November 18, 2008 | posted by Michael Baxter in House prices | comments (6) |

And then it hit the buy-to-let market.

There are those who are surprised. For so long we were told that falling house prices would boost the buy-to-let sector. The argument went like this: since more and more would-be first-time buyers couldn’t afford to buy their home, they would have to rent instead.

In September 2007, Nigel Terrington, chief executive of buy-to-let mortgage specialist Paragon, said, “There is broad agreement that buy-to-let is a beneficiary of a softer housing market, as would-be homebuyers defer house purchase and find themselves competing with migrants, students and first jobbers, among others, for a finite supply of rented homes.”

In June 2008, Mr Terrington said: “Commentators forecasting a downturn in the buy-to-let market have overlooked the fundamental dynamic of the UK housing market - people need somewhere to live and, for many, house purchase is simply not an option.”

Then more recently than that, in July of this year, when the last survey from the Royal Institution of Chartered Surveyors (RICS) was published, RICS said: “Becoming a landlord is now an increasingly profitable option with rising rents and yields offering good returns.”

It is all a little odd, because the last 24 hours have seen the release of three sets of data, each painting a somewhat different picture. It’s that cliff edge again. It appears the buy-to-let market has found it. No doubt it will drag the wider housing market down with it.

First piece of data to bring such damning news to the sector came from the Empty Homes Agency. It reckons there are now more than 762,000 empty homes in England, with no less than 650,000 of this number owned by landlords. It says there are another 77,000 empty homes in Scotland and 50,000 in both Wales and Northern Ireland.

It’s strange isn’t it? There is supposed to be a shortage of property in the UK.

Then comes news from Standard and Poor’s. It has produced an analysis after studying 200,000 securitised buy-to-let loans. Its finding: at the end of June, 3.7 per cent of this number were in arrears – this compares with an average of 2.9 per cent of owner-occupied homes. Standard and Poor’s reckons between 20 to 40 per cent of the buy-to-let market could fall into negative equity next year.

And the third piece in this damning jigsaw comes in the form of the latest report from RICS, out this morning. Something unprecedented happened to rents in October.

RICS asks its members whether rents went up or down and the balance forms its key headline lettings survey index. Last year, this index peaked at a score just shy of 40. For the next few months it fell slightly, but only modestly, so that in July the index stood at 31.

Well, since then, the index has just collapsed, falling to minus 12 in October. That is the lowest reading ever recorded.

RICS says: “London and the Southeast have been hardest hit with the net balance of surveyors reporting rises or falls in rents for London houses falling from a stable zero per cent in the second quarter to negative -53 per cent in the third quarter, while flats fell from a positive five per cent to a negative -33 per cent. However, the biggest turn around was in the Southeast, with the net balance of surveyors reporting rises or falls in rents for houses plummeting from 53 per cent to -33 per cent. Equally, expectations for future rises in rents turned pessimistic for the first time since July 2002.”

Okay, now it is time to stop reading, and start writing. So, pens out please. There is one question in today’s exam. If rental income is falling, if house prices are falling, if a growing number of buy-to-let mortgages are for more than the property they are lent against, and if there is a massive supply of vacant properties, what will happen next?

If your answer has the word crash in it, then you will probably get top marks.

November 11, 2008 | posted by Michael Baxter in House prices | comments (1) |

My, is it a month already? The Royal Institution of Chartered Surveyors (RICS) released its latest report on the housing market this morning. This is the barometer index which provides some real underlying data that can hint at the shape of the market for months ahead.

Meanwhile, the Nationwide, which for so long only ever struck the pose of a bull when talking about house prices, has made its most bearish comments yet.

We all know house prices are going to carry on falling. According to the Halifax, prices are already down by around 15 per cent. The real question now relates to whether prices will fall by another 10 per cent (the most optimistic prediction), by 20 per cent (which is what Capital Economics predicts), or by more.

The headline RICS index improved a tad, but it is still in record low territory.

Every month, RICS asks its members whether house prices moved up or down in their neck of the woods. It takes the percentage number who say up, subtracts the percentage number who say down, and out the other end comes the RICS index.

For September, this index stood at minus 81.8. That is slightly better than last month’s score of minus 84.2, and the year low set in April of minus 94.7. So, yes, the index has improved, but frankly, anything less than minus 70 indicates a market running around its all-time low.

Actually, though, the data which provides a more meaningful guide compares sales with supply. On average, the number of houses sold per estate agent over the last three months fell from 11.5 to 10.9 in October. October saw the lowest number of sales per estate agent since 1978, when RICS first started tracking this reading.

