1. Wait Before Buying

In the UK and US, the next 12 months are likely to see falling house prices. Therefore, this is a good time to wait and allow prices to drop before buying getting a mortgage. If you are wanting to buy now, use these predictions to offer significant discounts off the asking price. Homeowners who hold out for higher prices, will struggle to sell in the current climate

2. Save Deposit to get better rate.

Renting temporarily also gives you chance to save for a bigger deposit. A higher deposit will enable a better mortgage deal, especially in the current climate. If you can only put down 5%, you are likely to have less choice and face higher rates than if you can put down 10% or 15% deposit.

3. Make Extra Monthly Repayments.

Once you have a mortgage, one of the best things that you can do, is to try and make extra monthly payments. Therefore, if this is going to be possible take out a flexible mortgage which will not penalise over payments. Even making an extra £50 or $50 a month can make a huge saving to your final mortgage cost. Making extra payments will save interest payments and could shorten the length of your mortgage by several years. Paying extra into a mortgage is likely to beat most investment decisions you can make. Plus there is no risk and gaining a bigger % share in the house will make remortgaging easier. (Making extra mortgage Payments)

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With falling house prices and a temporary collapse in house building, it may seem strange to be talking about a housing shortage. However, if we put aside the short term difficulties of the credit crunch and falling demand, there is an underlying problem that in the long term housing supply is forecast to fall well short of housing demand. For example, the government have stated that the UK requires an annual rate of 240,000 houses a year if we are to meet demand. However, the current rate is only 125,000. Even during the housing boom it was not possible to meet demand.

Reasons for Housing Shortage

Rising Demand

Firstly, the population of the UK (unlike many other western countries) is rising. This is partly driven by immigration and higher birth rates.

Furthermore, the number of households is rising faster than the population. For example, there is an increase in the number of one person households. This is due to factors such as divorce rates, ageing population and people leaving home earlier.

There is also rising demand for second homes and demand from abroad. The demand from foreigners is particularly noticeable in parts of London. Russian oligarchs take advantage of UK tax law to live in the UK and avoid paying tax. (It is rather perverse that locals are being forced out of their own housing market, so that Russian oligarchs can avoid paying tax. But, this isn’t just an ‘urban legend’ there is a lot of truth in it.
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This is a question I sometimes ask my economics students. - If you were the Bank of England governor what would you do?

To be fair, the MPC have quite a few difficult choice to make. The decade of low inflationary continuous growth seem to be over. The current economic situation includes the unwelcome development of both higher inflation and lower economic growth. This deterioration in economic prospects comes against a backdrop of falling house prices, a shortage of credit in the banking system and record levels of personal and government debt.

In one regard, the MPC have a simple target - keep inflation between 1-3%. However, although the government only set an inflation target, it is assumed they will be sensitive to other issues such as economic growth and unemployment.

Recently, the Bank forecast that inflation will rise to 4% by the end of the year. This is not unreasonable given rising food and energy prices. In normal times this would require higher interest rates to reduce the inflationary pressure. However, these are not normal times.

This inflation is caused by rising costs and not rising demand. The rising costs are squeezing living standards and consumer spending. Furthermore, falling house prices are discouraging consumer spending. With this ‘double whammy’ of rising living costs and falling house prices, the last thing the MPC should do is to be increasing rates. Higher rates at this stage of the economic cycle could tip the economy from sluggish growth into a full blown recession.

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2008 has seen some of the biggest changes to Buy to Let mortgage criteria since they were introduced in 1994. The ‘credit crunch’ has meant that lenders are more selective about whom they will lend to and the type of propositions they will lend on.  If you haven’t been actively looking at funding for your portfolio recently, some of the changes may come as a bit of a surprise and changes are still occurring now on a daily basis.

Here’s what you should know…

Availability of mortgage products
The number of Buy to Let products available has fallen 60% since the onset of the credit crunch. An increasing number of investors are asking for funding for certain property or tenant types, rather than asking simply for the best rates.

New build property
New build property (which come lenders may also classify as properties, flats or houses built or converted in the last twelve months) has been a particular cause of anxiety for Buy to Let lenders. It is increasingly common for lenders to refuse to lend on this type of property altogether.
New builds is the one are of concern in the sector, particularly in come city centres where supply is outstripping demand and the fact that twelve months are classed as new build may come as a surprise to many investors. It is still possible to fund new build Buy to Let property but funding options are extremely limited.

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The Market for Flats in the UK.

In 2003, Leeds city centre had 1,800 apartment flats. By 2007, that figure (planned or built) had risen to 21,000. It was a remarkable expansion in flat numbers Yet, now the housebuilders are left with a high % of flats either empty or being let to students at a discount rate. It is symptomatic of a housing boom that has turned to bust.

Why were so Many Flats built when British people much prefer to live in ordinary houses?

In a period of rising property prices (upto 25%) a year, it didn’t really matter how bad or inefficient your investment was. Even the worst investment decisions were making profit. With prices rising at that rate. building more property, of any sort, was a no brainer.

Investor Market. Alot of these flats were targeted at investors (buy to let) rather than occupiers. Therefore the market for flats was always more volatile than ordinary housing. Now that property prices are falling, investors have much less incentive to buy flats to rent.

