Do you think the credit crunch will lighten up and house prices will stabilise?
It’s no surprise that the vast majority of calls and emails are about this subject and it’s difficult to ignore, given its consequences. The UK has, for a long time, dined out on the fantasised wealth of the ‘equity’ in property.
After September 11th, interest rates were allowed to remain low in order to stabilise the economy. We will pay the price for that.
Whilst Mervyn King1 (Bank of England chief) is attacking the city bonus culture in commercial banks, criticising their excessive pay packages, Mr King will be reminded that he controls interest rates, and in turn people’s buying and selling habits.
The rich and greedy are an easy target but most educated people won’t fall for that.
Banks are in difficulty, and they will continue to want to protect themselves by creating extra margins. It is unlikely therefore that we will see lending return to normal for some time to come.
Alliance and Leicester increased its mortgage book by 82% over the last eight years. The net income for all that risk is a mere £1m. 2 Expect things to remain tight.
This will have a dramatic effect on demand. At the end of the day however we are all a bit like Friar Tuck trying to be like Robin Hood. After firing an arrow into the forest, he asks what Robin thinks of his shot. Robin responds by asking which tree Friar was aiming at, as there are thousands. He walks into the woods and draws a circle round the arrow in the tree and says ’this one’. Easy after the event.
Just like the canary in the mineshaft, this column for months has been pointing out that house prices would plummet as we could see what demand was doing.
As those with their hands in your pockets referred to the ‘housing shortage’ and the need for new properties, we pointed to the fact that property completions were down each month on the year before, and the numbers deteriorating. We told you in October that completions (the only true measure of demand which drives house prices) were down 11.9% on the year before. Well brace yourself; the most recent numbers for house prices is a massive 39.2% down on the year before and 57.16% of the 24 month high. 3
Perhaps this crash will be the biggest learning point not to ever use a house price index as a measure of what to do. If history was that relevant, librarians would be the richest people in the world.
House price indices are naturally flawed in any event as they measure an ‘average’. What’s an average? In times like this when properties are not selling, the larger properties (unaffected by the economy as they are bought by the wealthy) keep the index propped artificially.
The key is to look at the future market. Plummeting demand and increasing supply will prove themselves over the next few years.
Remember also that a number of lenders are tightening up in numerous areas. They are pulling out of apartments completely (try selling these on again with a flood of properties on the market and few banks to fund them) but more importantly they are also down-valuing properties and lowering the amount they are prepared to lend (loan to value). Once again this will drive down demand.
Remember however, this isn’t really bad news. It is only bad news for those with more than one property or indeed those who have borrowed excessively. If property drops back it means less stamp duty and less potential Inheritance tax. For most that will be good news.
As far as lending is concerned you just need to use a good broker now. Up to now anyone could get a reasonably good price but now that things have tightened, a broker will come into their own, as they will know how to package the deal.
Your home may be repossessed if you do not keep up repayments on your mortgage