But at least the supply of new properties seems to be outpacing the fall in sales. The stock of properties on estate agents’ books fell 81.6 to 80.7 in October. Actually, stock levels have been falling all year, although they are sill 21 per cent up on a year ago.

The key score, however, the sales to stock ratio, fell from 14.1 to 13.5 per cent. RICS says market conditions are now the loosest since 1992.

The key may well lie with repossessions. We all know that as unemployment rises, more and more people are going to fall behind in their mortgage payments. If banks jump in and take possession, the result will be a rush in new properties coming on the market, and prices will just fall and fall. If the government can persuade the banks to act with more restraint than comes naturally to them, price falls may end up being more modest.

Talking of modest, the Nationwide has been making noises. It is not fair, argues the building society. While all around rivals took on all the airs and graces of kamikaze banks, the Nationwide maintained a capital tier one ratio which was well in excess of the levels seen at the banks. Furthermore, it now claims to have a capital tier one ratio of 10, suggesting the building society is prudence it very self.

And yet it has to fork out money as part of the scheme all the banks and building societies sign up to for compensating customers when other banks fail.

So, Icelandic banks go bust, and the building society of prudence has to pay the bill – it’s a rotten world.

But while its chief executive Graham Beale was crying into his milk over the unfairness of life, his group development director Tony Prestedge said something else, which was far more headline grabbing.

“Our forecast is now for the total mortgage market to be valued at £18bn this year, compared with £90bn last year,” he said, and then the real sucker punch: “So far we have experienced a price reduction of more than 14 per cent since the market peaked in August 2007, and we expect a similar fall over the next year. We believe, peak to trough, there will be falls of around 25 per cent and it will be into 2010 before we see a stabilisation of the market.”

It is a tad odd. For so long the Nationwide, via its economist Fionnuala Earley, was telling us all was hunky dory with the housing market. Now it is predicting 25 per cent falls.

The truth, though, is that it is just a guess. The Nationwide has shown that for all its inside knowledge, data and savvy economists, it doesn’t really know. And actually, given the rate at which house prices are falling at the moment, it seems that we would be quite lucky to see total falls of around 25 per cent.

November 6, 2008 | posted by Michael Baxter in House prices | comments (0) |

House prices are down again, according to the Halifax.

Keep your chin up. It says: “The UK average house price is 22 per cent higher than five years ago.” It added: “House price to earnings ratio – a key affordability measure – is improving significantly.”

But take a gander at the data, and it’s difficult to avoid the reality that October saw one of the worst months yet for falling house prices.

In the month, average prices fell by 2.2 per cent, making it the worst month since May. The Halifax now has annual house price falls running at 13.7 per cent. But remember, when it calculates annual house price inflation, it takes the average over the last three months, and compares with the average over the corresponding period a year ago. If, instead, you do a straight month on month comparison, then prices are now down by 15 per cent from a year ago.

Furthermore, house prices have been falling now for over a year. Prices peaked, according to the Halifax, in August 2007, meaning they are now down by almost 16 per cent.

If you then take the latest readings from Hometrack and Nationwide, you find that October saw the second-sharpest drops of the year – only May saw a bigger fall.

The Halifax said: “The house price to average earnings ratio…has fallen by 16 per cent from a peak of 5.84 in July 2007 to 4.92 in August 2008. As a result, the ratio is below 5.0 for the first time for four and a half years (4.99 in February 2004). We expect a further improvement in the ratio as prices continue to soften. The long-term average is 4.0.”

There is one thing that does seem to be a bit of a puzzle. If this house price to earnings measure is so important, why didn’t the Halifax warn that house prices were too high when the ratio moved to 5.84? Instead, at that time, we were told prices would continue going upwards. Strange, isn’t it?

Also bear in mind that prices are now £31,400 down from peak. If they fall by a similar amount over the next 15 months or so, then average prices will be at the same level seen in September 2003.

November 4, 2008 | posted by Michael Baxter in House prices | comments (1) |

Even though base rate is expected to be cut this week, homeowners should not assume that mortgage rates will fall accordingly.

Following the last cut in base rate, three in four mortgage lenders failed reduce their standard variable rate (SVR) and mortgage brokers are predicting that subsequent cuts in base rate are unlikely to be matched by lenders.

Even if you have a tracker mortgage, which is suposed to follow base rate movements, don’t assume that all lenders offering trackers will do so in practice.

Halifax and a number of building societies, including Nationwide, Skipton and National Counties (to name but a few) set a minimum mortgage rate known as a collar, which they will continue to charge, even if base rate drops below the collar rate.