Government encouragement. Government have tried to encourage the building of ‘affordable’ ‘environmentally friendly’ housing. In this regard, city centre flats have the potential; in particular they have the advantage of not taking up green belt land, which can be so divisive. However, the problem is that homeowners have not shared the government’s enthusiasm for buying city centre flats.

Why are Prices for flats falling More Sharply than Ordinary housing

High levels of vacancy. 25% of city centre flats are unoccupied, but even more are temporarily occupied by short term renters. It appears that supply of city centre apartments and flats is greater than the demand.
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According to the government’s official statistics, inflation is currently 3%. But,many people in the UK, would probably say that they feel prices are rising much faster than this official figure. Is the government method wrong? Are people right to be sceptical of official figures. What is the real Rate of Inflation?

CPI (Consumer Price Index).

Firstly the CPI rate excludes many factors. CPI excludes mortgage interest payments (so the recent rise in mortgage costs are excluded). CPI also excludes council tax rises (which are once again above inflation.

The old method of inflation is the Retail Price index RPI. This does include housing costs and council tax. The current RPI gives a higher inflation rate (4.3%) and has done for a long time. It is argued, with good reason that CPI underestimates inflation.

RPI and CPI Inflation

source: ONS

Input prices

Input Price Inflation is rising at 15%. Materials and fuel inflation is approaching 30%. Input prices are often a lead indicator. i.e. because input costs are rising now, we can expect higher inflation in the future. ONS

Some Goods Are Rising Much Faster than inflation

Petrol prices are rising very rapidly. Nearly 30% increase in the past few months. This takes a big part of people’s spending and is a very visible figure. If you drive anywhere, you can’t help but notice the rise in petrol. Therefore, there is a constant reminder of this important barometer of prices.

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The rates on Fixed rate mortgages in the UK are continuing to increase. The average fixed rate deal is now 6.75% on 2 year mortgages. Fixed rate mortgages have now reached a 10 year high. Furthermore, continuing problems in the credit markets means that fixed rate mortgage rates are likely to rise even further. Mortgages, and especially fixed rate mortgages are determined by the interbank lending rates.

• These are sometimes known as ‘Swap Rates‘. The libor 3 month rate is also a leading indicator of interbank lending.

Because credit is in short supply with banks unwilling or unable to lend to each other, it is pushing up the cost of mortgages. Therefore, commercial banks are increasing their margin between the Bank of England base rate and their commercial rate.

For example, Nationwide, one of the biggest mortgage lenders has recently announced a 0.5% increase in interest rates, despite base rates remaining the same.

One of the lowest fixed rate mortgage rates is currently offered by Skipton Building society; its rate is still below 6% at 5.75%. However, with a set up fee of just under £1,000, the rate is effectively 6%. (link to Skipton Fixed rates)

Many other lenders are also increasing their charges to maintain profitability.

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According to a survey of 225 members of the Society of Business Economists (SBE) 60% of their members suggested house prices will not recover their peak level (July 2007) until 2012.

56% of respondents thought house prices will fall by 20% from their July peak; some believed prices could fall by 30% in nominal terms.

Meanwhile the CBI suggested the UK economy faces its worse outlook since 1992. The CBI forecast rising inflation, rising unemployment and slowing growth. They say the rise in oil prices combined with slowdown in consumer spending is causing an unpleasant mix of rising prices and falling output.
The rise in unemployment could cause a further rise in home repossessions which will do nothing to help improve the housing market.

If inflation rises to 3.8% as predicted it will present an unwelcome dilemma for the Bank of England. Homeowners hoping for rate cuts in the near future, are likely to be dissappointed.

The Key Economic statistics:

• Inflation 3%
• Economic Growth 2.5%
• Unemployment 5.3%
• Interest Rates 5%
• Current Account deficit 4.2%
• Government borrowing 2.8%

• These statistics taken from National Statistics online. [link]
• Note many forecast a deterioration in economic growth. These statistics tend to be backward looking; i.e they reflect what has happened in the past.

Snapshot of UK House Prices

• Halifax House Price Index May 08 average house Price - £184,111

Halifax House prices Monthly change - 2.40%

Halifax Annual House price change (last 12 months -3.80%)

• Land Registry Monthly Report April 08 average house price £183,626

monthly change - 0.20%

Annual Change in house prices 2.70%

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There are a bewildering array of financial products on offer. Each one will help to improve our financial situation. But, some will be much more helpful than others. These are some suggestions about how to approach the market for personal finance.

Don’t Buy Under Pressure

Always be wary of being sold financial products and deals under pressure. The quick sale is one of the easiest ways to get a consumer to buy a product before he realises there are better deals on the market. Any significant decision about investment or taking a loan will benefit from being left for a day or two. This means you won’t be pressured into buying something you later regret.

Listen to Recommendations of Friends not pushy salesmen

When making any decision about financial products or buying goods it is advisable to take advice. The key issue is who do we take advice from? It is important to evaluate how trust worthy / independent a person’s advice is. If someone has an ulterior motive for suggesting a product we need to be cautious. Find someone who is knowledgeable about the field of finance and products and who can offer independent advice.

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