SOMETHING is changing.
The fall in house prices may still be relatively modest considering the unique economic crisis, but the cost of loans is having a remarkable impact on the affordability of bricks and mortar. And it might get better sooner than some think.
Mortgage rates fell for the fourth month in a row on Thursday (January 8) when The Bank of England cut its benchmark interest rate by 0.5 percent to prevent the economy falling into further trouble.
Buyers deciding to look for that dream home now may find themselves well placed come the spring to take advantage of some of the best mortgage deals ever seen on the UK High Street.
The loans problem
The problem over the last year has not just been the relative instability of the market. It’s been the inability of buyers to get loans. That could finally change over the coming months following pressure from Government. January was the fourth reduction in four months for the Bank of England and it brought the cost of borrowing down from five percent in October to an all-time low of 1.5 percent - the lowest level since the central bank was founded more than 300 years ago. Analysts predict zero rates are increasingly likely.
More important than the benchmark rate is the fact that the banks are finally bowing to pressure to pass on the savings to borrowers.
Three big lenders have promised to match the Bank of England's rate cut.
HSBC, Lloyds TSB and Nationwide will each reduce their standard rates by 0.5 percentage points. Lloyds and Nationwide's variable rate will reduce to 3.5%, while HSBC's falls to 3.94%. HSBC and Lloyds have also confirmed they will pass on the full cut to mortgage customers holding tracker loans. Barclays, HBOS, NatWest and Abbey also said tracker customers will benefit from the 0.5 point cut.
Former caution from the banks was perhaps understandable. Figures released in the Bank of England’s quarterly report for October to December 2008 showed a rise in default rates over the last three months.
The report also suggested that lenders expected a further increase in defaults by March 2009.
Fears over more bad debtors forced many lenders into reducing the availability of secured credit to households.
the Government's attempts to ease the burden on homeowners (suspending stamp duty for a year and offering a buffer period before repossession) will help those in the worst difficulty, while the low cost of interest rates will ensure that any emergency interest only payments are negligible. More importantly, the combination of these measures will almost certainly begin to restore home owners’ confidence, while easing fears among new buyers about the prospect of losing jobs.
The UK Government’s action to date, although not implemented as fast as it should have been, is finally reinforcing the long term aim: stabilising the economy around high levels of home ownership.
The steep decline in lending by banks may have caught Prime Minister Gordon Brown by surprise in the autumn. The scale of the so-called global, credit crunch was even greater than the Bank of England had expected, according to its last quarterly survey.
Since then governments around the world have looked to implement a two-part plan, modelled on the rescue package that helped solve Japan’s economic crash during the 1990s: low interest rates and increased liquidity.
But while interest rate reductions have been welcomed, they are useless unless the loans are made widely available. As demonstrated in America, there are limits to how far rates can come down. You can’t go lower than zero.
Part two of the plan involves printing more money, an option being considered by the British government. The Chancellor, Alistair Darling, played down suggestions this week it could happen, but did not deny it was under consideration for the future.
Known as ' quantitative easing', the Japanese government most famously used this as a tactic to solve the financial crisis in the early 1990s.
If implemented here, British banks are likely to be forced to buy hundreds of billions of pounds in government bonds under proposed rules over the coming months.
The Financial Services Authority recommended in December a proportion of banks’ assets should be in the form of ‘highly liquid’ government bonds.
These proposals will have far-reaching implications for the banks and their efforts to generate riskier, but larger profits, outside the traditional mortgage sectors. The banks will be restricted by the enforced switching of more than £200 billion worth of assets into bonds.
The Bank of England’s quarterly survey commented that the shrinking availability of secured credit for households was ‘associated with a larger than expected decline in loan approval rates as lenders lowered maximum loan to value ratios and tightened credit scoring criteria’.
The Bank of England report read: “Expectations for house prices and concerns about the economic outlook were reported to have been factors contributing to this tightening.”
The impact on house prices based on the limited amount of cash available has been significant.
Nationwide this week reported that housing market activity in 2008 was the lowest ever recorded.
House prices drop
But the fall in prices has not been as great as many have anticipated with home owners either choosing to keep prices inflated or removing their properties from the market altogether until things improve.
Nationwide reported prices dropped 2.5 per cent in December, compared to just 0.4% in November. This brought the annual drop to 15.9%.
A typical house price is now £153,048 – around the same level as spring 2005 but still £17,500 more than five years ago.
Fionnuala Earley, Nationwide’s Chief Economist, said: “While house price falls are helping to improve affordability and the steep drop in interest rates will provide some further support, all of the typical affordability measures are still above their long-run averages.
“This suggests that prices have further to fall before significant numbers of buyers will be willing to return to the market.”
However, Earley added that a ‘pent up demand’ was likely to play a part in the industry’s recovery.
As 1.5 per cent loans or lower start to become more widely available over the coming months, the market could well begin to stabilise.
Since 2003 only 33% of transactions have been made by first time buyers, far less than the 46% average since 1979.
First time buyers may have been desperate to take their first steps on the property ladder but have been ‘locked out’ by rising prices.
For the first time in more than five years, interest rates could at last start to make home affordable again.
Martin Ellis, Chief Economist for Halifax, agreed with this sentiment, adding, "There has been a marked improvement in housing affordability in many parts of the UK. First-time buyers, in particular, are benefiting, especially outside the south of England and the midlands. We expect this trend to continue in 2009."
First time buyers
Halifax figures show that the number of local authorities within the UK were first time buyers are able to afford properties has more than trebled in throughout the last year. Whilst in 2007 properties were affordable to first time buyers in only 4% of local authorities, the figure at the end of 2008 stood at 14 per cent.
Despite being the only part of the UK to show a seasonally adjusted increase in house prices (0.1% according to Nationwide between October and December of 2008), Halifax figures show Scotland as having the most affordable properties for first time buyers with 67% of all Scottish local authorities offering affordable housing. Other affordable areas for first time buyers are Yorkshire and the Humber, where 40% of local authorities are reported to offer affordable properties.
Halifax figures show that there have been no increases in affordable properties for first time buyers in London, South West, West Midlands, Wales and Northern Ireland.
The short term fix
As long as the building industry remains in the doldrums, the short term fix may be the mortgage market. But new cash could also be the start of something bigger. What is certain is that while the hunger among existing home owners to trade up may have temporarily diminished, first-time buyers are keener than ever to get onto the property ladder if affordable mortgages are made available. Could the credit crunch be about to play itself out on the back of unprecedented government intervention and zero rated cash?
It will partly depend on how much more public cash Government decides to pour into the banking system.
The prospects may be better than some think for property investors in 2009.
Liquidity and zero interest rates might just save the housing market’s decline, and with it the UK economy.
The Bank of England stated in its quarterly survey that lenders predict a decrease in demand for credit for house purchase, remortgaging and other purposes over the next three months.
I’m not sure. It’s January. Go see what you can pick up in the sales.
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