Bad News for Finance and Housing Markets

more bad news for finance markets as the stock market plummeted and banks went bankrupt.

Merger of Halifax and Lloyds TSB


Financial System Collapse

Effect of Credit crunch on housing market

Housing Slump in UK Continues

The UK housing slump continues, with Halifax reporting a drop of £20,000 in house prices since the start of the year.

Mortgage approvals have fallen by 71% since last year. The credit crunch has forced banks to ration credit and try to encourage savings rather than borrowing.

With house prices falling, many potential buyers have been deterred from buying. Instead they have moved into the renting sector, which has seen healthy rentable income for landlords.

It is not clear when the slump in prices will end. Mortgage markets are still not operating normally. Furthermore the impending recession means that the risk of unemployment is putting more people off buying.

For more tips on finance and mortgages visit Housing Finance

House Price Falls

2008, has seen a marked turn in the performance of the UK housing Market.

House prices have fallen for several months. THe lower prices have been driven lower by
Credit crunch causing a record fall in availability of mortgages. Many would be buyers, simply can't get onto the property ladder because they can't borrow enough.

The housing collapse is not equally spread. It has affected certain areas much more than others. Also the new home build sector has been the most adversely affected sector, with many new flats being unable to be sold.

House prices are likely to keep falling for the foreseeable future as mortgage lending remains very tight.

US House prices fall
Economists predict house price falls of 20%
Why House prices are falling - in depth look

UK House Prices 2008

2008 has seen a turnaround for the UK Housing Market. Since the turn of the year, prices have been falling. The main reasons for the falling house prices are.

1. UK House prices overvalued compared to long term trends. See: Overvalued housing markets at Economics Blog. The main indicator to look out for is the ratio of house prices to earnings; for first time buyers this has more than doubled in recent years
2. Shortage of funds for mortgage lending. The Council of Mortgage lenders have reported a 40% fall in mortgage approvals since the start of the year. This has reduced demand and also made it difficult for people to refinance. In particular people who used to be on fixed rate deals as low as 3.99% are now facing significant increases in the cost of their mortgages. This will get worse throughout 2008. The shortage of credit is also increasing the interbank lending rate. This increase in bank costs is nullifying the small cuts in the Bank of England base rates.
3. Buy to Let investors starting to sell. Buy to let investors who hoped to cash in on rising property values are now starting to sell to try and avoid any potential housing crash.

More detail at UK Housing Market. org

Housing Blogs

I no longer update this particular blog. But, I regularly update other blogs on house prices, the UK housing market and Economics.

• UK Housing Market Blog Entries
• Economics Essays - Blog about the UK and US economy. Option to ask any Economics related question
• New House Prices Blog
• Finance and Mortgage Blog - General blog on personal finance, savings tips, mortgages and debt reduction
  

Buying a House on a Credit Card.

Buying a house on a credit card may sound a ridiculous idea, but to some extent, this is what I ended up doing myself.

Actually what happened, is that in the process of buying a house my credit card debt went from 0 to £4,000 and this enable me to pay all the various extra costs associated with buying a house. I didn't intend to buy a house on a credit card, but the extra £4,000 proved very useful in maintaining a reasonable cashflow during this expensive process.

Is it a good idea using credit card to buy a small part of a House?

It depends. In my situation it worked out OK. This was mainly because:

1. I borrowed at introductory rates of 0%. After 3 years I still have the same £4,000 debt. However, I just haven't paid any interest on the debt. At the end of the introductory period I simply move the balance to another credit card. Therefore, it has been cheaper to borrow this £4,000 debt on a credit card than a mortgage.

2. It requires a good credit history. If you don't have a good credit history it might not be possible to keep getting new credit cards every 6-9 months.

3. If you have a large credit card debt before you apply for a mortgage it will reduce the amount the bank is willing to lend as a mortgage.

4. It is risky if you are unable to switch the balance to a new lower rate. Because you could end up facing a rate of 17%

5. It is another monthly payment to make on top of you mortgage payment.

After 3 years I have been fortunate in that the house has increased in value. Therefore, I would be able to remortgage and get a bigger mortgage. This would enable me to pay off the credit card. However, as long as I can benefit from this balance being paid at 0% I shall continue to keep the debt on a credit card. I pay the monthly balance through direct debit to make sure I don't miss any payments.

