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THE turmoil in the financial markets that sparked the Northern Rock crisis may
have put an end to the London property boom and may further dampen house
price rises in the rest of the country. London, the South East and parts of
the country that have been boosted by City money over the past few years are
likely to be hit by a fall in City bonuses and job losses in the financial
sector, as the full effects of the credit squeeze debacle emerges.
Other areas, such as the North of England, where property prices have not been
pushed up by London’s mini-boom, will be less affected.
Although the immediate panic over savings held by the Newcastle bank subsided
after the Government intervened to safeguard deposits this week, the market
upheaval over the last few weeks has already dented confidence among house
buyers.
Asking prices fell by 2.6 per cent this month, reversing the gains of the
previous five months, according to Rightmove, the property website. The fall
was the second biggest recorded in the six-year history of this index.
Figures also show that new buyer inquiries have fallen for nine straight
months. It is still not clear how the Northern Rock crisis will affect the
property market over the next few months. But what can we expect?
Is a crash looming? For all the doom and gloom, economists and property
experts believe that a 1990s-style property crash is very unlikely. Martin
Ellis, an economist at the Halifax, said: “Higher interest rates meant that
the market was slowing down anyway, even before the troubles in the
financial markets. But the fundamentals remain strong. Employment is high,
the economy is growing, interest rates are still historically low and, most
importantly, the supply of property is still tight.”
Although the number of buyers has dwindled there are still not enough houses
to go round and Simon Rubinsohn, chief economist at the Royal Institution of
Chartered Surveyors (RICS), sees no signs of this changing. “Unemployment is
not picking up and forcing sales. We need quite a big rise in unemployment
for that to happen.” The last big property crash was fuelled by a rise of
unemployment from 1.6 million in 1990 to 3.2 million in 1992. The potential
City job losses of between 5,000 and 10,000 is tiny by comparison. However,
it is likely to affect the most buoyant part of the property market – the
top of the market in London where prices have been pushed up by big City
bonus payments over the last couple of years.
So it’s stagnation, then? The strength of the market in London
has obscured the fact that house prices have been pretty flat in much of the
country throughout most of this year. Interest rate rises and affordability
pressures have already subdued the market in the parts of the UK where City
bonuses and wealthy foreign money fail to reach.
At the bottom of the market, buyers struggling to get a mortgage could be
affected as financial institutions review their lending practices and
restrict credit. Norwich Union is just one lender that has already stopped
issuing loans to those who can not afford a deposit. This could particularly
affect struggling first-time buyers who rely on large loans to get their
foot on the ladder. Many homeowners are already paying more for their
mortgages as lenders raise the cost of borrowing.
Buyers everywhere are likely to become even more price-sensitive, refusing to
pay over the odds. Richard Donnell, of Hometrack, the property data company,
said: “Pressures will hit asking prices rather than the underlying value of
property. Transaction prices are unlikely to take such a big hit.” Donnell
added that serious sellers would have to be more realistic about pricing
their homes. “There are a lot of sellers who just want to try their luck.
They will probably end up taking their homes off the market.” The restricted
supply of homes for sale is likely to shore up the property market and keep
prices from falling.
Could prices even rise? There is not much optimism in the property
market. Even estate agents are being cautious. Neil Chegwidden, of Cluttons,
said: “That several London investment banks have frozen recruitment and some
are laying off staff are not good early signs but it is still most likely
that stability will be restored.” Although Central London prices are almost
20 per cent higher than a year ago, according to figures from Cluttons,
prices in sought-after areas such as South Kensington, Chelsea, St John’s
Wood and Hampstead have seen no price rise in the past quarter.
Ultimately, the health of the property market will depend on buyers’ and
sellers’ confidence. There are no fundamental reasons why it should not be
business as usual for serious buyers with a good credit history or for
sellers who price their homes sensibly. But uncertainty and fear can be a
deterrent. As David Forbes, of Savills, said: “Having had precious little to
view, buyers think they may be able to pick up bargains. Sellers are wary
and will wonder if this is the wrong time to sell. There is a hiatus as
people wait and see.”
What does Northern Rock’s crisis mean for you? Go to timesonline.co.uk/northernrock
You guys make me laugh. Why are you all so miserable? Rising house prices have been fantastic for millions of people. If you are not one of them then so what? Be happy that you stayed out of the market, don't spend your time having a go at those that have bought.
There is no shame in renting, that is the model used throughout continental Europe, so just chill out a bit.
BTW I still think it v unlikely there will be a significant decline in my local market (central London), so would still advise against selling now in the hope for picking up a bargain. No idea what it is like in the sticks, you might be right that it is dire (and sticks includes Edinburgh, MB).
Gareth, London,
Gareth, London: do you enjoy working as an estate agent? I always thought it would be a dull job - just wondered if it has anything to recommend it these days, given the ailing market.
