house-prices

Not content with lending billions to the banks and bailing out Northern Rock, the UK government has set its sights on homeowners who are struggling to pay their mortgages.

According to the BBC:

Homeowners will have enough support to ensure that their homes are not repossessed, the government says. The comments came after key mortgage industry figures met Chancellor Alistair Darling and Housing Minister Caroline Flint at 11 Downing Street. But ministers did not outline how they would stop people losing their homes.

There are two ways to read this news: cynically, and angrily.
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The newspapers are full of stories about the rapid inflation in basic foodstuffs like rice and potatoes. We’re warned of social unrest, new global inequalities, and even the selfishness of speculation (which you can engage in via an agricultural ETF, although I prefer to think of it as insurance against my escalating grocery bill).

Yet ironically, the other economic story making headlines in the UK this week is the tiny fall seen so far in house prices, which comes after a tripling of prices in little over a decade. When it comes to houses, we’re told, stupidly high prices are good.

After an initially reasonable response, PM Gordon Brown has been spooked into promising he will do all he can (which hopefully won’t be much) to halt the decline. Property pundits are ringing their hands about a looming crash even as they phone their estate agents to sell, and banks and building societies are warning that the end of civilisation is but a repossession away.

But consider this: why are rising food prices bad, yet falling house prices not good? We all need somewhere to live, just as we need to eat. Surely we should rejoice that prices are coming down, given all the woes of first-time buyers unable to afford a shoebox on the edge of town, the twenty-somethings unable to leave home, and so on?

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Things are looking ever gloomier for those who see the latest stalling in house price acceleration as more a speed bump then a socking great wall being hit by a Great British love affair that’s been drunk at the wheel for years.

According to the latest Royal Institute for Chartered Surveyors (RICS) survey for March:

The balance of Chartered Surveyors reporting house prices falls increased to an historical low in March.

However, a lack of new supply is still preventing significant price falls despite rising stock levels, says RICS.

The RICS house price balance dropped for the eighth month in succession.

78.5% more Chartered Surveyors reported a fall than a rise in house prices, an increase from 65.7% in February.

This figure has exceeded the historical low of June 1990, when 64.5% more Chartered Surveyors reported a fall in house prices and is now the lowest figure since the survey began in 1978.

The regional picture is even more depressed.

In the East Midlands 89% more Chartered Surveyors reported a fall than a rise in house prices and a net 86% reported falls in East Anglia.

Scotland is the only UK region with the net balance of surveyors reporting price rises. That’s devolution for you.

In gloomy accord with Nationwide seeing UK house prices falling across every single region for the first time in 30 years, Halifax has now released monthly figures for March estimating UK house prices have dropped 2.5%. Some areas are down twice that.

House prices have now fallen year on year. In March 2007, Halifax had the average UK house price at £194,094. For March 2008 it’s down to £191, 556. (Halifax doesn’t highlight the fact, instead focusing on three month rolling averages to record a small year on year gain.)

Key data from the Halifax report

• House prices fell by 2.5% in March. Prices in Quarter 1 were 1.0% lower than in 2007 Quarter 4. House prices in March were 1.1% higher than a year earlier.
• The biggest rises were in Greater London (1.6%), East Anglia (1.4%) and East Midlands (2.2%).
• There were price falls in a number of regions, with the biggest falls in West Midlands (-5.0%) and Wales (-4.7%).

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More evidence that house prices are really falling comes from the Nationwide building society, in its latest official house price index.

While it tries to draw attention more to annual figures in the accompanying commentary, which are still very much up, the quarterly figures for January to March 2008 are dreadful. House prices haven’t fallen across every region of the UK like this since the early 1970s:

A few points:

• The negative spin would be that just as the bubble had spread out across the whole of the UK (instead of it being only London and the South East that went crazed, as in previous years), this time it’s bursting everywhere.
• If you were more bullish, you might say the uniformity of the falls reflects the impact of lenders making mortgages more expensive, rather than any particular changes in demand…
• …but still, doesn’t that drop in Northern Ireland of 10% have all the hallmarks of a bubble bursting?

You can download the first quarter 2008 figures from Nationwide as a PDF, or just the figures for March.

Ireland is falling. The US is plunging. After 15 years of house price growth and five years of house price bubble, is the UK housing market aksi turning downwards? Will Elvis finally be spotted on the moon?

Prices are certainly stalling, with a drop of 0.4% in London last month according to the Land Registry. Not much after the stupid and socially divisive rises of recent years, but a start for those who’ve been astonished by their resilience.

Property indices never plunge suddenly in the UK; in previous downturns at least, they’ve more been chipped away at, like rental tenants wearing down a once-pristine buy-to-let flat. If prices do fall substantially, it’ll be through 0.5-1% a years (and with some positive months), not via a quick plunge back to sanity levels. (If you want to see the last five year crash in slow motion for yourself, you can download full house price data going back decades from HBOS.)

