Newsletter 7 - Live long and Prosper!
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Housing & Mortgage Market Update
“Conquest is easy. Control is not.” Captain James T Kirk
As the Bank of England pumps another £50bn into the system and news stories of green shoots abound, what is really happening in the economy? Have we conquered the threat of deflation and how will we control any recovery?
We hear what the ‘Royal Institute of Chartered Surveyors’ and ‘Halifax’ have to say and get the ‘word on the street’ from ij’s Principal, James Carter.
James Carter, Principal, Independent James
The summer is proving unexpectedly hectic with rises in share prices, homebuyer activity and optimism. It does appear that the rates of decline are easing but we must not forget the underlying signals of continued economic recession. How much of this has been priced into the current market, only time will tell.
The Bank of England announced last week that they are pumping a further £50bn into the economy, which takes the total amount for quantitative easing to £175bn. This is actually £25bn more than initially agreed by the Treasury and the Bank has admitted the recession is worse than they thought.
Whether this is getting banks lending again remains to be seen. The suspicion is that the cash is being used to shore up balance sheets and that lending is only being made to the most secure borrowers. I have certainly noticed this trend and it can also be attributed to a reduction in the number of lenders actively engaged in the mortgage market.
Looking at my list of prominent lenders and their ownership, there are only a handful of groups actually lending; Barclays (Woolwich), Nationwide, Santander (Abbey and A&L) and the Lloyds banking group (BOS, Halifax, C&G, LTSB, Scottish Widows Bank) accounting for a large portion of this. Further consolidation is likely amongst these groups and then we have Northern Rock and RBS in which the UK taxpayer has vested interests.
Those who are lending are making good premiums when looking at the differential between wholesale rates and actual mortgage rates available. Banks do have to rebuild their capital positions and being profitable is necessary to do this. These factors continue to constrain mortgage lending and until the Government legislates to force a proportion of new lending to higher loan to values, smaller businesses and more innovative projects, this will remain the case. Hopefully we will learn the lessons from the Japanese crisis where QE funds were largely squirreled away and had little real impact on the economy.
And the housing market? There are some seemingly good value properties available at present and many people are trading upwards on the basis of a larger actual cash reduction. However, judging good value has always been difficult. The recovery looks to have started (or the worst is behind us) and certainly all indices are in agreement for once but this is from a low base number of transactions – less than a quarter of the 06/07 peak.
With interest rates being held artificially low at present, people are simply battening down the hatches and trying to repay debts. This has also led to fewer properties actually going on the market, even as the number of repossessions has increased. Certainly, it is agreed that demand is outstripping supply which is supporting house prices. This may actually be a more realistic long term scenario; people moving less and transaction numbers down. People no longer gain 10% every year on their property and don’t move up the chain with their equity and flexible financing every few years. Instead you must wait until you have paid down your mortgage sufficiently to move upwards.
I have also seen a number of homeowners looking to raise equity against their existing homes or simply keeping their existing homes and purchasing on a ‘Let to Buy’ basis. Again this supports house prices and if you are moving up the chain can still work well as you get good value at the top end and are not selling an asset that is falling in value. This reinforces the fact that falling house prices can affect your ability to obtain a new mortgage, otherwise it is not an issue until you need to sell.
Finally, I would to draw your attention to the Halifax affordability index. This looks at average prices to average incomes and is still above the long term average. With wages set to fall and this measure expected to overshoot during a recessionary period, buying a property for profit is an extremely difficult task. As I have always advocated, your number one priority should be to buy a home that you can call home….
Brigid O'Leary, RICS senior economist, has obviously been reading ij’s Quarterly newsletters, recently commenting, “There has been a clear change in the housing market over the past few months and, as a result, it is unlikely that we will now see the kind of house price falls widely predicted at the start of the year.
Instead, the return of buyer demand and the limited availability of housing on the market could be enough to support prices so it wouldn't be surprising to actually see prices increase further from here in the short term. That would be consistent with more positive expectations that have been reported in recent RICS Housing Market Surveys.”
“However, the outlook for 2010 is fairly uncertain and there is a real risk that prices may slip back again. Affordability is still stretched and mortgage finance, while improving, is fairly hard to come by. The positive news we have seen has been a recovery from record lows and there are still many uncertainties in the economy. In particular, we are concerned about the mortgage finance environment and the impact of further increases in unemployment on house prices.”
Martin Ellis, Housing Economist at HBOS, is also cautious, commenting:
"There was a 1.1% increase in the average UK house price in July. This was the second rise in the past three months and prices in the three months to July were 0.8% higher than in the previous three months. So far this year, house prices have fallen by less than 1%.
Demand for homes has risen, albeit from a very low base, since the start of the year, driven by improvements in affordability and low interest rates. Higher demand has combined with the low levels of property available for sale to boost sales activity from exceptionally low levels and support prices over the past few months."
Key facts
- House prices increased by 1.1% in July. This was the second increase in the last three months and the third in the first seven months of 2009.
- Prices in the three months to July compared to the previous three months - an indicator of the underlying trend - were 0.8% higher. This slight increase was the first rise on this quarterly basis since October 2007.
- Prices fell by 0.8% over the first seven months of 2009. The average house price in July was £159,623 compared to £160,861 in December 2008.
- House prices in July were 12.1% lower on an annual basis. The annual rate of change (measured by the average for the latest three months against the same period a year earlier) improved for the third consecutive month and has eased from -17.7% in April.
- The house price to earnings ratio – a key affordability measure - has declined from a peak of 5.84 in July 2007 to an estimated 4.36 in July 2009. The long-term average is 4.0.
- Further signs of an improvement in housing market activity, but less than half the level in mid 2007. Bank of England industry-wide figures show that the number of mortgages approved to finance house purchase – a leading indicator of completed house sales - increased by 22% between the first and second quarters of 2009, on a seasonally adjusted basis. Approvals increased for the fifth successive month in June and were 35% higher than in June 2008, but were nonetheless 58% lower than in June 2007.
- Lower interest rates have reduced mortgage payments. Monthly repayments accounted for an estimated 21.4% of average gross household income in July 2009 for existing mortgage borrowers. This compares with a peak of 26.9% in October 2008 and is the lowest proportion of income devoted to mortgage repayments since mid 2004. The long-term average for income accounted for by mortgage repayments is 20.4%.
Please do contact me to discuss the issues surrounding the housing market.