Either way, I suggest you sell off your BTL "portfolio" soon before prices drop further. Oh, sorry, I forgot all you property investors are in this for the long-term, aren't you? That doesn't explain the air of desperation in your post, however.
MB, Edinburgh,
Ok despite the fact that i would love for house prices to fall, there are several factors that will mitigate this. firstly new builds are constrained by the cost to build them, and the need for a margin, the companies building will not sell at a loss.
similarly until those selling properties they currently reside in or have as buy to let reduce the prices they will not fall, since they will try to get the most they can for thier property in order to pay for the next property these will tend to stick. so even if the prices do drop expect them to start slowly and initially show a tendancy to stick. The downward movement on prices will need to gain momentum before a crash takes place. this will happen when properties arrive on the market below the price and the panic sets in.
Ben, folkestone, uk
Yawn, yawn, yawn ... there is more to life than house prices you know. I feel like I am trapped in some kind of middle-class dinner party from hell; the amount of articles that are written on this subject is ridiculous (and why do journalists always ask estate agents what they think? That is like asking the Pope if he believes in God!) Must go now the person next to me is telling me how their children are 'very bright' and 'very talented' and ... yawn yawn yawn
Richard , The Gower, Wales
It is in the interest of the wider for house prices to fall. We have finally woken up to the fact that our economy has been largely based on easy credit i.e. spending tomorrow's money today.
House prices are actually more a reflection of how much the bank will lend borrower than anything else. Banks have lent at higher and higher multiples of earnings made possible by the the low interest rates of the past few years. That is history and what was affordible at a 4% fix may not be at 7%.
However, we should rejoice that it will again be possible for people earning less than £50,000 to buy in London. This is not something to get upset about.
Henry, London,
'The last big property crash was fuelled by a rise of unemployment from 1.6 million in 1990 to 3.2 million in 1992.'
Actually, the crash happend in 1989.
Unemployment followed.
http://www.ablemesh.co.uk/thoughtsboombust.html
gordong156@aol.com, Milton Keynes, MK
Record debt, banks running scared and now unwilling to lend on highly geared purchases (kiss goodbye 5 or 6 times earnings), inflation out of the bottle and rising (£1 a litre in days), and poor yields (around 4%) on rental investments...what do you reckon?
Every bust is preceded by a boom and we are going to have a nasty and quite justified fall in real prices in the next 18 months.
Jonathan Tedd, Marlow,
Are these experts who say they don't see any sign of a property crash the same experts who earlier this year said they saw no signs of an impending credit crunch; or who said that little difficulties in the sub-prime sector of the US mortgage market would not affect the wider US economy, the stockmarket, the credit market or the global economy and certainly wouldn't cause problems in the UK?
If so, perhaps we should be told - so that we can order another large pinch of salt.
Huw Sayer, Norwich, England
With many people having buy to let properties, which, with raising interest rates, rental income may not cover mortgage payments, more properties will be placed up for sale. This could trigger a price fall on a large scale..
Don, Swindon.
Don, Swindon, Wilts
Prices need to drop, low income families need to be able to buy a home. Home ownership helps stablise the ecomany and society.
G Singh, London,
Great article!
Ask a load of people with a vested interest in the property market whether prices will crash and they say no...
Dave R, London,
Delusional. Interest rates might not be that high but when people are borrowing 6 times their earnings, something has to give. Property prices have risen through pure speculation... sounds a bit like the dot-com crises......
Chantel, UK,
We really have to think about the kind of society we want for the future. If we want our children to have the opportunity to own their own homes, we need to buid more houses and accept that prices must drop to an affordable level. With the added debt that young people face when studying at university, house prices need to fall by more than 20%. Homes should be regarded as places where famlies live rather than a way of making 'easy money.'
Gordon Callan, Shanghai,
It is hardly surprising that the "experts" (Estate Agents, Mortgage lenders and others with a vested interest in higher house price inflation) see the miracle of never ending house price inflation continuing. However, there is no economic model known that demonstrates a soft landing following from years of hyperinflation. The UK has "enjoyed" the highest level of inflation in the world with prices having soared 300% since Gordon Brown promised he would eliminate the "bust" side of the usual business cycle. Wages have fallen far behind and the economy is drowning in debt. According to the World Bank the UK owes more per capita than the US or any other nation on the planet. Rightmove claim prices fell 2.6% nationally last month. This is just the beginning. I would suggest we shall see 50-60% falls by the time this crash has completed its cycle.
