Beware the UK house price plunge
By Chris Gilchrist 13th November
2007
A nationwide fall in house prices in 2008 is in prospect as surveyors report continuing
declines in new buyer interest and tighter lending conditions make it even tougher
for first-time buyers.
House price indices are backward-looking, so to get an idea of what’s going to happen
next it’s best to look at the Royal Institution of Chartered Surveyors (RICS) monthly
report on 'new instructions’.
This is a good leading indicator because it measures how many people are putting
houses up for sale and how many people are registering interest in finding a house
to buy. For the fifth month in a row, surveyors reported fewer new sale instructions
in October. New buyer instructions fell for the eleventh successive month. The stock
of unsold property rose at its fastest rate since 2003 while surveyors’ confidence
in house prices was at its lowest level in four years.
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HIPs cut sales
No doubt the introduction of Home Information Packs (HIPs) has played a part in
reducing the number of houses being put up for sale. But this is double-edged: if
more houses were up for sale, prices would be falling faster because there just
aren’t enough buyers out there.
Mortgage lenders rejected twice as many applications over the summer as they had
previously, and brokers report a widespread tightening of lending criteria. Six-times-salary
mortgages are probably a thing of the past and interest rates on self-certification
mortgages – where the lender doesn’t have any real proof of the borrower’s earnings
- are rising.
Moreover, it’s now clear that Northern Rock- which accounted for more than one in
every ten new mortgages earlier this year – has virtually withdrawn from new lending.
This is making it easier for other lenders to raise interest rates and tighten lending
terms. Rock is now a zombie bank and will only return to life if and when a takeover
happens.
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More trouble ahead
Ominously, RICS says that it is limited supply that is propping up the market. That
could persist over the winter, but the real test will come next Spring, the traditional
time for a surge in housing transactions.
Optimists can hope that by then, the Bank of England will have cut interest rates,
making mortgages cheaper. My own view is that even if this does happen, lenders
will not cut interest rates that much. Less competition in the lending market will
mean higher lending margins. And lending criteria will continue to get tighter.
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Cheaper to rent than buy
Abbey does a regular survey comparing buying with renting. Last year, it showed
a definite advantage for buying. This year, the margin is very small and in some
areas- including London and Northern Ireland- it is financially more advantageous
to rent. In fact there are only three regions where the saving from buying rather
than renting over a 25-year term exceeds 10%.
In Greater London, the average cost of buying over a 25-year term is £728,000 and
renting costs £718,000; only in East Scotland is there a big margin of £117,000
in favour of buying (buying costs £450,000 against renting £568,000).
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but not doom
So we are definitely heading for a period in which house prices 'stay flat’- estate
agents’ code for a 5% fall - or worse.
What happens in 2008 will depend on the following:
• Interest rates: how much will they fall next year? A half-percent cut by Spring
would be a strong support.
• The economy: provided employment stays high, there will be little pressure to
sell, so would-be sellers can just sit tight.
• Buy-to-Let: if landlords start to unload property at a faster rate, this could
put more downward pressure on prices generally.
Long-term homeowners don’t need to pay much attention to any of this. But those
thinking about buying now need to do their sums very carefully. Buying on a 95%
mortgage now could leave you with negative equity, locked in and unable to sell,
for several years.
My advice to first time buyers is to buy only if you are absolutely sure you could
let the property and make a good profit over your mortgage repayments. When faced
with a possible trap, make sure you have an exit strategy..
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Article produced by EveryInvestor.co.uk
