June 3, 2008 | posted by Michael Baxter in House prices | comments (0) |

Mortgage approvals are down – and have just fallen to the lowest level ever.  It is actually becoming a struggle to keep up, what with the British Banking Association, Council of Mortgage Lenders and Bank of England all releasing monthly data on mortgage lending, we have lost count of the number of times we have told mortgage lending has fallen to an all-time low, or the lowest level since such and such a time.

It feels as if barely a day passes without some new all-time low being passed.

The latest data from the Bank of England says this:

The value of mortgages approved, excluding re-mortgages, was £58 million in April. That’s half the level seen ten months ago, but, more to the point, even lower than the trough reached in the early 1990s.

Capital Economics has produced data which shows a correlation between year-on-year changes in mortgage approvals and annual house price inflation – but with a time lag of two or three months.

Or to put it another way, it appears house prices will follow the lending figures down – over the next few months.  The Nationwide’s 2.5 per cent fall in house prices in May is just the beginning – if lending data is any guide then even bigger falls could follow.

All of a sudden, it seems analysts are talking about this downturn being even worse than the one seen in the early 1990s – something most analysts said was inconceivable not so long ago – although Investment and Business News has given umpteen warnings for at least two years now.

Capital Economics now says its prediction of a 20 per cent fall by the end of 2009 could be conservative. In fact, it said, “Indeed, even if approvals do not drop further but remain at current levels for the next few months, we could be looking at house price falls that are well into double digits by the end of the year.”  And remember, it expects falls to be even greater in 2009. 

Yesterday, a report from Gocompare.com said that nearly half of respondents to a recent survey it ran said their financial situation made them feel trapped in their current home.   Only 14 per cent said they are likely to move in the next three years.

As long as people stay put, house price falls will be restricted – but the longer the downturn continues, the more people will be forced to move.

The cost of renting may well go up – as people stay away from buying houses.  Then buy-to-let landlords with modest borrowing will see yield cover costs.

Ultimately, it seems we are likely to see a scenario of falling house prices and rising rents.     Eventually, rent relative to a mortgage payment on an equivalent property will become expensive.  At that point tenants will conclude it makes sense to buy, investors will conclude that the yield on property investments is such that even without capital growth the investment is still worthwhile.  At that point, the market will turnaround. And the next cycle will begin.

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

Now, one swallow does not make a summer, and for that matter neither does one piece of bad news spell doom. Even so, the latest data release from the Royal Institution of Chartered Surveyors (RICS) could be significant.

It appears that all that woe has spread to buy-to-let landlords.

Among its many surveys, every quarter RICS asks estate agents if instructions for landlords are up or down from the same time last year. Yesterday it published the results of its survey for the last quarter of 2007. And the difference in the percentage number who said instructions were up, and those who said they were down, went negative for the first time ever.

In fact, the difference was 1 per cent, so the RICS index moved to minus 1; it was negative, but only by a smidgen.

Then again, demand from landlords has been surging year-in, year-out. As was stated by one of our readers on our blog – Owen Raybould, “The housing market has changed massively since the 1996 law which allows you to buy a house and rent it out, but retrieve the property from the tenant at two months’ notice. This has created a whole new raft of buyers other than the traditional owner occupiers. If therefore you are looking for reasons why house prices have gone up further than you would expect with the supply to population ratio, here is the main reason.”

There can be little doubt that it is the buy-to-let market that has pushed up house prices so high in recent years. Right now, the buy-to-let investor is surely all that stands in the way of a crash.

RICS says, “The credit crunch has restricted the number of buy-to-let mortgages approved, as well as the number of mortgages available to investors.”

It seems that the key to the future movements of house prices lies with investors. On one hand, they may look at the prospects and choose to sit tight. Their reluctance to buy could then become a self-fulfilling prophecy. On the other hand, they may reason that rents are high enough for it to still to be profitable for them to make more investments.

But, if the RICS conclusion is right, investors just may not be able to raise the money, even if they want to.

It seems more likely, however, that buy-lo-let investors are nervous. Right now, investing in property would appear to be a very brave thing to do.

February 27, 2008 | posted by Michael Baxter in House prices | comments (0) |

And from one paradox to another. If inspirational first-time-buyers can’t afford to buy a property, how can it be profitable for landlords to buy those properties and rent them to the people who can’t afford to buy them?

The answer lies with the amount of spare equity in a buy-to-let investor’s portfolio. If, say, a 40 per cent deposit is required for rent to cover costs, including mortgage interest, maintenance and voids, and the landlord currently has gearing of, say, 50 per cent, then it arguably makes sense to borrow a little more and invest the money in another property.

