Newsletter 1
Main Story – The Housing Market in 2008
“Learn from yesterday, live for today, hope for tomorrow.” (Albert Einstein)
Oh to have a crystal ball! The recent Mortgage Business Expo @ London’s Earls Court gave us the opportunity to hear the opinion of 2 leading Economists for The Housing Market & Economy in 2008. Their views certainly provide us all with food for thought and in this article we will also look at what this means for you.
Martin Ellis, Head of Group Economics at HBOS, commented that he felt the fundamentals in place in the UK Economy were sufficiently strong and the ingredients were “Not a recipe for a housing market crash”. Whilst there has been a slowdown in recent months, annual growth to October 07 was still 9%, a very respectable return.
New enquiries and approvals in the Mortgage market have declined and this has been linked to a reduction in ‘Real’ earnings growth (the increase in average earnings being less than the Retail Prices Index). This is due to increases in utility bills, council tax, oil and petrol process reducing the amount of disposable income.
Much has been made of the US effect but this was dismissed. It was pointed out that there are big differences between the US and UK housing markets – mainly negative for the US. The US tends to increase interest rates more sharply, reducing consumer confidence, there are no supply shortages in the US, there are higher average loan to values in the US and they have a larger sub-prime market.
Mr Ellis also pointed to the Council of Mortgage Lender’s statistics which show that in 2005/6 approximately 2.8 million homeowners took advantage of the low 2 year fixed rates on offer. These consumers will face an average increase of approximately £100 pm but counteracting this is an increase in the equity of properties and increased incomes.
In conclusion there will be a slowdown in house price growth and a reduction in the number of property transactions next year with Purchases bearing the brunt. However, the Government housing figures underestimate demand and they do not account for the recently revised (upwards) immigration figures. This lack of supply will, combined with stable demand due to increasing demographic pressures, maintain a stable Housing market in 2008.
Laurence Sanders, Economic Adviser, Bristol & West, held similar views to Mr Ellis when stating “I still believe the UK housing market is heading for a soft landing”. His main reasoning for this was the strength of the global economy, with the IMF predicting worldwide GDP growth of 7% for 2008. With London being a global services leader and 30% of UK GDP being derived from exports, this is very positive for the UK.
Any downturn in the UK housing market and economy would be from a very strong base. Mr Sanders sees the potential for two 0.25% reductions in base rate in 2008 and predicts GDP growth of 2.25% in 2008 – the same as Mr Ellis.
Whilst the Bank of England’s remit is primarily to keep Consumer Price Inflation at 2%, they also have a wider remit to underpin the UK economy (help government achieve growth targets). Many of the same points were made regarding strong employment, rates rising in 2009 and the lack of supply. If 1st time buyers cannot buy then he sees professional landlords purchasing more property and predicts house price growth of 4% in 2008 and 5% in 2009.
Summing up, Mr Sanders also temporarily turned Nostradamus, when commenting on economic cycles. The last UK economic slowdown was 2001 and modern cycles are 10 years, so he sees a slowdown of growth in 2012-2013 but not a significant crash and then longer term there is a 50 year cycle – crashes in the 1920’s and late 1970’s – 80’s; so beware 2020!!!
James Carter, Principal at Independent James, concludes that overall, the picture for the UK Economy appears positive but there still remains a certain element of fragility to the impact of a large external shock. The UK Economy is inextricably linked to the Housing Market and as such is a driver of prices.
I maintain my position that if you are looking to profit from property in the short term you will struggle. Buy to lets should be considered as part of your wider investment and financial planning portfolio and it should be remembered when buying residential property that it is your Home and not just an investment.
Predicting the next movement of interest rates and the future growth of property can be a futile exercise when so often the City itself gets these decisions wrong. The main factor behind a property purchased should be that it is affordable. If you have concerns about affordability you should opt for a fixed rate and vice versa for the adventurous of you out there, with regard to variable tracker rates.
Whilst the Mortgage Market undoubtedly faces fresh challenges in the year ahead, IJ is ideally positioned to be able to provide you with the independent advice required.
Contact Us with any queries relating to this or any other matter.