So if base rate were to fall to 2 per cent, Halifax has a collar of 3 per cent, Nationwide one of 2.75 per cent, while HSBC  says it has the right to stop reducing its tracker rate if there is a “material change to the mortgage market.”

Halifax, however, says its 3 per cent collar, isn’t necessarily a floor and that it “may, or may not” choose to exercise the collar rate.

Ray Boulger of mortgage broker, John Charcol says: “This uncertaintly is annoying for borrowers, but with the Halifax set to be taken over by Lloyds TSB, there may be political pressure for it to help customers by cutting rates below the collar.”

Lloyds TSB itself does not impose a collar, nor do Woolwich or Chelsea building society, while Abbey has a minimum  rate of 0.001 per cent.

Collars are often hidden away in the small print of a mortgage offer, so borrowers can sometimes remain blissfully unaware of their existence until it’s too late.

Ray Boulger  says: “Collars have become an issue of late because, until recently we never expected base rate to drop below 3 per cent, whereas now that is a distinct possibility.”

It may worth taking advice from a mortgage broker as the lending market remains difficult, following the withdrawal of thousands of mortgages from the market.

To find a mortgage broker visit www.unbiased.co.uk

Try out Defaqto’s unique mortgage calculator:
http://www.defaqto.com/consumer/mortgages.aspx

October 31, 2008 | posted by Michael Baxter in House prices | comments (0) |

We all know house prices are falling in the UK. And they are declining in the US and Spain, too. But what about the rest of the world? Where else are you likely to see house prices fall, and by how much?

And then take a look at China. Use China as a kind of helicopter view, you will be surprised at the lesson we learn for the UK property market.

Top of the pack comes Ireland. The IMF has calculated that prices would need to fall by over 30 per cent to be restored to something like the level you would expect.

Next on the list is the UK – around 22 per cent overvalued, followed by Down Under, Norway, France and then Spain.

Capital Economics has taken its own look, formed a slightly different perspective, but comes to similar conclusions. It has looked at house prices and compared them to both incomes and rent. Prices are too high, measured by both yardsticks and by a similar amount. It then took the average overvaluation from the two measuring criteria and found that, in order of scale, Ireland, Australia, Spain, the UK, Denmark, Norway, Netherlands, France and Sweden all suffered from greater overvaluation than the US.

The IMF concedes that a part of the surging house prices can be explained by strong economic growth, rising immigration and low interest rates. But adds: “However, the expansion was also fueled by new financing techniques based on securitization and weakening lending standards, particularly in the United States where 40 per cent of new U.S. mortgages were nonprime mortgages, often with very high loan-to-value ratios and minimal documentation. In European countries, there is less evidence of declining lending standards, but, as in the United States, in several countries the availability of housing finance was sustained through the increased availability of wholesale financing, involving serious liquidity mismatches in some cases.”

Or, to put it another way, some of the rises in house prices could be explained by fundamentals, but equally the unsustainable availability of credit was clearly a major factor.

Capital Economics, however, goes further. Looking at the demographics argument, it concedes that two countries which have enjoyed especially large rises in house prices, Spain and Ireland, have also seen rapid increases in population. But, it asks, how do you explain house price rises in the US, Australia and the Netherlands, which have not seen a rise in population?

It also dismissed the low interest rates argument saying that, actually, after allowing for inflation, real interest rates were not as low as people thought, and pointed out that while low interest rates may make a mortgage cheaper in the short-term, in the long-term low inflation can actually mean the cost of repaying a mortgage as a proportion of income is actually higher.

But, at least the bad news isn’t everywhere.

In Asia, prices have shot up, too, but there is one big difference, so too have wages. As a result, it calculates that, with the exception of Hong Kong, and to a much lesser extent the Philippines and Taiwan, house prices in all the major economies in Asia are actually lower than one would expect. In the cases of China and Korea, it suggests house prices are more than 30 per cent undervalued.

It may be quite interesting to consider the long-term effect of cheap house prices today in China on future attitudes.

Imagine that, over the next 30 years, your average Chinese becomes three times better off – that is to say, average income trebles. Now assume house prices rise so that the 30 per cent overvaluation is corrected. Then assume inflation runs at 5 per cent a year. If you follow those assumptions, house prices in China would rise 164.6 times over. A house selling for the equivalent of £10,000 today, would sell for £1,646,000. (Don’t believe it? – do the sums.)

Now imagine what it will be like in China in thirty years’ time. People will say a house is the best investment you can possibly make. They will say: “Look at that data, it goes back 30 years, and you will see, house prices always go up.” You can imagine the Chinese talking about a property ladder, and saying, when you buy a house, buy the most expensive property you can possible afford – “You can’t go wrong.”

