The Housing Market June 2008
June, 11, 2008
The housing market is dominating the headlines again and for good reason, when nearly twelve million Britons have a mortgage.
SaveBorrowSpend brings you a round-up of what key players in the property world are saying about the state of play this summer.
Negative Equity Fears
Thousands of people who took out 100% (or more) mortgages at the peak of the market are facing the prospect of negative equity as house prices fall. Put simply, a person who bought a property last year for a 100% mortgage of, say, £300,000 might now have a house worth £292,000. Sadly, their mortgage is still £300,000, leaving £8,000 of negative equity.
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The latest data from the Council of Mortgage Lenders shows that in excess of 23,000 people took out 100% mortgages in the year up to 31st March 2008. These are the people who are in danger of seeing the amount they borrowed becoming greater than the value of their property.
However, many thousands more could be at risk if house prices fall even more dramatically. Research from US investment Bank Morgan Stanley suggests 370,000 homeowners are at risk if prices fall by a total of 5% this year and next. And, if as some are predicting the fall is as much as 20% the prospect of negative equity looms for another two million homeowners.
It’s difficult to put a positive spin on negative equity. But it is worth listening to the experts who say it isn’t a problem if you can ride out the storm and keep up your mortgage payments during the slump. So the logic goes, view your property as just another investment vehicle, subject to market variations. Eventually you might well make back your loss.
After all, people who kept hold of disastrously devalued flats and houses in desirable parts of London in the late 80’s and early 90’s clearly more than made up for it by the mid 2000’s.
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So how far will house prices fall?
Michael Saunders, head economist at CitiGroup says “House prices are down 6% in just the last five months, and the worst of the credit crisis – all that still lies ahead”. He had predicted house prices will fall by 15% in 2008 and 2009 but now fears the drop could be even bigger.
The Royal Institute of Chartered Surveryors’ l(RICs) latest figures show 84% of estate agents reporting prices falling the past 3 months, with house prices going down in every region of England and Wales. There's perhaps a glimmer of good news as RICs said that for the first time in ten months there was a slight decrease in the proportion of surveyors reporting house falls in May.
Recent house price surveys from the Halifax and Nationwide show big falls in May. Halifax reported a 2.4% drop and Nationwide a 2.5% drop. This has prompted analysts to predict a slump of more than 20% in the next two years. The worst hit region is the East Midlands where prices have now been falling for 17 consecutive months.
The latest survey from the Department of Communities and Local Government (DCLG) makes interesting reading... unlike other surveys it is based on sale completions and it shows that UK house prices rose 0.7% in April compared with March. A DCLG spokesman also pointed to the fact that UK house prices are 44% higher than they were 5 years ago.
The National Association of Estate Agents Vice President, Chris Wood says “Some areas will be more affected than others. People really need to look at their local markets to get a true picture”. I know we tend to bang on about what we call ‘micro-markets’ a lot here at SBS, but they really are crucial in understanding that this is a complex story that belies the bald statistics. Ask any estate agent how important school catchment areas or favoured a street or a riverside location is!
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No one’s buying
If you are trying to sell your property times are tough as RICs says they’ve not seen so few sales since monthly reports began in 1978. There were only 17.4 transactions per Estate agency in the three months to the end of May, down almost a third on a year ago. A quick look in my local agent’s window supports the ‘cupboard is bare’ theory, too.
The problem is compounded by a lack of mortgages, a dearth of first time buyers and people digging in and waiting for the storm to pass by. Is it only people so equity-rich that they can absorb the loss, or people who have to move instructing agents? If you are an agent, let us know what you think (and why we should sell our house through you!) and we might put your views up on the site for our readers. (Email us)
Mortgage Costs rise
The cost of borrowing is continuing to rise as the Bank of England reveals that despite cutting interest rates earlier this year and leaving them on hold for two consecutive months some mortgage rates have shot to their highest level for eight years. Figures show the average interest rate for a 2 year fixed rate mortgage with a 25% deposit was up to 6.27% at the end of May (and this is likely to rise). This is the highest level since the autumn of 2000.
Furthermore, the number of different mortgage deals available has collapsed from 15,600 before the credit crunch struck last July to only 3,600. This lack of credit is at the heart of the crunch, restricting movement in a market already taking a pounding.
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Tell us how the Market is for You
Do you live in a region experiencing dramatic falls in house prices or is your neighbourhood very resilient? Why do you think that is, and what would make things better? Please let us know and we’ll print the best comments in one of our upcoming articles. (Email us)
SaveBorrowSpend Philippa Adam
