder. If you find it difficult to approach your parents for help with a deposit. Try consider writing up a realistic plan which gives them a benefit from lending. This may make it easier.

Move to Cheaper Parts of the Country / Your Town.

House prices vary tremendously between different parts of the country or even within a city. Setting your sites on a different district / area may mean housing becomes much more realistic.

Part Rent / Part Buy

This is a government scheme which could help you to buy a house. It involves getting a mortgage for part of the cost and paying rent on the remainder. There are more details here New Home Build Scheme

Mortgage in Someone Else’s Name.

If getting a deposit is difficult, you could consider asking your parents to act as a guarantor or get a mortgage in their name. This is not ideal but it could be the only way to get on the property ladder.

See also

• 10 Tips for Getting First mortgage