But then imagine, in thirty years’ time, economic growth slows right down, inflation drops to zero. You can imagine for several years, the experiences of previous years will encourage the Chinese to carry on buying. And as prices go up, they become even more confident the rise will continue. Some will say house prices are too high, but then that view will be laughed off, because they will say it’s different now. Because inflation is down to zero, interest rates will be low, and economists will say it is affordability that counts, not size of loan.

From that perspective, it is easy to see where things are going – the market is heading for crash.

Now apply that scenario to the UK, add in the effects of a credit boom, making mortgages with a loan to asset valuation of 120 per cent available. But in the case of the UK, let the story begin at the end of World War II, so that the story of house prices rising to correct for undervaluation in the 1930s, coupled with high growth and inflation, creates a 60-year boom. You can see how such a scenario would create the most remarkable of bubbles.

October 30, 2008 | posted by Michael Baxter in House prices | comments (1) |

You have to feel a little sorry for Fionnuala Earley, Nationwide’s Chief Economist. Every month she somehow has to put up a credible case for the housing market, even though the Nationwide’s own predictions for the market have been so completely and utterly blown out of the water.

Even so, her comments this morning on the Today programme take the biscuit.

When asked if there would be an end to the fall in house prices, Ms Earley laughed back the response, of course there will be, these things go in cycles.

Well, if that is so, then why is it that the building society failed to call this fall? It seems that when we are in a boom, the thinking is that house prices always go up. When we are in a decline, well, don’t forget, we are in a cycle.

Anyway, the latest report from the Nationwide had house prices down 1.4 per cent in October, taking the annual fall to 14.6 per cent. It seems that the annual rate of falls may now be close to peaking, for the simple reason we have now seen 12 months of successive falls. Last November, the Nationwide had prices down 1.2 per cent, so prices would need to fall by even more than that next month for the annual rate to decline any further.

The Nationwide pointed out that house prices are still around £30,000 higher than their levels five years ago. But, just bear this in mind. So far they have fallen £30,000. If the falls carry on at the same rate for another year, by the end of 2009 average prices will be at the same level seen in 2003.

Consider average house prices today with January 1 each year since 2000.

The annual rate of house price inflation may be close to peaking, but expect the peak-to-trough fall to continue for at least another year.

October 29, 2008 | posted by Michael Baxter in House prices | comments (2) |

It will come as no surprise to learn that repossession levels soared in the second quarter of this year. The FSA released its findings yesterday, and they were broadly in agreement with data released by CML recently.

But it is when you peer beneath the surface that things get interesting.

Repossession levels in Q2 hit 11,054, 20 per cent up on Q1, but, more to the point, 71 per cent higher than a year ago.

The CML data came up with a slightly lower reading, but then FSA figures include homes with a second charge, and buy-to-let properties.

But the interesting bit comes with news on the number of homes in arrears. According to the FSA, no less than 312,332 mortgages were in arrears by the end of the second quarter. It appears that once mortgage holders go into default, they are finding it harder to catch up. It is not hard to guess why. In the past, they could use the rising value of their home as security for a mortgage top up. This option has been removed.

If markets were left to themselves, it is clear that we are about to see an enormous rise in repossession levels – they could easily pass the peak seen in the early 1990s

The government of course wants to stop that. It wants banks to be all soft and cuddly and nice to people who get behind. And frankly, the government may have a point. In the past banks were far too fast to take properties into possession.

The danger is simply this. If house prices continue to fall, and if unemployment starts to rise, the number of people in arrears will just grow and grow. The real risk is that any government action will just slow the inevitable – and that could make things a whole lot worse in the longer-term.

October 28, 2008 | posted by Michael Baxter in House prices | comments (0) |

Negative Equity – is there a more unpleasant coupling of two words in the English dictionary? And now the Bank of England has turned its attention to the matter. Its conclusion: negative equity levels in the UK will reach 1.2 million. That’s not good, but not as awful as the early 1990s when they reached 1.8 million. So, it’s bad news, but not that much bad news. It is just that if you dig a little deeper, the argument is not so clearcut.

It seems there is still a tendency to bury heads in the sand over the matter of negative equity. It could be a costly mistake. Nothing can be done, or even should be done, to stop house prices from falling, but the government can take measures to minimize the economic costs of negative equity, and the sooner the reality is allowed to dawn on people, the sooner something can be done about it.

In its latest financial stability report, the Bank of England warned that around 1.2 million people could find themselves in negative equity before the great housing crash of 2008/2009 finally comes to an end. Apparently, half a million are already there.

