THE FIVE interest rates of the past year are taking their toll. Nationwide’s
house price statistics, released this week, show that all prices in all UK
regions are rising but that the pace of growth has slowed, particularly in
the North, while figures from the Royal Institution of Chartered Surveyors
indicate that house-price inflation has halved. Nationwide’s figures suggest
that, in the second quarter, national prices grew by 2.1 per cent, down from
2.3 per cent for the same period last year. While some areas continue to
grow strongly – Northern Ireland prices rose by 7.8 per cent while London
rose by more than 3 per cent – other regions did not: in Yorkshire and
Humberside prices rose by 0.7 per cent and in East Anglia by 1.3 per cent.
As rate rises take their toll, will we see the housing market crash that
everyone has been warning us about for years?
The consensus is that there will not be a crash, rather a slowdown; the
figures from the Nationwide confirm that. “Over the past six months, the
strength of the London market has masked significant underperformance in
much of the rest of the country,” says Richard Donnell, director of research
at Hometrack. “In London, house prices are driven by the City and by
international buyers. In the rest of the country, house prices are driven by
average people on average incomes.” Some commentators believe that the Bank
of England needs to hold off making any further rate increases to wait for
previous rises to sink in. “There is too much focus by the MPC on one
month’s stats,” says Max Ziff, head of Humberts Group. “The impact of a rate
rise takes a while to kick in. It’s a bit like turning a supertanker. My
fear is that if rates increase too sharply, they will overshoot the mark and
we could find ourselves in a recession.”
So will the London market finally falter?
Most commentators believe that Central London prices will continue to rise
strongly: King Sturge is forecasting a 12-month price growth of 20 per cent
in 2007 and double-digit growth in 2008. However, some agents disagree. “The
market is already cooling,” says Neil Chegwidden, head of research at
Cluttons. “In Central London, where we used to have 10 to 15 people bidding
on a property, we now have five to ten.” Although the headline figures for
London look impressive, not all areas are growing strongly. June figures
from Hometrack show that while prices in Kensington and Chelsea, Hammersmith
and Fulham, Richmond and Wandsworth rose significantly, prices in Greenwich,
Hackney and Haringey did not move.
At the very top of the market, though, the rate rise will have little impact.
Brian D’Arcy Clark, of Savills, says: “The super-prime market – those houses
costing more than £5 million – is primarily bought with cash, so a rate rise
will have little effect. The prime market of £2 million to £5 million may
see a degree of adjustment.”
Which areas of the country will be worst hit by the latest rate rise?
The market in most of London and the South East will be supported not just by
money from the City and abroad, but by the acute shortage of housing. Areas
likely to suffer most are those outside London that have recently had the
most spectacular prices rises. “The worst effect will be felt in areas where
price growth has been strongest recently, such as Northern Ireland, Wales
and northern England,” says Liam Bailey, head of residential research at
Knight Frank. “These are locations where prices have risen strongly but
incomes are still ‘catching up’ with the rise.”
What are the prospects for prices outside England and Wales?
“Recent growth rates in Northern Ireland appear unsustainable,” says Fionnuala
Earley, Nationwide’s chief economist. “Average earnings in Northern Ireland
are still lower than the UK average, suggesting that affordability is
deteriorating fairly rapidly.” However, the Scottish market, which has
cooled only slightly, looks more robust. “Even after the growth seen over
the past year, Scotland is still one of the least expensive markets in the
UK,” Ms Earley says.
How will the rise affect first-time buyers?
David Bexon, managing director of smartnew-homes.com, says that first-time
buyers “are staying away in droves”. Statistics from Barclays suggest that
first-time buyers now spend almost a third of their total household income
on their mortgages; in London, the figure is almost 50 per cent for people
aged in their twenties.
Will there be a rise in repossessions?
Repossessions have been rising for two years, although they are at very low
levels compared with the 1990s peak. The number of repossession orders has
actually flattened over the past 12 months, but this is because there is a
significant lag behind interest rate rises.
How will buy-to-let investors be affected?
Because first-time buyers are being kept out of the market, rental demand
should remain high. However, it is likely that some buy-to-let investors,
particularly those new to the market, could find themselves in trouble.
Moore Blatch, a firm of solicitors, predicts a rapid rise in the number of
buy-to-let repossessions as the housing market weakens and landlords find
themselves unable to sell their properties quickly.
Is the worst over or is there more to come?
Most experts believe that a further quarter-point interest rate rise is on the
cards. More importantly, how long will rates stay at 5.75 per cent or 6 per
cent? “The whole outlook for the market depends on whether rates pop up to 6
per cent and then come back down again, or whether they stay there,” Mr
Donnell says.
The Council for Mortgage Lenders says that two million people will come off
fixed-rate mortgages in the next 18 months; Humberts suggests that 225,000
borrowers on fixed and discounted-rate loans will come off those deals in
the third quarter of this year.“The best-casescenario for someone coming out
of a £300,000 fixed-rate mortgage agreed in the autumn of 2005 into a new
fixed-rate deal will be an additional £250 a month,” Mr Ziff says. “That is
really going to hurt at the bottom end of the market.”
