Mortgage News

Despite the frantic efforts of the government’s economic stimulus package, recovery in the housing market will still be a long way off. The UK economy in 2009, is likely to be characterised by rising unemployment, national debt and falling economic growth.

The recent economic stimulus package offers tax cuts, most notably VAT cut to 15%. However, the impact on economic growth may be muted to the continued credit crunch and low consumer confidence. Recent reports from the BBA suggested that mortgage lending in 2009 could be negative - i.e. the banks could be drawing in more repayments than giving out in new mortgages [BBC link]

Economic stimulus packages tend to have a time lag. With lower saving rates and high levels of borrowing, the tax cuts may not be sufficient to encourage an increase in spending

Also the tax cuts might discourage the MPC from cutting interest rates as the prospect of deflation diminishes with expansionary fiscal policy

National Debt is forecast to rise sharply over the next few years, as the triple effect of:

• recession (reducing tax revenues)
• Bank nationalisation and bank bailouts
• Tax cuts to try and boost economic growth

Even economic recovery may be insufficient to prevent house prices falling. Unemployment often lags behind the economic cycle. If the economy recovers in the second half of 2009, unemployment could still keep rising until 2010.

Original post by Tejvan R Pettinger

In the last housing boom and bust house prices peaked ato £62,782 in the third quarter of 1989, they then dropped to £50,128 in Q3 of 1993.  That was a fall of £12,654 or 20.2%. Prices then took another 2 years before starting to increase.

However, in the early 1990s, the inflation rate was much higher. Therefore, there was a much bigger fall in the real house prices. In real terms, the prices fell by 37.4% from a peak in the second quarter of 1989 to the trough in the last quarter of 1995.

So far, in this housing bust house prices have fallen 14.6% and are forecast to have fallen 16% by the end of the year.

The other big difference between the last boom is that interest rates are significantly lower in this crash. Home repossession rates in 2008, have not yet reached the rate of the last crash.

However, the level of transactions in this crash is even lower than in the early 1990s. This is due to the credit crunch and the difficulty of getting mortgages.

The Royal Institution of chartered surveyors suggested that Rentable incomes have fallen for first time since 2003.

Buy to Let landlords have the highest repossession rate.

Original post by Tejvan R Pettinger

Until 1997, Monetary policy was controlled by the Government. However, this was blamed for many boom and busts, e.g. Lawson boom - when government allowed economy to grow too quick causing inflation. Therefore, the government made the MPC independent to set interest rates. The government gave the MPC an objective of:

• 1. Low inflation of CPI 2% +/-1
• 2. Consider wider macro economic objectives such as growth and unemployment.

Therefore, the MPC’s primary target is low inflation, but the second objective enables them to give less importance to inflation if there is an unexpected shock to the economy.
Many argue the MPC have done a good job. Between 1997 and 2007, they kept inflation low whilst maintaining strong but sustainable growth. Unemployment fell and the UK enjoyed the longest period of growth on record (16 years). It appeared the MPC had avoided the old boom and bust cycle.

However, the MPC have been criticised

1. For allowing a boom in house prices which was unsustainable. Now house prices are falling the economy has suffered lower growth
2. Ignoring the impending recession and giving too much importance to temporary cost push inflation. e.g. David Blanchflower criticised MPC for keeping interest rates too high for too long. The dramatic cuts in rates, show how the MPC perhaps admit they were too high for too long.

However, in defence of the MPC

1. The MPC were not asked to target house prices with interest rates. Arguably this was a micro economic problem. If they had increased interest rates in 2004-05 to reduce house prices it would have caused lower growth even when inflation was on target. Rising house prices reflected shortage of supply and excess lending. The boom in house prices was undesirable, but, it needed to be tackled by measures other than interest rates.2. The recession was mainly caused by the global credit crunch outside their control. The UK government could have done more to regulate the financial system.
2. Many were surprised at how quickly the UK Economy slid into recession
3. Also the cost push inflation presented a difficult dilemma. The MPC feared that if they cut rates as inflation was increasing it could lead to permanently higher inflation expectations. The MPC were not confident oil prices would fall.