Contrast this finding with the finding of an FT report in April which headlined: “negative equity fear ‘overplayed’.” The FT piece argued that Britain would escape a repeat of the negative equity crisis of the 1990s unless “there is an unprecedented fall in house prices.”

The FT article said house prices would need to fall by 25 per cent for negative equity to reach the kind of levels seen in the early 1990s.

Curiously enough, the Bank of England happens to think house prices in the UK will fall by around 15 per cent from the current level. The Bank reckons house prices are down by about 15 per cent at the moment, so this would take the total fall to around 27.5 per cent. So, as ever, statisticians can’t agree.

The real worry, though, is that if house prices fall by even more than the Bank of England is estimating – and let’s face it, its estimates to date have not been good – then negative equity will rocket. April’s FT said if house prices fell by 35 per cent instead of 25 per cent, then the total number of people in negative equity would double and easily exceed 1990s levels.

Here is another curiosity. The FT’s April article quoted the Bank of England chief economist Charlie Bean as saying: “I am reasonably sanguine about the implications of any fall in house prices for consumer spending.”

At the moment, it is banks who are under the rap. When the dust has finally settled on this crisis, those who denied the housing crisis – and especially those who tried to talk up house prices – should be accountable, for it is they, and that includes the media – especially those in TV – who have done more to encourage the madness of the housing boom than all the bankers in the world put together. And for the punishment to fit the crime, it seems the government may have to employ extreme sanctions, such as forcing those concerned to watch two episodes of Location, Location, Location, back to back – without as much as a break.

Negative equity is a tragedy for those concerned. The government may think it can remove the problem by getting banks to act all nice and cuddly when its mortgage holders fall behind, but there is a snag with that approach – it can penalise those who try to do something about their plight. And these are the people who deserve our full sympathy. That is, those who try to sell their home and move somewhere cheaper in order to cut costs, but find they can’t because they have a negative equity mortgage. Likewise, those who have to turn down promotion because it would mean moving and they can not afford to sell, deserve help.

Ultimately, the solution may be some kind of government-backed negative equity loan, treated in much the way that student loans are handled, with repayments deducted from source.

Negative equity is a huge problem in the making, and the government would be better advised to put in place a plan to deal with this problem, rather than waste taxpayers’ money trying to stop it from occurring in the first place.

October 24, 2008 | posted by Michael Baxter in House prices | comments (0) |

The recession is going to be deeper and more serious than was originally expected – well, we all know that now. Yet, bizarrely, that could be good news for the housing market recovery.

Capital Economics has revised its projections for the house price crash. It still reckons prices will fall 35 per cent from peak to trough, which means there’s still around 25 per cent worth of fall to come, but it now thinks this will all happen a whole lot quicker.

“Government bailouts of the ailing banking sector, both here and abroad, have hopefully averted full scale meltdown of the UK and global banking systems. But they will not prevent a major fall in bank lending to households and companies. We now think that the UK economy will contract by 1 per cent in 2009 and by 0.5% per cent in 2010. We also expect unemployment to rise by almost 1.5 million,” said one of its economists, cheerfully.

“However,” went the latest forecast from the economics consultancy, “the deeper recession does not mean we are necessarily facing a deeper housing market correction. After all, our previous forecast already factored in a significant rise in unemployment and some falls in GDP. It also allowed for house prices to overshoot our estimate of fair value a little. What’s more, we expect inflation to drop rapidly, allowing interest rates to fall to 2.5% next year, if not lower. At the margins, lower interest rates will help to prevent a larger fall in house prices. But, the deeper recession is likely to mean that the pace of house price falls will intensify.

“Given time, the Government’s bank rescue package might help to ease the mortgage credit squeeze. However, with expectations of further house price falls widespread and with unemployment rising, a lack of mortgage demand, not supply, may be the bigger problem next year. We expect transactions to fall to around 650,000 this year – half their 2007 level, with only a modest pick-up in 2009.

“Our analysis suggests that regional house price falls will be more evenly distributed across the country than they were in the early 1990s slump. However, valuations look most stretched in the South West, Wales, Northern England and Northern Ireland, and these regions will see the largest drops.

“Although tenant demand is likely to remain healthy, the rise in supply of rented accommodation and the larger increase in unemployment that we expect will bear down on rental growth and our forecasts have been reduced. At best, rents will match average earnings growth but not exceed it.”

So why is all that good news? Well, the big problem with Japan 20 years or so ago, was the terribly slow pace with which it all imploded. By getting the housing crash out the way as quickly as possible, we can then return to conditions of normality.

Mind you, our definition of normality might change. It used to be considered both normal and good to see house inflation in double digits each year. If we see a repeat of that, then it will mean we have learnt absolutely nothing from this saga.