What a Fall in House Price Inflation Means

There is a very important difference between falling house prices and a fall in house price inflation.


Quite often newspaper headlines may lead with a phrase like:

"Housing Boom over: dramatic fall in house price inflation"

This means that house prices are now increasing at a slower rate. For example, rather than increasing at 12% per year they are now increasing at only 4% a year. However, at first glance it may appear house prices are falling. If house prices are rising at 4% it is still higher than CPI inflation, and therefore, the real cost of housing is still rising.

A fall in house prices means a negative house price inflation rate.

A fall in the house price inflation rate, doesn't necessarily mean an end to the housing boom. For example, in the recent decade the rate of house price inflation has fluctuated, but the average house price has continued to rise all the time.

House Price Growth Slows

House price growth in the UK has slowed in the past couple of months. Evidence suggests that recent interest rates are beginning to effect consumer spending.

Related to the fall in house Prices. The number of mortgages approved fell for the third month in a row. Mortgage approvals totalled 107,000 in April, down from 111,000 in March and the third monthly decline in a row.

Reports suggest, however, that further interest rates are still likely. This is because retail inflation is picking up. The CBI added that the sustained growth in sales volumes had encouraged a rising balance of retailers to put up prices compared with a year ago. The balance of +33 was the highest since May 1998.

Rate rise likely

Housing Market North East

The North East housing market has experience rapid growth in the past 10 years. House prices are still lower than elsewhere in the country; however, the gap between the north east and average UK house prices is narrowing.

Areas such as Newcastle are witnessing significant regeneration, housing is often a key to this regenerations.

For example, Bridging Newcastle Gateshead is one of 9 projects to create new, better homes in the north east. BNG is supported by the government and has received funding of £65 million to subsidies a 15 year programme. The purpose is to create great places to live in an area covering around 77,000 properties in Newcastle Gateshead.

Low Demand Housing

Despite rising house prices, pockets of Newacastle and the North East are characterised by low demand housing.

Low demand housing is predominantly in areas deemed unsuitable, unsafe; therefore, despite low prices demand for these houses remains low.


Areas of low demand housing are characterised by higher crime rates and high unemployment levels. They are often associated with the high rise tower block, built in the 1960s.

Therefore, the challenge for housing in the north east is not just to build new houses but replace the majority of the low demand housing. It is hoped that through schemes such as BNG residents can be incorporated into the planning process; it is hoped this will create more desirable areas to live, without the problems of the past.

Are House Prices set to Fall in the North East and Newcastle?

The rise in house prices in the North East, is mainly based on demand outstripping supply. The forecast for future house prices in this area are fairly similar to the rest of the country.

• Will House Prices fall in UK?

UK House Price Growth Slows

A new report by Hometrack shows that UK house price inflation is continuing to fall. House price inflation has now fallen to 6.7%

This is still higher than the rate of inflation (2.5%) however, it shows that the recent interest rate rises are starting to have an effect. Also, there is an increased number of first time buyers who are unable to afford house prices. House prices in London continue to rise at the fastest rate in the UK, with prices rising by 1.3%

The average cost of a home in England and Wales increased 0.6 percent from April, the least s

Today's Hometrack report, which is based on a survey of 3,500 real-estate agents, showed prices rose 6.7 percent from a year earlier. The number of buyers registering with a real- estate agent didn't increase on the month while the volume of sales rose 4.3 percent, less than half the pace of April, Hometrack said.

see full report at Bloomberg

Will London House Prices fall in 2008?

Evaluate whether House Prices in London are likely to fall in 2008?

London House Prices have doubled in the past 6 years.


Reasons why London House Prices may Fall?

