House Price Horror .. or is it?
02 December 2007
The latest house price figures make for grim reading. In November, Nationwide Building Society revealed a fall of 0.8% last month alone in house prices (an average of £1500) and mortgage approvals are down to their lowest rate for two years.
Even if there isn’t a crash it’s still reasonable to expect what you could call “a robust realignment.” Ouch. The Bank of England is facing pressure to cut interest rates by up to 0.75% to ease the pain (although it remains to be seen if lenders will pass on the benefit to hard-pressed customers).
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When you include the very real chance of recession in the US and the imminent decline of the once-profitable buy-to-let market (where rental yields are steadily falling), you appear to have the recipe for a grim 2008.
Politically, it’s a toxic mixture as the property-owning democracy is now seen as the status quo. Many younger readers won’t have owned property in the mid-1990’s, when sky-high interest rates led to repossessions and negative equity… the buoyant market since the late 1990’s makes it all seem like a faraway nightmare unlikely to happen again.
So what is the truth? The headlines are dramatic but what is the big picture? One problem is that the statistics are often one-size fits all. The British property market is made up of a number of distinct micro-markets, often regionally based. For example, London and the Southeast is usually seen as having a very resilient market based on high demand (interestingly, though, the latest Hometrack report points to recent falls in London of up to half a percent in October, suggesting over-valuation).
Also, areas that have recently done well in the property game are often the ones that de-value the quickest when there’s a downturn. For example, a newly gentrified area “piggy-backing” on it’s proximity to a more popular neighbourhood will devalue quicker during a downturn (proving the wisdom of the old adage of “buy the worst house in the best street, not the best house in the worst street”).
So, what can the nervous, over-mortgaged UK homeowner do? Most experts will agree the answer is weather any storm by good personal financial administration: re-mortgage for a better interest rate if you can, save money on credit cards and services, consider realistically how much equity you really have in your home, not what you would like it to be (don’t worry, I’ve done it too!).
If you are planning on moving, commentators are advising you do your research on how much properties are selling for in your area and don’t be afraid to stand your ground in negotiations. And, most crucial of all, consider how much you can afford to spend on your mortgage. Remember, people over-borrowing from lenders who were prepared to take a risk is part of the reason we are all in this situation in the first place.
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Lastly, the one group who might take a little cheer from all this are first-time buyers. Over the next couple of years, as the economic cycle turns, first-timers will probably be able to scramble back onto the ladder as the buy-to-let bubble bursts and enables others to sell, release equity and move on. If I were a first-timer nowadays I’d be planning my finances to make a move within the next eighteen months. Good luck!
SaveBorrowSpend Philippa Adam