What’s more significant I think than the slight price wobble is that mortgage lending is being reigned in. If a banker is somebody who will lend you an umbrella when it’s sunny and then ask for it back when it rains, our banks see a monsoon ahead.

Now, a reduction in mortgage lending has previously been a great indicator of UK house price falls. But previously, such as in the late ’80s crash, that’s been because demand has dropped as people don’t want to buy houses any more. This time, mortgage supply is being constrained by banks trying to cut back on lending, either because of the risk or because of a lack of finance, even as they’re overrun by new customers who would have previously gone to the effectively neutered Northern Rock. So who knows how it will play out.

A further interesting new bear point concerns remortgaging. Nobody thinks about this in normal times as anything other than a formality and a chance to cut costs. But this time around, some buyers coming off very keen fixed or discount rate deals who have little cash are finding they are unattractive to the lenders offering lower rates. As a result, the rate they can remortgage is a sharp step upwards.

In extreme cases, the more unappealing mortgage holders might struggle to find a mortgage at all, or at least not one without punitive and unaffordable interest payments, which would then mean they’d have to sell their homes at the prevailing market price.

You don’t need to be the Governor of the Bank of England for the words ‘vicious circle’ to spring to mind.

House price falls are now the consensus view

When even an estate agent starts predicting 15% falls, we’re in new territory. After years of calling the market wrong and looking like a Wally (it was a word fashionable back when I first turned bearish on property… ok, slight exaggeration!) I’m wary of putting my cojones on the line, even now. But it really does look like the fat lady might be loosening up for a bit of shrieking.

How far will they fall? By my reckoning London house prices are 40-50% overvalued. Nominal falls might be partially masked by inflation over a period of years, but 25% or so lower from here by the time we reach the trough would seem entirely possible.

While many people have made a fortune out of property in the UK over the past few years, some have lost a packet – even as prices continued to rise. These are the so-called ‘Sell-to-Rent’ brigade, who attempt to time the peaks and troughs of the house price cycle by selling their home at the top and then buying after the presumed house price crash.

With prices finally wobbling and the credit crunch making terrible headlines every day, now looks a great time to sell-to-rent. Flog your home for £350,000 and you might be able to buy it back in five years for £250,000!

Happy times? Perhaps, but remember:

• 2005 looked a good time, too (prices dipped slightly when interest rates began to rise)
• 2003 also looked a promising time to sell (the onset of the second Gulf War led to a plunging stock market and global gloom)
• 2001 saw the earliest sell-to-renters make themselves known (this was around the time that London property first passed through its long-term price-to-earnings average, which has historically been a good barometer as to the future direction of house prices. It’s proven very unreliable in this era of low interest rates)

Now London property blog The Rat and Mouse notes that the sell-to-renters are back, going on to warn that:

Few financial decisions are as risky, or real-world calculations as tricky… taking in the cost of storage, rents (which can go up and down), the costs of selling and buying, the value of time, inconvenience and risk, all multiplied by however long it might take for prices to start to drop and then assuming it’s possible to buy in just before everybody else does. The chances of getting all this right are low.

Too right. I’ve not sold-to-rent, but I hold my hands up as a would-be first-time buyer who has sat out the property market for several years now, most recently believing that property prices are unjustifiable if you compare mortgage costs with rent.

It’s been a costly error. You gamble with the Great British love of property at your peril.

New government statistics reveal home ownership in the UK is the lowest it’s been for a decade. In London there are an incredible 110,000 fewer home owners than in 2001 (not that surprising if you’ve seen London prices recently). Blame buy-to-let.

“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.”
Robert Frost

Whether to buy your own home or not is a tricky question for anyone wanting financial freedom.

Now that might seem to some a mad statement; in most English speaking countries, buying a house to live in is a rite-of-passage, and while these days renting doesn’t quite conjure up visions of a harried mother washing tired clothes in a tin bath while four kids sleep head-to-toe in a single bed behind her, it’s still frowned upon.

Indeed – and ironically – the British love affair with property has blossomed into Buy-To-Let (BTL), where renting is perfectly acceptable as long as it’s not you doing the renting. These nouveau landlords had better hope the rental sector doesn’t return to its bad old image of multi-occupancy squalor and sordid bedsits. (When most people want to buy their own home, just like you, it’s a daydream to believe that sufficient millions of your peers will put this aspiration aside just to rent from hundreds of thousands of similar new BTL investors and make you all rich.)

But leaving aside for now being a landlord – which can certainly make great money if you buy at the right price – what are the pros and cons of owning your own home to live in?

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