This only makes sense, of course, if the investor expects the value of the asset to rise.

Bear that in mind when you hear about the latest findings from the Council of Mortgage Lenders (CML). The number of loans (including remortgages) to buy-to-let landlords in the second half of the year was 179,100, up from 171,800 in the first half of the year and 177,200 in the second half of 2006.

The total number of outstanding buy-to-let mortgages has now passed the million mark, standing at 1,038,000 at the end of 2007 – nearly 23 per cent up on 846,900 a year earlier.

On average, at the end of 2007, lenders had an 85 per cent maximum on the percentage of the value of the property that they were willing to advance, and required rental income to amount to 120 per cent of the required mortgage payment.

CML says, “Arrears remain lower than in the wider mortgage market, with 0.73 per cent of buy-to-let loans in arrears of more than three months at the end of 2007 (up from 0.63 per cent at the end of the first half of the year, and 0.58 per cent at the end of 2006). This compares with 1.1 per cent in the wider mortgage market. The proportion of buy-to-let mortgages taken into possession was also smaller than in the wider market - 0.18 per cent for the year as a whole, up from 0.13 per cent in 2006 but lower than the 0.23 per cent in the wider market in 2007.”

So that’s a pretty rosy outlook for buy-to-let investing then.

Michael Coogan, CML director general, commented:

“Tenant demand for private rented property remains strong, and buy-to-let is fulfilling an important role in helping to deliver an increased flow of high quality homes to rent. Buy-to-let has remained resilient in the face of the funding constraints that have affected the sector and the wider mortgage market.”

Peter Williams, Executive Director of IMLA (Intermediary Mortgage Lenders Association) said, “IMLA members continue to believe that the buy-to-let market will remain well underpinned in 2008 and expect further growth this year. Some further deterioration in credit quality is possible, but the vast majority of landlords will continue to be able to service their borrowings. Indeed, they believe the combination of a slower housing market and rising in tenant demand represents a good opportunity for them to buy additional investment properties on a selective basis.”

Capital Economics, on the other hand said, “Two months have passed since these data were collected. In that time, mortgage lenders have only become more cautious and general economic and housing market sentiment has deteriorated. In our view, house prices will fall this year, and, against that backdrop, we expect a much more subdued BTL sector.”

The key surely lies in what house prices will do. Sure, for buy-to-let investors who are not too heavily geared, it is possible to carry on investing and cover costs – but if house prices then fall a little, or even stay static, what is the point?

It is how property investors react to that key point that will determine the course of house prices this year. If a small fall in prices, which seems quite likely, dampens investors’ enthusiasm, then further falls could follow, ultimately leading to a downward spiral.

December 19, 2007 | posted by Michael Baxter in House prices | comments (0) |

It’s only Tuesday, and already this week has seen three pieces of bad news relating to house pices.

First off the blocks was Rightmove. The property web site, that claims to list 90 per cent of all homes for sales in the UK, says that asking prices dropped 3.2 per cent in November. London suffered a 6.8 per cent drop. Rightmove says part of the fall was down to HIPS, with property owners trying to sell their homes before the December 14 deadline for introducing HIPS for all homes.

But then Rightmove reckons the HIPS-effect only accounted for around a third of the overall fall.

Then the Bank of England dished out some worrying news. In a survey of 2,000 people it found that around 22 per cent have experienced difficulties when their fixed rate mortgage came to an end.

The Bank of E is dressing this up as good news, saying the majority of people will not have difficulties when their fixed rate mortgage comes to an end. But remember, next year there be 1.4 million such deals ending, at a time of much tougher credit conditions. If 22 per cent have difficulties as a result, that’s more than 300,000. Could the UK cope with 300,000 people suddenly struggling to repay debt?

Finally, there was the Royal Institute of Chartered Surveyors. It reported a slow-down in the demand for rental properties from tenants.

But the really interesting bit of news comes in the shape of this quote from Jeremy Leaf, a spokesmen for RICS. He said, “A combination of tightening lending criteria and successive interest rate rises has started to hit the buy-to-let market but with the drop in capital gains tax due in April, many landlords are resisting selling until spring”.

In short, buy-to-let investors will wait until next April before they start selling - making use of the new capital gains tax rules.

It seems that the property market has until then to sort itself out. But if conditions are still tough then, that could spark mass selling from the buy-to-let brigade.