Mortgage News

The housing market is facing acute short term difficulties. In particular:

• Drop of mortgage lending (there has been 45% fall since this time last year) has caused a big fall in demand for housing. It means that potential homeowners, especially first time buyers are finding it very difficult to get a mortgage. If this freezing of the mortgage market continues, house prices are liable to fall quite significantly.
• A good question is how long will the mortgage crisis last? The Bank of England has attempted to inject liquidity by offering £50bn of government securities; they even promise up to £100bn. However, there are signs that this is not creating extra finance as hoped. Most banks have still not passed on the lower rates. There are also fears that the full extent of the subprime losses have not been accounted for. Therefore, some feel the situation will get worse before it gets better. Nevertheless, over time, lending in the mortgage markets is likely to improve (even if it doesn’t get back to 2006-07 standards). It is in the banks interest to resolve the shortage of mortgage funding. There is demand for mortgages and they should be profitable for banks if they can sort out the issue of raising finance.

Long Term Interest rates.

As house prices slow, the economy will also slow. This should enable cuts in interest rates. This is complicated by a rise in cost push inflation. However, these cost push factors (such as rising oil, food and energy prices) are liable to be short term. It is unlikely that commodities such as food will continue to rise at their present rate. Oil prices may remain high over $100 a barrel, but to maintain the present annual increase in prices, would be very unlikely. In the medium term it is unlikely that we will see a significant rise in interest rates it is more likely that interest rates will be slightly lower than the current 5% rate. Therefore, borrowing for a mortgage will remain relatively attractive compared to renting. The long term affordability of mortgage payments is below historical peaks in 1991. As a % of disposable income it is not unreasonable to predict that demand for mortgages will remain strong amongst the UK population.

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Original post by Tejvan R Pettinger

Falling house prices certainly create no shortage of newspaper headlines. Although some of these headlines can sound unnecessarily apocalyptic, falling house prices are not quite the end of the world. In fact falling house prices can be of benefit to some people.

Who Benefits from Falling House prices?

First time buyers. At the moment the ratio of house prices to incomes are very high, close to 5 times salary. Falling house prices will enable increased affordability. Also rising salaries and pricing can mean that real house prices will fall than more than nominal. If you are a first time buyer then waiting for a while can enable prices to become more affordable.

People wanting to buy bigger Houses. If your house price is falling in value, then it will also be cheaper to buy other houses. If you are wanting to trade up to a more expensive house, this will actually make it cheaper.
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Original post by Tejvan R Pettinger

I wrote a lengthy summary of the main factors that affect house prices here.

In the UK, the supply of housing is fairly inelastic; this means it is unresponsive to changing prices. The number of houses being built is relatively low, therefore, supply increases only slowly. This means that changes in demand for houses will be influential in determining house prices. A small rise in demand will cause a significant rise in price. But, also a small fall in demand will cause a significant fall in prices. (It is a myth that areas with shortage of supply cannot see falls in prices)

What Determines Demand for Housing?

Traditional factors.

1. Incomes. Economic growth and rising incomes means people can afford bigger mortgages so demand for housing rises.
2. Interest Rates.  Higher interest rates increase cost of mortgage repayments, reducing demand for buying.
3. Number of Households. Rising population leads to increased demand. Also, the number of households can increase faster than the population. For example, recent years have seen an increase in the % of single people households. Social factors such as rising divorce rates can influence demand for housing (more…)

   Original post by Tejvan R Pettinger

Last March, saw house prices fall in UK by some of their biggest % levels for many years. April and March are traditionally a good time of the year for selling a house, but, the credit crisis has changed the nature of the housing market and prices look set to fall by 10-15%.

Of all the reasons mentioned here - House prices set to fall I think the most important reason is the drying up of the mortgage market and the credit crisis. The Bank has promised to inject money into mortgage sector. But, even £50 billion may be insufficient in a mortgage sector worth over £1.19 billion or 85% of total GDP.

The council of mortgage lenders notes that mortgage approvals are down 40% and this is causing a shortgage of first time buyers. In recent years, first time buyers have been able to overcome rising house price to incomes ratios by using mortgage products which enable big mortgage to income ratios. But, these products and mortgages with low deposit ratios have been withdrawn or made more expensive. Therefore there is a significant fall in the number of buyers.

For house prices to fall to their long term average of house price to income ratios, even bigger falls may be expected. However, on the positive side, base rates are set to fall (even if banks don’t pass these on to consumers). Falling house prices are unlikely to increase the cost of homeownership; therefore, for most people who buy a house to live in, there should be no panic to sell.

Furthermore there is still a fundamental shortage of supply in the UK, which may mean that long term house price to incomes ratios continue to be higher than in previous decades.

Alot depends on how deep the credit crisis continues to be for the UK and whether the Bank can do much to unfreeze the credit markets.

Related essays

• Overvalued Housing Markets 
• I wrote an essay on a comparison between the UK and French economy 

Original post by Tejvan R Pettinger

Unfortunately, when it comes to measuring house price statistics there are a bewildering array of different statistics and measures. Surprisingly, given the importance of house prices, the government do not have an authoritative overall statistic. To get an overall impression of the housing market, we need to look at a variety of different statistical measures. The variance in house price inflation shows the limitations of house price statistics.

