Newsletter 3
Main Story – Housing Market Update.
There really is a huge amount of uncertainty surrounding the housing market at present. However, it is now not a case of whether house prices are going to fall, but by how much and when the market will recover. Will first time buyers jump back into the purchasing arena or will buy-to-let investors simply pick off the ‘bargain’ properties that are becoming increasingly available?
It’s guaranteed that the downturn will last well into 2009; however, it is increasingly difficult to judge and to know whom to believe. Lending institutions do have a vested interest in ‘talking up’ the market’ and the press appear desperate to grab doomsday headlines. The markets themselves are predicting interest rate reductions one week, whilst the following week, inflation rears its ugly head again to put a dampener on the previous week’s predictions! We hear from two chief economists of major lenders.
“Things will get worse before they get better….” Laurence Sanders, Bristol & West’s financial services economist**. He also noted that “The international liquidity crunch is likely to exert further downward pressure on lending volumes and therefore on average house prices.” Mortgages are certainly less competitive than 12 months ago. “I predict the annual rate of house price inflation will reach a low point in the region of minus 10 per cent a year in August. Thereafter, I anticipate as last year's very substantial price increases drop out of the annual rate of house price inflation will gradually recover to zero in the winter of 2008 to 2009.” A touch optimistic???
On interest rates Mr Sanders appears uncertain. “Following a further surge in the crude oil price and a sharp rise in both UK input and output inflation, the MPC may well keep the base rate on hold for the remainder of the year. I estimate there is a now only a 50 per cent chance the base rate will be reduced this year.
If commodity prices continue their upward spiral, the next move in the base rate will be a 0.25 per cent increase despite the slowdown in the UK economy. If this were to occur, the impact on consumer spending would be significant eventually leading to a downturn in inflation and a falling base rate environment in 2009.”
** FT Mortgage Adviser, Economics Report, 18 June 2008
“Previous peaks make the current descent seem worse than it is” Martin Ellis, Head of Group Economics at HBOS ***. “Recent house price falls should be seen in the context of the significant gains in recent years….79% over the 5 years to August 2007.”
On the current downturn, strong indicators highlight this. “…figures from the Royal Institution of Chartered Surveyors showing the number of new buyers interested in home purchase falling for the 18th successive month in May. The number of mortgages approved to finance house purchase, a good leading indicator of house sales, in April 2008 was 49 per cent lower than in April 2007 at 58,000.” If it isn’t moving, it can’t speed up!
“The decline in prices is driven by a squeeze on spending power, affordability difficulties due to the rapid rise in house prices in the last few years and the decline in credit availability resulting from the crisis in the financial markets. These factors have curbed housing demand. The rise in interest rates between August 2006 and July 2007 has increased average mortgage costs. There has been a modest decline in real earnings over the past year. Average earnings rose by 3.8 per cent in the year to April compared to a 4.2 per cent increase in the headline rate of retail price inflation over the same period. Sharp increases in both fuel (11 per cent) and food prices (9 per cent) in the past year have helped to reduce the discretionary income available to households to fund house purchase.” In layman’s terms, people are ‘feeling the pinch’ and sitting tight for the time being.
Shifting back to his more characteristically positive outlook, Mr Ellis comments that “High employment, low interest rates and a shortage of new houses, however, support housing valuations.” A final note on the effect of the downturn for UK households…” We expect unemployment to rise somewhat during 2008 due to the easing in economic growth. The scale of the increase in unemployment is unlikely to cause widespread difficulties for households.”
*** FT Mortgage Adviser, Economics Report, 25 June 2008
James Carter, Principal at Independent James
Conditions in the UK mortgage market at present are the toughest we have seen for over 15 years. We have been blessed with a recent ongoing economic environment of low inflation, low interest rates and high confidence in financial markets. Two of these three are no longer present but interest rates are still historically low.
The situation will not start to improve until banks come clean about their losses in the securitisation and property markets, which are significant. Optimistic valuations enabled the financiers to power ahead but the brakes have been firmly slammed on. With each bank suspecting the other, this has resulted in further write-downs to declare and higher inter-bank lending rates, feeding into higher mortgage rates for clients.
Securitisation saw a record number of new lenders vying for business in the UK mortgage market and as a result of this, underwriting criteria was perhaps not as vigorous as it should have been. Lenders were making losses or, just breaking even, on a number of 2-year interest rates, which allowed many borrowers to afford larger loans than previously available. These borrowers are now feeling the ‘payment shock’ and are certainly not thinking of trading up. Many lenders have withdrawn from the UK mortgage market, several of whom were branded by large US banks and others remain in the market but their pricing means that they are effectively not looking to lend at the moment until the uncertainty appeases.
2-year deals are now becoming a rarity and when they will return is uncertain. The number of 3-year deals has increased dramatically and many lenders are now offering competitively priced 10-year fixed rates. These take away the need to remortgage and incur fees every two years, giving security of payment.
100% loan-to-value mortgages are a thing of the past and 95% loans are extremely heavily priced. They will return to the market once confidence returns but the timescale here is uncertain. The 75% tier for the best rates has now reduced to 60% in many cases as lenders look to protect their positions in the market and take on board high quality loans.
Lending criteria has also tightened, with the loan to value on new build flats in particular being significantly reduced and in some cases lenders not lending on these properties at all. This is particularly so within the buy-to-let market.
The number of buy-to-let and adverse credit mortgages available has also been severely reduced. Many new lenders who launched in the UK did so in these markets and are now running for the hills.
However, I do believe that lenders will return. When, though, is the 64 million dollar question, but at present it appears that lenders are following each other, all managing risk and I believe they have overshot their caution. Whilst our economy is linked to the US, where the housing market is in a particularly dire state, our mortgage market is different. In 2006, 40% of all US mortgages were granted with no deposit (100% loan to value) and 20% were sub-prime / adverse credit loans. This compares with 6% sub prime in the UK and in my experience, the number of 100% loans granted is small indeed. Underwriting criteria in the UK is also much more rigorous.
Once confidence returns amongst the banks and they have all come clean with their write downs, I believe we will see a return to enhanced lending criteria, i.e. the return of 100%. However, I cannot see rates reducing significantly as lenders realise that perhaps property and securitisation in particular isn’t the guaranteed bet they thought it was. Rates are historically competitive and we need to be prepared for current rates being not too far from the norm in future.
Please see the next section of the newsletter for practical steps to take to ensure that you are positioned to minimise any payment shocks and ensure you are prepared for the coming years.
If you have any queries regarding your current mortgage arrangements, please do not hesitate to contact us. Whilst mortgage market conditions may be challenging at present, you can be sure we will do all we can to ensure the impact of recent developments are minimised for you.
Contact Us with any queries relating to this or any other matter.