In hindsight, interest rates could have been cut earlier in 2008. The concerns over inflation have been outweighed by the much more serious decline in growth and rise in unemployment. This may have caused a sharper downturn. But, it was not the main cause of the recession - far from it. The main cause of this recession was the combination of a global credit crunch, falling house prices and decline in consumer confidence.

Overview of MPC at Bank of England

Original post by Tejvan R Pettinger

What Will Happen to Mortgage Rates?

After the Bank of England’s decision to cut interest rates by 1.5%, there was a predictable scrutiny of the high street banks to see whether they would pass the cut on to consumers.

Interestingly, one of the first banks to announce they would pass the cut on was Lloyds TSB and its mortgage subsidiary Cheltenham & Gloucester. The other part nationalised banks, Halifax, (HBOS) and Royal Bank of Scotland have all stated they intend to pass the cuts on. The only two to avoid trimming their rates so far are HSBC and Barclays (both of whom avoided requiring government funds)

However, even if banks do cut their standard variable rate by 1.5% there is no guarantee that all mortgages will be cheaper. In the boom years, anyone with any sense would remortgage to a better mortgage deal. To stay on your mortgage lenders standard variable rate was an expensive mistake to make. What will happen now is that banks will reduce the number of offers and special mortgage deals. The days of tracker mortgages 1% below the base rate are over. It will be harder for people negotiating a new mortgage contract to get a deal which offers any discount on the standard variable rate. For example, the Abbey, Halifax and Nationwide have all been increasing their tracker rates to new customers. The number of tracker mortages on offer has also nearly halved. Therefore, although the banks standard variable rates will be falling, many will not see the equivalent reduction in mortgage payments they might expect.

The Libor Rate

The libor rate is the rate at which banks borrow from each other. This is very important for determining the rate at which commercial banks want to lend. The good news is that this has come down. On Friday the Libor interbank rate fell 1.07% to 4.5% the biggest fall since 1992; suggesting an easing in lending conditions and making it more practical for banks to cut their own rates.

Availability of Lending

As many have pointed out the problem with the credit crunch is that banks don’t want to lend because they are desperately trying to improve their balance sheets. Therefore, although loans may appear cheaper, banks will not be in a rush to lend. With property prices falling, banks will be requiring large deposits to protect themselves against negative equity. Therefore, although mortgages may look cheaper, many first time buyers may still be unable to get a mortgage - even if they would like to get one. - Reducing the cost of borrowing is not really the problem the problem is a shortage of funds, liquidity and confidence for lending.

The Devil’s in the Detail.

Even people on tracker mortgages may not necessarily find themselves with lower rates. This is because some tracker mortgages have what is known as a collar clause. What this means is that your rate follows the base rate upto a certain point. But, if base rates fall below 3%, the bank does not have to pass the lower rates on. (At the same time, these collar mortgages also often have an upper rate as well.)

Forecast for Interest rates into 2009.

The outlook for medium term interest rates is for them to fall and remain low. Although interest rates have been cut to 3%, many analysts suggest rates could fall to 2% or even 1%. This is because so far, the recession has been much steeper and deeper than expected. Unemployment is rising sharply. Output is falling across different sectors from manufacturing to retail. The housing market continues to drag the economy down.

Inflation is widely forecast to fall sharply from 5% to 2%, some in the MPC now fear that inflation could drop below the government’s target of 1% - raising the ugly prospect of deflation. The bank will certainly be keen to avoid this.

Original post by Tejvan R Pettinger

The most startling feature about trends in UK house prices is there volatility.

Recent Trends in UK House Prices leave you with a feeling of vertigo.

UK House Prices 2007-2008

After the last boom house prices fell for 4 years before entering another boom.

Why are UK House Prices so Volatile?

