August 25th, 2008 — uk housing market -
I am currently on holiday in New York, US. I will return to a regular posting schedule on September 1st.
Just as a side note, evidence of the US housing slump is quite evident here in Queens, New York. The number of vacated, foreclosed houses is increasing. Locals expect the problem to get worse before it gets better. This is even though the US housing market has been in decline for quite a while now.
August 20th, 2008 — uk housing market -
There is a strong correlation between unemployment and the Housing Market.
When unemployment is rising, demand for buying a house will fall. If people are made unemployed they will be unable to afford mortgage payments. But, also, if people fear being made unemployed, they will avoid taking on the risk of a mortgage. Unemployment is currently low, but many expect a deterioration in economic circumstances.
In the last housing crash, two factors contributed to a sharp fall in house prices. These were
Rising interest rates made mortgage payments unaffordable, and because nearly 2 million were made unemployed many others were forced to sell.
The current situation is a bit different. Interest rates are not high, but unemployment is rising and an increasing number of people will be forced to sell.
Unfortunately, rising unemployment often occurs at a time of falling house prices. Therefore, those who lose their jobs and have a home repossessed, are likely to also have negative equity.
August 20th, 2008 — uk housing market -
Those in the construction industry or estate agents were faced with the grim evidence of the overwhelming slump in market activity.
The number of housing transactions is expected to fall to 400,000. This is 60% less than the 1990s slump when housing transactions fell to 1 million.
The credit crisis and poor mortgage availability is to blame for this unprecedented decline in activity. With little immediate prospect of a change in fortunes, many construction workers and estate agents are at risk of being made unemployed. The housing sector could push the UK into recession.
The Bank of England reported only 36,000 housing transactions in June.
Estate agents across the country are reporting very thin volumes, with some branches saying they are lucky to get 1 sale per week.
The renting sector is booming as first time buyers who can’t get a mortgage look to rent.
August 15th, 2008 — frugality -
There is a fascinating programme on BBC called Spendaholics. Basically, it looks at people who are seriously in debt and examines why and how it can be resolved. Although it is easy to feel smug that we are not spending £10,000 a year on shoes or mobile phones (like some of the participants), it still highlights issues relevant for many people.
We Underestimate How much We Spend on Inessentials.
A powerful technique the programme used is to work out how much the person was spending on shoes, coffee, or mobile phones in a year. They would then present the evidence. For example, somebody would see 212 pairs of shoes, 450 takeaway Sarbucks, 300 mobile phones all stacked up. Without exception, people were shocked to see how much they had spent on these seemingly small things. Quite a few had spent over £3,000 a year on say just takeaway breakfast. When faced with the evidence of how much they had spent, many just couldn’t believe it.
August 13th, 2008 — economics, uk housing market -
Definition of Negative Real Interest rates - When the inflation rate is higher than the Bank of England Base Rate. Negative real interest rates are bad for savers and good for borrowers (assuming their income increases in line with cost of living)
The UK, is now experiencing negative real interest rates for the first time in 27 years.
This 16 year peak in inflation puts pressure on the Bank of England to increase interest rates (or at least not cut them. Inflation is now far above the government’s target of 2%. The Bank will also be concerned that the current spike in inflation will increase inflationary expectations and make it more difficult to reduce in the long term. (When inflation is high people will start demanding higher wage increases and this cements the higher inflation)
The MPC face a difficult dilemna. They will be hoping inflationary pressure work their way out of the system soon. They don’t want to increase rates with the risk of recession. But, they don’t like to see inflation above the target. I think they will keep interest rates the same at 5% for a few months and see how things develop.
August 12th, 2008 — uk housing market -
Why can’t UK House Prices Remain Steady?
If you look at the historical trend of UK house prices, one thing stands out - Volatility. House prices seem to be either rising by 20% a year or falling by 10-15%. Why can’t house prices remain steady, like say the price of cars? Why are house prices so volatile?
Speculation
Although people talk of housing speculation, the majority of homeowners do actually buy a house to live in. A house is not like stocks and shares which can be easily bought and sold. It is true there are investors who are influenced by the prospect of rising and falling prices, but, this small (if growing segment) cannot explain the housing volatility by themselves.
Falling Prices Makes Lenders Cautious.
When prices are rising lenders are more willing to lend ‘risky’ mortgages. If house prices are rising by 20% a year. A 100% mortgage will soon become a standard 90% mortgage. In a period of rapidly rising prices lenders require a smaller deposit. They are more willing to lend to people with bad credit. Even if people default, it doesn’t matter because the bank will have made capital gains.
When prices fall, the opposite happens. Banks are concerned with negative equity. With house prices falling, repossession becomes a real liability. Not only does the bank suffer costs of repossession but also the equity loss. This is why banks are currently penalising homeowners with small deposits. It means the goal posts have been moved for first time buyers. A couple of years ago, only a small deposit was needed. In today’s climate a much bigger deposit is needed. This is leading to a fall in the number able to get a mortgage.
Price changes and confidence.