Different House Price Statistics

Asking House Price. The asking house price index measures the average asking price of more than 700,000 homes across the UK. It excludes houses over £2million and houses under £20,000. The benefit of using the asking price or listing price, is that it gives a guide to the future of the housing market. The disadvantage is that selling prices can often differ from the asking price quite significantly. Asking house price index

Nationwide House Price Index. The nationwide Building society has kept data for house prices since 1958. It gives the longest historical set of data. The Nationwide accounts for 12% of the Housing Market. Also has a house price index calculator Nationwide House price index

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Original post by Tejvan R Pettinger

Figures released by rightmove suggest that house prices have picked up in February, making prospects of large falls unlikely. The survey found an increase of 5.3% in the asking prices, despite a glut of properties on the market. It is worth noting that house prices are often sold for less than the asking price. The sale price is a more reliable guide to effective house prices. London house prices were amongst the most sluggish, being particularly affected by the downturn in the housing market.

Home sellers may have been encouraged by the latest interest cut and homebuyers looking for a bargain. However, with the governor of the Bank of England being cautious on future interest rate cuts, it may be this boost in house prices proves to be temporary.Latest predictions for mortgage interest rates

Original post by Tejvan R Pettinger

House price data from the Land registry showed that UK house prices fell on average by 0.4% in December, bringing the annual inflation rate down from 8.1% in November to 6.7% last month.

The land registry estimate that average UK house prices are now £184,469
The only 3 regions to avoid house price falls were the north east, east and London. The biggest house price falls occured in the East Midlands.

Statistics from the Land registry are backed up by data from other major house price surveys. For example, the Halifax index of house prices shows a drop in the annual house price inflation from 12% in July to 6% at the end of 2007.

The prospects for the rest of 2008, are likely to involve further monthly falls.

• Fall in mortgage lending (Council of Mortgage Lenders CML say lending is down 25% in December.
• Fall in confidence
• Credit crunch making mortgages more difficult to obtain and more expensive.

However, with inflation relatively low, there is arguably room for the MPC to cut interest rates. This may prevent demand falling too much. There is even evidence of some housebuyers looking for bargains as prices fall.

Original post by Tejvan R Pettinger

As the saying goes - There are lies, damned lies and statistics.

It seems that there are no end of statistics about the housing market, some of which can seem a bit contradictory.

At the moment there is a general assumption that UK House prices are set to fall and are vastly overpriced. However, before you rush out to sell your house, there are a few things worth bearing in mind.

1. House prices are not significantly above long term average compared to earning.

Graph of House Price Affordability 

• I should point out that this graph finishes in 2005, and since 2005 house prices have increased considerably. Therefore the ratio of house affordability is higher than this graph shows.
• If you had chosen 1995 as the starting point of the graph, of course, things would look a lot different, (in 1995 the affordability of housing was at an all time low) Even since 2003, there has been a considerable increase in the ratio of house prices to earnings. (See ratio of mortgage costs to earnings for first time buyers)
• However, compared to the peak in 1990 house price affordability is not that bad.

Why are House Prices Still Affordable despite House prices doubling in the past 5 years.

There are two factors which determine the cost of buying a house.

1. The actual house price
2. Interest rates, which will determine the monthly repayments. (more…)

   Original post by Tejvan R Pettinger

The UK housing market is very significant for both the economy and the general population. Housing is the biggest form of wealth and also the biggest cause for financial difficulties. In the recent housing boom there have been clear winners, but, there have also been clear losers. These are my recommendations for a more equitable and efficient housing market.

More Flexibility in Supply

Increasing supply of houses, especially in property hotspot areas is important for dealing with the fundamental imbalance between supply and demand. Greater flexibility would prevent future rapid house growth caused by a bottleneck in supply. Admittedly increasing supply is easier said than done. However, I believe the government should take the initiative in building good quality council homes. - for either sale or renting to low income households.

Deal with Scandal of Empty Houses.

It is estimated that there are nearly estimates that there are 840,000 empty homes in the UK ( Empty Homes Agency) The National Land Use Database figures suggest there could be a further 420,000 homes in commercial properties. Making use of empty homes would go along way to relieving the shortage of supply, without the environmental costs of building in green belt land. (Why are they empty?)

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Original post by Tejvan R Pettinger

• In 2003 Average household income in England was = £34,197 Average house price = £115,181
  House price to income ratio = 3.36
• In 2008 Average income was about £38,302 (1) Average house price =£197,000 (BBC)
  Therefore house price to income ratio about 5.1

• London average house prices 4.8 times income (2006), against 2.6 times in 1970.

• The South East, where the ratio has climbed to 4.3 times income from 2.7 times 35 years ago, is the second least affordable region.

House Prices and Mortgage Payments

This increase in house prices is reflected in the increased burden of mortgage payments

• Mortgage interest burden stands at 20% of gross income (up from 11% in 2003) (source Economist)
• Household debt now exceeds 150% of disposable income (this is another historical high)

The Impact of Rising House Prices to Income

The ratio of house prices to Income remains an important guide to long term affordability of housing.
However, it does not make it a perfect guide to future house prices. Just because the ratio of house prices to incomes have increased doesn’t necessarily mean a house price crash will occur.

Nevertheless, the rising ratio of house prices to incomes does raise some serious concerns. (more…)

Original post by Tejvan R Pettinger