• Limited Supply. Difficult to increase supply during period of rising demand
• Confidence plays a big role. When prices rise, people jump on the bandwagon. When prices fall, nobody wants to buy.
• Interest rate changes have big impact in UK, where mortgage payments play a high role.
• Shifts in mortgage lending. During boom periods mortgage lending criteria relax. When house prices fall, lenders become worried over negative equity so make it more difficult to borrow aggravating the fall in prices.

Future House Price Trends

- Will we have future Boom and Busts?

Probably, Many reasons for past boom and bust will remain in the future. Mortgage lending may be better regulated, but, the supply constraints, have if anything got worse.

Original post by Tejvan R Pettinger

The Bank of England surprised analysts with a massive 1.5% cut in base rates, 6th November (Bank rate cuts)

Interest rates are now at 3%, well below the CPI measure of inflation.

Interest rates have been cut on the back of a string of poor economic indicators, suggesting the economy is in its most serious slowdown since 1981.

It remains to be seen whether this bold move to cut rates will actually stimulate the economy. Interest rates may not solve the problem of recession because:

• Interest rates have a time lag
• Banks will not pass the full 150base points onto consumers
• Confidence is so low, people don’t want to borrow anyway.
• Banks don’t want to lend mortgages because of liquidity problems

Nevertheless it is good news for borrowers and the long pressed housing market.

Original post by Tejvan R Pettinger

Readers Question: I am British and live abroad but want to buy in the UK when the market hits its bottom prices. When do you feel that this will be?

It is hard to say, though I think another 12 months of falling house prices is likely.

If you look at historical UK House prices, in the last housing bust, house prices fell for 4 years. 1989 Q3 (£62,782) to 1993 Q3 (£50,128)

There were of course, some differences in the 1990s. In particular, interest rates were more important in the boom and bust; there wasn’t the same.

Next year, is likely to see a significant fall in interest rates which could make buying more attractive. But, the market needs to see mortgage lending become less stringent to really kickstart the economy.

The other factor is that the economy faces a serious recession and rising unemployment. This will lead to higher mortgage defaults and arrears.

My advice is to watch the market closely, basically, when national house prices start rising for 2 consecutive months will be an excellent time to buy into the market. I doubt there will be a double dip in house prices.

If house prices fall another 10-15%, there is great potential in buying for the long term. The current crisis has really caused a fall in the supply of new houses. When demand is able to return, prices could be pushed up again. (long term forecasts for house prices)

In recent data, house prices reached there lowest levels for 2 years, with prices falling especially in London and South East. The only good news is that property transactions increased 5%

Original post by Tejvan R Pettinger

The impact of the credit crunch has now caused the UK to enter into an official recession, with economic output falling 0.5% in the last 3 months. The Credit crunch is now not just hurting the housing market, but the wider economy.

Major effects of the credit crunch

• Difficult to borrow, especially difficult to get mortgage.
• Bank of England cutting interest rates is leaving us with negative real interest rates. Inflation currently 5.2%, interest rates 4.5% (and interest rates likely to fall to 3% soon
• Recession, causing unemployment to rise
• Lower real incomes. Workers accepting pay rises below or close to inflation to protect jobs.
• Falling Stock Markets

How To Survive Credit Crunch

• Don’t worry about buying a house. Prospects for buying a house will probably be much better in 12 months, when house prices have stopped falling. The next 12 months is an opportunity to save for a deposit if possible. In the current mortgage climate, it is even more important to save for a deposit, to enable a better mortgage rate.
• Keep a track on Savings. Although we have negative interest rates. Banks are keen to improve their balance sheets so are offering attractive rates for savers. Northern Rock, Abbey National and Halifax all are offering saving rates above the base rate. This is a way to protect the real value of your savings.
• Worried about safety of Banks. My advice is that if the bank / building society is British, your savings are as safe as you can get.
• Investment diversification. If you own shares you will have seen the value of your share portfolios fall. However, on long term price to earnings ratios, share are good value. They may continue to fall in the short term, but, in the long term, are liable to rise. Amidst the uncertainty, many are buying into gold stocks.
• Remortgage. Just because it is difficult to get a new mortgage doesn’t mean you shouldn’t continue to try and get the best mortgage deal. Even now, the benefits of remortgaging and avoiding your bank’s standard variable rate is as great as ever. (Checklist for remortgaging)
• Paying off Debt. Levels of personal debt in the UK are at an all time high. (See: Debt levels in UK) We are now waking up to the necessity of reducing debt and increasing our savings ratio. The current low rates of interest should be seen as an opportunity to pay off more than the minimum payments. Remember, even if interest rates fall to 3%, they could easily increase to 6% within a couple of years. Avoid the temptation to take on more debt because interest rates are so low. As usual, it makes sense to pay off the highest interest rate paying debt first. (10 Tips for paying off debt)