To find out what’s happening to house prices in your area, go to: timesonline.co.uk/buyingandselling
LOANRANGER
MORTGAGE lenders claim to be offering a lifeline to cash-strapped homebuyers
with new short-term fixed-rate deals. After last week’s fifth successive
rise in the Bank of England base rate, the 750,000 borrowers who took out
fixed-rate loans two years ago shortly face sharply higher repayments.
With a further two million borrowers due to see their super-discounted deals
run out over the next 18 months, a few of the larger lenders are seeking to
lessen the repayment shock for customers with new-style fixed-rate offers.
The rate is fixed for a year only: after that homebuyers pay a rate that
tracks the base rate. Some offers, though, have a sting in the tail in the
form of high arrangement fees.
“Many believe it is the wrong time to tie yourself into a two-year fixed deal
when it looks like interest rates might be on their way down in the next
couple of years,” says Jonathan Cornell, of Hamptons Mortgages.
“The Woolwich has a particularly good deal with a one-year fix at 4.99 per
cent going on to a two-year tracker of 0.65 per cent above the base rate.”
However, he says that not all offers are as good as they look. “Northern
Rock is offering a very good 18-month fixed rate of 4.99 per cent. But with
an arrangement fee of £1,995 and the tracker rate jumping to 1.99 per cent
above the base rate, borrowers will face an interest rate of over 7 per
cent, which is very close to Northern Rock’s standard variable rate.”
Lorna Blackwood
Rather than prices rising 3% p.a., during the last couple of months the asking price of properties in the area I am looking buy (just north of London) have fallen between 5-10%. I don't where people are getting a figure of 3% from - although maybe these price falls are just a local phenomenon. The question for me is whether to wait and see if prices fall further or carry on renting. Anyone else seeing significant price movements local to them?
Matt, Watford,
To Michelle from Richmond,
If properties are over-valued by 20%, Steve from Purley will see a slowing of growth rather than a fall - his attitude is not to sell. Even if property prices rise by 3%pa in line with inflation over the long term, Steve will do better from property than an ordinary savings account as his property is a leveraged asset and will double within 19 years (a 1000% ROI on a 90% mortgage) while a savings account returning 7%pa would treble in the same period.
Andrew, London,
The sooner we get back to reality the better. I am tired of competing in the market with people who are happy to run up debts, this can only inflate prices generally but the effects on the housing market are clear for all to see.
Cliff, Sheffield, Yorkshire
Moore Blatch, a firm of solicitors, predicts a rapid rise in the number of buy-to-let repossessions as the housing market weakens and landlords find themselves unable to sell their properties quickly.
And the FSA are investigating the selling of these mortgages. We will of course pay for the misselling in extra insurance. In some areas of the country BTL repossessions make up 80% of the postcodes in auction.
Pete Balchin, Solicitor, Bristol, uk
To Steve,
If you buy today with the prospect of a 20% devaluation in the next 5 years, then it will take you 20, not 10 years, to double the capital. Ordinary saving accounts do better.
Michele, Richmond, UK
Doomed if you are a short term gainist. Medium to long term property has double in price approx. in 10 year cycles. Maybe buying a house should be more about making a home than making a profit....
Steve, Purley, England
Were all doomed!!!!
I blame the banks for printing all that money in the first place and given us the illusion that were all rich and now they tell us were not!
Deane, Bristol,
....More importantly, how long will rates stay at 5.75 per cent or 6 per cent? “The whole outlook for the market depends on whether rates pop up to 6 per cent and then come back down again, or whether they stay there,â€
Exactly, and with Interest Rates being priced into City transctions at 6.3%, two years hence, don't hold out your hopes.
A taxi driver spoke to in London last week said that he was carrying a Bank of England Official who said that they predict the may have to go up to 8% and that they are really worried about inflation now.
Pete Balchin, Solicitor, Bristol, uk
So House Price Inflation is alive and well in all areas of the country. A recently renovated 3 bed victorian semi up the road from me has been on the market for about 4 months. The price has dropped from £350k to £315k. Still no sale. I can recount many similar examples. Lots of properties have two estate agent's boards outside - a sure sign of a slow market. But, let's say the house eventually sells for say £305k. Have prices fallen? The vendor will certainly think so. But it won't show up anywhere in Nationwide's figures.
How do they measure House Price Inflation. Surely the only sure method is to compare what a particular property sells for at different times. But what about renovations and improvements? It's almost impossible. But that doesn't stop those whose vested interest lies in getting people to borrow more and more money to constantly claim House Price Inflation is constant and eternal and, therefore, you can afford to take the risk of massive borrowing.
Mike Wilson, Reading, England
Its a shame you're still relying on the old experts who couldn't see the slowdown coming 6 months ago, consequently you will be reporting the crash in 6 months time and they'll be saying the same old drivel - its simple, house prices are disconnected from earnings, personal debt is £1.3 TRILLION - its going to crash.
Look across the pond (oh of course its different here, actually their prices AND interest rates are lower so its worse here) and thats whats going to happen - when will the experts realise this?
Steve Baker, ilkley, North Yorkshire