Real Istbear, Warwick, UK
I agree with Gareth. I bought a 1200sq ft 1st floor flat near Earls Court in London 2 years ago for £950,000 and now it's valued at £2,250,000. I think it could go up even more. Why not £4,000,000 for all these 2 bedroom flats? OK I hear my neighbours sneeze through the thin ceiling/walls, and I can't park within 200 yards of it when I come back from work, but it keeps going up in price. I work in the City and think bonuses should only be down a bit this year (fingers crossed!). I'm looking to buy a 3000 sq ft house in Kensington ... I've seen an average one in John D Wood for £7,800,0000. Now that is good value, Gareth.
nick, london,
Given that we've had a run on a top-five mortgage lending bank this week, the first run on a bank for 100 odd years, this article can only be described as extraordinarily complacent. As Mr Greenspan said in the press a few days ago, house prices in the UK are massively overvalued and will fall. A drop is virtually certain now that the sources of money mortgage lenders have been tapping has dried up. The days of conning buyers that a 3-bed semi is worth over 200K will soon be over. Its like asking someone to pay 30000 pounds for a ford fiesta, oh and we'll give you a 40-year interest only mortgage to do it. It cant go on forever, and whoever is left standing when the music stops is going to lose out big-time. Consider this: if I had told you a week ago that Northern Rock would go bankrupt and be effectively nationalised by the Government because it cant cover its costs, you would never have believed me. Now, are you still so sure that house prices are going to stay this high?
Gerald Hodges, London,
Gareth from London - you do make me laugh, you must be an Estate Agent or BTL'er despaerate for house prices to remain stupidly high. You sound like someone on the deck of the Titanic after it hit the iceberg shouting out - 'don't worry, it will never sink.'
There are huge numbers of warning bells ringing, and lights flashing telling us all loud and clear that house prices are going to plummet over the next few years, and possibly longer. Every Tom, Dick and Harry is now fully aware that house prices are going to drop after the 5th biggest mortgage lender has all but collapsed. Prices are falling in the US, Spain, France, Germany, Ireland, etc. but you think the UK is immune?
To sell now makes sense. To buy now will be financial suicide for anyone who does it.
Dave, Birmingham, UK
I thought I would be the only one to say rising house prices is a good thing.
Why do you people take such a negative attitude? Anyone with a job could have bought a property in the last 10 years, rates have been historically low and banks have been falling over themselves to lend. Just because you did not take the opportunity is no reason to have a go at those that did.
All this stuff about the poor working classes is bunkum. Those in council houses were offered massive discounts to market price to buy their homes. Those who did where I live will have made hundreds of thousands of pounds in the last few years. Should they have that taken away from them?
Come on guys, lighten up. If you are like this in a boom time what will you be like if there is a crash. It sure won't help the poorer sections of society. Only the cash rich and those with high incomes will benefit from a crash. Is that you?
Gareth, London,
Prices need to drop. The working class need affordable homes. This would help stabalise growth and reduce the social problems in council estates. Buy to letters shoul maybe develop their careers to improve thier income rather damage the housing market.
G Singh, London,
Rents bear no relation to mortgage costs and there certainly is no real shortage of housing. This is simply touted as an excuse for speculation. If there were a real shortage, it would be reflected in rentals.
Chantel, UK,
It is certainly the case that houses seem to be sticking around unsold longer than they were a year ago, but there are so many factors involved - HIPs, interest rate rises, financial stability, speculative over-pricing etc etc that it's hard to pinpoint causes.
Personally I don't see a big problem for most people if there is a decline in prices - after all the house you are planning to buy also declines in price. The only problem arises if you are trading down or getting out completely - for example selling a house you have inherited, in which case your gain will be less than you might have thought, or bought to let, and I can't summon up any tears for the people who have helped crowd out first time buyers and fill our city centres with so-called "executive apartments" in ugly blocks which few people really want to live in, left them empty because they couldn't get a tenant (surprise surprise) for a couple of years and then expect to make a killing by selling up.
alexandria, Sheffield, UK
ok - ""Is a crash looming? For all the doom and gloom, economists and property experts believe that a 1990s-style property crash is very unlikely. Martin Ellis, an economist at the Halifax"" He would say this! as its in his company's interest to say that. Ask a different economist and one who has no job connected to making a profit from the housing maket.
Why are the media always quoting these people who have a complete bias to making sure the housing market doesnt fall.
This is getting boring!
Mrs A, London,
Prices to stop rising? It's about time!
Andrew Montgomery, Manchester, UK
In a probably vain hope to get something positive in before Michele from Richmond and her ilk make us all want to jump off a bridge, house price rises are great!
Overall, bonuses for bankers will be HIGHER this year than last. There will be some adjustment as to who gets what, but look at the third quarter results - bulge bracket banks are still making money hand over fist (significantly more than last year, which resulted in record bonuses).
Lack of supply is not about to change and the much vaunted retail level credit squeeze is not relevant to my local market (central London) as people with poor credit history cannot afford the properties anyway and banks are not about to stop lending to professionals.
Rents are increasing strongly in my part of town so no need for buy to letters to panic.
Things can change of course, but I think you would be a fool to sell now and expect to buy more cheaply next year (at least in central London).
Gareth, London,
Stop crying.
I do not see anything wrong with house prices dropping 20% and becoming more sensible
michele, richmond,