Original post by Tejvan R Pettinger

Today, I receive a nice surprise from my mortgage lender, Standard Life. Standard Life had reduced there APR by the full 0.5% that the MPC cut base rates. This meant by 47 year interest only mortgage was reduced from £627 to £571. It’s a significant saving, and if interest rates fall by another 1%, my mortgage will be getting close to £400. (By the way, the market rent for my house in Oxford would be over £800).

Anyway, the economic outlook is pretty grim at the moment.
Confidence amongst manufactures has fallen to -60
Unemployment is rising sharply.
Gordon Brown and Mervyn King have both admitted the economy is entering a full blown recession.
Housing market continues to freeze up, causing few house sales and falling house prices.
Banks still reluctant to lend despite injection of cash into the banking system by government.

Although inflation is still way above target, the collapse in oil prices means inflation will definitely be coming down next year. With inflation forecast to come down, the Bank of England may feel free to aggressively cut rates to try and avoid a lengthy recession.
In addition to a loosening of monetary policy, the government is also proposing higher spending to boost Aggregate demand through expansionary fiscal policy. (despite the increase in government borrowing and National Debt)

I think interest rates of 3% are a possibility for the end of 2009. It depends how deep the recession becomes and whether the economy responds to the lower rates and higher spending.

2009 will not be a good year for people living off savings, but, it will be a good year for people like me with large debts. If interest rates do fall to 3% buying a house will become very attractive - as long as people can actually get a mortgages.

Original post by Tejvan R Pettinger

Using some notes offered by the Monetary Policy Committee Roundtable. These are some of the key features facing the UK Housing Market at the moment.

1. House prices have fallen sharply in recent months.
2. Property transactions have fallen even more sharply.
3. Housing slump has spread to wider economic slump which bodes ill for the Housing market.

Main Reasons for House price falls:

• Shortage of available mortgage finance.
• Mortgage lenders requiring bigger deposit.
• Expectations of further falls discouraging people from buying during a slump in prices
• Slowdown in Economy.
• Why House prices are falling.

Prospects for House prices in 2009

House prices could fall by upto 20-30% Reasons include:

• On going credit crunch shows no sign of easing in mortgage lending conditions.
• Prospects of severe recession and rising unemployment.Home repossessions currently low and could rise as economy enters full blow recession.
• Cuts in base rates may help reduce cost of mortgage payments, but this may not be sufficient to reverse house price falls.
• By late 2009, housing affordability may rise encouraging people to look for bargain value.

Cost of Mortgage Payments

• Despite cuts in base rates during past 12 months. The average cost of mortgages hasn’t changed much. This is because
• Some have been remortgaging from attractive deals 2-3 years ago.
• Banks have been increasing their profit margins.

Housing Transactions

Average number of property transactions has slumped. This is because:

• Selllers unwilling to accept lower prices.
• First time buyers struggling to get mortgages.
• Remortgaging activity has held up better than property transactions.

Effects of Falling House prices

• Will contribute to lower aggregate demand - negative wealth effect.
• Lead to job losses in construction and estate agents
• Could lead to lower sales of white goods associated with moving house.
• Some homeowners more effected than others e.g. homeowners who were hoping to upgrade or buy to let investors who have relied on rising property values.

Original post by Tejvan R Pettinger