With prices in seeming freefall, there are very good reasons for delaying any purchase. Even if prices are falling by 5%, it makes sense to wait 12 months, as this could save you £10,000. The problem is that this, common sense attitude, exacerbates any price falls. As soon as prices fall by a small amount - nobody wants to buy and this magnifies the price fall. It becomes a vicious cycle, with prices falling no one wants to buy. With no one wanting to buy, prices keep falling. It is because of this that house prices can overshoot in either direction. With house prices falling at the moment, I anticipate price falls will overshoot and fall too much. Then we will go back to a period of rising prices. It’s rather like a bouncing ball which can’t stop moving from side to side.
Mortgages
The ratio of house prices to earnings did rise significantly in the 2000-2006 boom suggesting house prices were becoming unaffordable to first time buyers. But, this decrease in affordability was magnified by changing conditions in the mortgage sector. The credit crunch has magnified the variation of house prices because banks have changed their criteria for lending.
Time Lag in Supply
When prices are rising, homebuilders often find it difficult to build enough houses to meet growing demand. The planning process is long and difficult. Even when permission has been granted it can take several months to complete the house build. Because demand rises faster than supply, prices increase. On the other hand, when prices start to fall, there is a lag of new houses coming onto the market. Then in the midst of a housing price fall, nobody wants to build. This makes good sense in the short term. However, for the long term, the fall in building supply, means long term shortages of supply will continue. When the housing market recovers in the UK, we may again face supply shortages which squeeze prices higher.
August 12th, 2008 — uk housing market -
According to research by the Royal Institute of Chartered Surveyors, many estate agents are selling only one house per day. Mortgage approvals are down 71% on last year, pushing prices and home sales lower
I liked the cartoon by Matt in the Daily Telegraph today:
“If you want to move somewhere much cheaper have you thought about buying your own house?”
In a ray of good news, the Bank of England reported a slight easing in the cost of fixed mortgages. The cost of a 2 year 75% LTV mortgage fell from 6.6% to 6.3%. It is the first easing since February. However, the cost of mortgages is generally higher than 12 months ago - despite a cut in base rates. Banks have been boosting their profit margins by raising arrangement fees - bank profits rise
August 11th, 2008 — news, uk housing market -
With House prices falling, the renting sector is becoming more expensive and is experiencing an almost mirror price change.
The cost of renting for students has increased by 20% in the past 4 years. Renting costs are rising because there is less supply of rented accommodation. Landlords are renting to more professional workers who can’t buy a house. The increase in cost of student renting is similar to the increased cost of general renting.
There is a huge disparity in the cost of renting throughout the country.
The highest cost of renting is predictably in London, where the weekly average is £102.
Middlesbrough, Stoke, Wolverhampton, Crewe and Bradford. Here rents are less than £45 a week.
Students on a tight budget, would be advised to think carefully about where they study.
August 11th, 2008 — housing, mortgages, uk housing market -
The American Dream Suffers a battering
America has had its fair share of bubbles and busts. The dot com boom and bust was spectacular, if relatively short lived. The response of the Fed - cutting interest rates helped to smooth over the problem. The US avoided a serious recession and for most people (unless they had invested their life savings in dot com firms) the issue was of little importance. Furthermore the rapid response of the Fed reassured markets that the monetary authorities were eager to avoid any economic downturn. It appeared that boom and busts were not to be feared.
Against a back drop of very low interest rates, economic growth and a very competitive credit market, there was a rapid expansion in the number of mortgage advances. This enabled a new generation of Americans to buy a house (especially first generation immigrants and people with bad credit histories). Buying a house seemed to be an excellent investment. Not only did you get to own your own house, but, also could enjoy rising wealth as house prices shot up.
Between 2000 - 2006, American House prices rose by 135% encouraging even more to try buying a house.
With house prices rising so quickly, Mortgage companies were willing to lend 100% mortgages and mortgages to people with bad credit history. Mortgage salesmen were encouraged to sell mortgages with little evaluation of ability to pay. In a period of rapidly rising house prices, it was easier to mask poor mortgage decisions.
The boom in house prices also caused an unprecedented boom in building. Housing was the new gold rush. Large homes were knocked down to build several apartments. In particular there was demand for new housing in affluent suburbs, outside of central cities, but, within commuting distance.
The collapse of the housing market and credit crunch have been well documented - see credit crunch explained. In short house prices fell and banks suffered from large scale losses as people simply defaulted on rising mortgage payments.
In many cases, people are simply posting the keys in the letterbox and walking off. Unable to pay mortgage payments and left with negative equity, people prefer to have the home repossessed than struggle to fight a losing battle. The problem is that home repossessions are expensive for banks. Typically, banks may get 40% less than the original loan. It is these loan write offs which are causing the Fed to have to bail out mortgage lenders like Freddie Mae and Fannie Mac. The concern is that with house prices falling and unemployment rising, there are future waves of mortgage defaults still to come.
August 8th, 2008 — news, uk housing market -
The Council of Mortgage Lenders reported a 41% rise in home repossessions in the first 6 months of this year.
18,900 homes were seized in the first 6 months of this year compared to 13,000 in the last 6 months of 2007.
The number of people in arrears by more than 3 months also rose by 29,000.
The Council of Mortgage lenders forecast a total of 45,000 repossessions by the end of the year.
Although the statistics (41% jump) are alarming, the % of homeowners defaulting is still relatively small. The vast majority still continue to meet mortgage payments However, homeowners have faced a tough 6 months, with disposable incomes squeezed by:
