Mortgage & Housing

15 September 2008 

Reader Writes:
Do you think the governments changes will boost the housing market?

In short, not really. The changes are obviously at the bottom end, and will support the first rung of the ladder. I am not a ladder person, but no-one would go to the top if the first one was broken. Each layer feeds the other and without each layer the whole thing falls apart.

In that respect I do appreciate the attempts to support the market although my view is that it’s all too late. The Bank of England has been all too slow in introducing some liquidity by lowering interest rates. They should have done so by last November but an obsession with inflation has lead to them taking a stronger stance and the pain is evident with the rising repossessions and plummeting house prices.

It was a long time ago that I stopped believing economics was a driver for house prices, as fear and greed is all you need to focus on. Economics do have two parts to play however, and these will be key over the next few years. Economics is the common sense at the peak of the market or the lowest point in the market providing the wet kipper across your face which says ‘this is just stupid’. Sentiment does all the work in between.

House prices were too expensive in 2003 and that’s where they need to get to before the kipper tells Mr investor that he is indeed looking at a bargain. We have a long way to go before we get to that point.

As you know we have been pointing this out for over four years and giving all the warning signals. The most important signal is the amount of properties being purchased and this figure has been plummeting for eighteen months. Each month the % of completions on properties has fallen drastically. The most recent figures for May show a massive 43.5% drop on May 2007.¹

We have already turned to negative sentiment and the recent changes will do little to turn this before I believe property is a bargain. A fall from now of c20-25% is close to the mark.

Remember however, that people are very proud of their value and stick to it, indeed many readers of the column will already have switched off now as they are reading bad news.

It is not bad news however, it is just information. This thought process puts a temporary stall on house prices however as a typical property investor is known to anchor to a previous price as that’s what they believe it’s truly worth.

Evidence of this is clear with most bubbles as their ‘pop’ takes a lot longer to be heard. The reason for this is investor denial and it's only when they absolutely have to sell that the true price actually comes out.

Take 1989 for example. The housing market collapsed with only a trickle of houses being sold. House prices however did not really begin to fall until the beginning of 1992. They remained below their 1989 level until 1996. Amazingly an investment into a straight forward cash money market account over the period from 1990 to 2000 would have returned you 257% more than property. ²

These numbers will not have gone unnoticed to the clever investor and they will know when that bargain will arrive. It is with that in mind that the short term fix by the government is a bit like trying to stop a river with a sheet of kitchen roll.

The changes are however, a welcome boost and will in some ways support from greater falls as those in debt can reduce their debt by selling a bit of their property back. Many will not think economically and will use the 30% interest free loan as an opportunity to get on a ladder and the lack of stamp duty will now enable those with little deposit to act. If anything the move will take a % percentage of the glut of excess property off the market and lighten the depression this could cause.

If you have a query on mortgages or the housing market call Peter on 0800 0112825, e-mail info@wwfp.net or take a look at our mortgage section.

Sources;
¹land registry
²Lipper

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Your home may be repossessed if you do not keep up repayments on your mortgage.

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.