1. Interest rates have been increased 4 times in the past 9 months. This increases the cost of mortgage repayments, making it less attractive to buy. Although, the interest rate has only increased by 1% it is still quite a significant factor. This is because:

• To get on property ladder first time buyers have borrowed a high income multiple. Mortgage payments are a high % of disposable income, therefore, a small rise in interest rates causes a big reduction in disposable income.
• Increasing number have interest only mortgages. This means that they are more sensitive to interest rate changes.
• Interest rates may rise further. This is because the bank is committed to reducing inflation closer to 2%

2. House prices have risen faster than income.

This means it is increasingly difficult for first time buyers to get on the property ladder. Many houses are now out of reach of key public sector workers.

3. Speculation.

The London housing market has seen foreign investors buying houses to try and make capital gains. If house prices slow down or even start to fall they might sell to cash in on their gains. The London housing market is more volatile than the rest of the country, swings in house prices tend to be more extreme; this is partly because supply is very inelastic.

4. Downturn in the Economy.

A slowdown in economic growth will lead to lower bonuses and smaller wage increases. Therefore, city workers will be less willing to spend extravagant sums on expensive housing. The economy may slow down as a consequence of rising interest rates, and slowdown in housing market


Why House Prices in London May Continue to Rise:

1. Prices have risen because of economic fundamentals. Demand has been increasing greater supply. In London, there is a fundamental shortage of housing.

2. Supply very inelastic in London. Rising house prices have not led to increased homebuilding, because there is a shortage of space to build houses.

3. Demand has been rising for various reason:

Demographic factors - increased number of households.
Rising number of households due to more single people; e,g old people and higher divorce rates.
Rising immigration, especially from eastern europe, e.g. countries like Poland.
Foreign investors buying second houses as an investment.

4. People are willing to pay higher prices and borrow more.

New types of mortgages have enabled people to borrow higher income multiples

5. The price of renting has been increasing faster than inflation. Therefore, people might as well try to buy.

• House Price Crash in London?
• London Housing Market
• London Housing Market report by GLC - PDF format
  

What May Bring an End to the Housing Boom in the UK.

What May Cause House Prices to Fall in the UK?

1. An increase in interest rate. Interest rates have risen 4 times since last summer. Future interest rate increases are predicted. Quite often, it can take several months for interest rate rises to have an impact on consumer spending. Therefore, increasingly these interest rate rises will start to impact upon consumer spending.

Rising interest rates will have a very significant impact in the UK because:

• High levels of personal consumer debt.
• Mortgage Payments account for an increasingly high % of people's personal disposable income. This is in response to rising house prices and a wider range of more generous loans.
• Most UK homeowners have variable mortgages, rather than fixed rate mortgages.

2. Fall in confidence.

If people no longer expect house prices to rise, and start to fear they may fall then demand will fall. This is particularly important for buy to let investors and other speculative buyers.

3. Increase in numbers of First Time Buyers who cannot afford a mortgage.

Despite more flexible lending by mortgage lenders, many first time buyers find they are unable to get a sufficiently high mortgage to get on the property ladder.

4. Renting is becoming more attractive


5. Lower Economic Growth. Low wage growth will reduce affordability and confidence.


6. Slowdown in immigration and growth in number of households.

See also:

• Why UK Housing Market is subject to Boom and Bust
• House Price Collapse - Is it Likely?
• Will House Prices Ever Fall?
  

Oxford House Prices

Oxford, as a university town, has witnessed remarkable increases in house prices in recent years. House prices have risen above the national average to nearly £291,111 source

House price inflation in Oxford was 12% in the previous 12 months, this is close to the national average.

Reasons for rapid house price increases in Oxford include:

• Parents of Students Buying House for saving rent and capital gains.
• Limited land to build houses within Oxford ring road.
• Close proximity to London - 1 hour by train, good coach service to London.
• Booming local economy, with very low levels of unemployment

London House Prices Rise 32% in 2006

London

According to estate agent Knight Frank, London House prices, in certain areas like Mayfair, rose by a record 32% last year. A significant reason for this, continued London House price boom, is the generous bonuses given to city workers. Another reason is the inflow of money from abroad; foreign investors are buying houses in London. In particular demand is rising from Russian and Arab investors. It is not just the likes of Roman Ambrovavich who have countless millions to spend.

Despite the rising demand, supply is still limited. Houses are being sold very quickly after being put on the market. There has been an increase in gazumping and sealed bid - features not seen since the late 1980s boom.

The effect of these 2 groups is that house prices are rising, even though many houses in London are beyond the reach of ordinary workers, such as nurses and teachers.

The average price of a house in London is now £322,108

House prices in the rest of the country continue to boom.

(1) House Prices London

Elasticity and the UK Housing Market.

Elasticity measures the responsiveness of demand and supply to changes in price and incomes.

Price Elasticity of Demand.

PED measures the % change in demand in response to a % change in price. In the housing market, demand for housing is often inelastic. This is because there are few substitutes to buying a house; home buyers see buying a house as a necessity. Therefore as prices rise people are willing to spend a higher % of their income on the house. This has been helped by greater generosity from mortgage lenders: it is now easier to get a bigger mortgage multiple than before. E.g. in the past 15 years, UK house prices have risen by nearly 200%, but demand has continued to grow. This suggests demand for housing is very inelastic.

However for some people on low income their demand may be more elastic; this is because as house prices rise they can no longer afford to buy.

Income Elasticity of Demand.

YED measures the % change in demand in response to a % change in income. In the UK rising incomes have led to a bigger % of income spent on housing. This suggests demand is income elastic for housing. Demand is elastic because as income rises, people place great emphasis on buying a bigger and more attractive house. For example people are willing to spend alot on a new house near a good state school; this is because buying a house in the right location can save the necessity of sending a child to a private school. Some people even buy a second house when there income increases. In the past 15 years the ratio of house prices to incomes has increased significantly.

Prices Elasticity of Supply

PES measures the % changes in supply in response to a % in price. In the short term supply is very inelastic; this is because it takes along time to get planning permission and build a house. In the long term the elasticity of supply depends on geographical location. For example, in London it is very difficult to find space to build more houses, therefore supply is very inelastic. In other parts of the country it is easier to get planning permission and find space to build new houses.

AVerage UK House Prices over £100,000 in every town

Research by Halifax Britain's biggest mortgage lender shows that even the cheapest town in the UK, Lochgelly, has an average house price of over £100,000.

In another study it is suggested that 99% of all towns are too expensive for a nurse to buy a house in.

Lochgelly in Scotland used to be a mining town, but suffered economically when the mines closed down. However in recent years it has been a target for regeneration and this has had a knock on effect for house prices.

The average UK house price is now over £160,000. House Price inflation continues to exceed market expectations. There are concerns that first time buyers are being priced out of the market. However despite this occurring it is not limiting house price increases because of the shortage of supply relative to demand.

UK House Prices

House prices by postcode

average house prices pass £100,000

The news will add to growing concerns that thousands of key workers and first-time buyers are being priced out of the market. A recent report showed 99 per cent of towns are unaffordable for a nurse on a typical salary.

The report revealed another milestone. For the first time, the 10 towns that have seen the biggest house price rises during the last 12 months are all in the same area - Northern Ireland. Craigavon in County Armagh and Newtownards in County Down are the UK's property hotspots, both clocking up a 55 per cent rise in prices in the past year.

House Price Collapse in UK? is it likely

With interest rates set to increase in the near future some commentators argue this could be the signal for house prices in the UK to collapse either at the end of 2007 or in 2008.


In the US house prices have been falling significantly. The reasons for the fall in US house prices can be seen here: Fall in US house prices.

However there are various reasons why the UK Housing Market is different to the US housing market.

Why House Prices are unlikely to Collapse

1. Differences in Sub Prime Market.

The US sub prime market was more aggressive in its sale of "bad credit mortgages". Although the UK mortgage lenders have become less stringent they still retain more safeguards in checking a mortgage plan is payable.

2. Shortage of Supply in UK. Excess supply in US.

In the UK there is still a fundamental underlying shortage of housing. In the US there is a growing surplus of housing. The excess supply of housing is a consequence of the irrational exuberance generated in the housing boom of 2002-2005. There is an increase in the number of houses without owners.

3. Differences in Interest Rates.

US interest rates have increased from a low of 1% in 2003 to their current rates of 3.5% This has had a significant impact on increasing cost of mortgages. In the UK the increase in interest rates has been a smaller and more gradual process in last year UK interest rates have only increased by 0.75%

4. Population growth.

The UK is witnessing an increase in the number of households. This is caused by:

Immigration from Eastern Europe
Demographic Factors such as rising number of single people.
Aging population, increasing number of old people living alone.

Combined with a shortage of supply this explains a significant reason for increase in UK house prices.

Why Houses Will Fall

• Why House Prices may Fall

• When Will Property Prices Fall?

• Why House Prices may Keep Rising

• House Price Crash - views on UK housing market

How house prices can affect the Whole Economy.

House Prices have a significant impact on the National Economy

• House prices are the biggest component of household wealth.
• The number of homeowners in the UK has increased with a bigger % of people buying their house rather than renting.
  
• This trend has been helped by the sale of council houses in the 1980s.
  
• It was Mrs Thatcher’s desire to transform the UK into a property owning democracy. To a large extent this has been done. (78% houses are owned)

Rising house prices increase consumer wealth and are likely to be associated with an increase in mortgage equity withdrawal.
means people remortgage and take out a bigger loan against the value of their house. It means they have more money that they can spend and this leads to an increase in consumer spending and therefore Aggregate demand.

Rising house prices can also increase consumer confidence. It encourages people to take out other borrowings as they know that they can always release equity from the value of their house if necessary.

Therefore rising house prices can be instrumental in raising consumer spending and economic growth. Rising house prices can also be inflationary. This will occur if increasing house prices cause economic growth to be unsustainable. For example in the late 1980s rising house prices were a key factor in causing the inflationary Lawson boom of 1989. However rising house prices do not always cause inflation. If other components of economic growth are increasing at a slow rate, house prices may not cause inflation. For example between 2001-2007 house prices in the UK have been rising far quicker than the rate of inflation (which has remained in governments target of 1-3%)

Effect of Falling House Prices

Falling house prices usually have a more powerful effect than rising house prices.

People are used to rising house prices and the majority of homeowners don’t actually release the increased equity through remortgaging. However when house prices fall it can trigger a large fall in consumer confidence. People view falling house prices as a serious problem and in the past has been associated with reductions in consumer spending as people become much more risk averse.

For those who have recently remortgaged or bought a house falling house prices can lead to negative equity. Negative equity means the value of the house is less than the outstanding mortgage debt. This is a real problem for those who are struggling to meet mortgage repayments; there is no option to switch mortgage deals and reduce monthly payments.

Again the effect of falling house prices depends upon other variables in the economy.

For example falling house prices in 1991 was associated with a period of very high interest rates. Therefore homeowners were faced with a twin problem of high mortgage costs and falling house prices. If house prices fell in the UK in 2007 or 2008 real interest rates would likely be much lower. Furthermore the MPC would be likely to cut interest rates as falling house prices reduced inflationary pressures.

See also How House Prices affect economic growth and inflation in UK

See also Role of House Prices in determining Monetary policy

Price of London's richest homes soars 31% in a year

Bumper City bonuses and an influx of foreign buyers are driving up house prices in London's smartest areas at the fastest rate for 28 years, a report showed yesterday.

Estate agent Knight Frank said the average price of million pound-plus homes in prime central London areas such as Belgravia, Mayfair and Chelsea leapt by 2.6 per cent in February alone to stand a staggering 31 per cent higher than a year earlier. That is the highest annual rate of increase since 1979, and is triple that for the UK as a whole.

The Gatehouse, a penthouse in Uxbridge Street, Notting Hill, is one example of how prices at the top end of the market have soared. It was on the market two and a half years ago for £4.5m and failed to sell. It was put back on the market two months ago and was quickly snapped up for £6m, above guide price.

Liam Bailey, Knight Frank's head of residential research, said prices continued to be pushed higher by a chronic lack of supply. And while big City bonuses were another factor, he said the biggest boost had come from an increasing number of wealthy overseas buyers, especially from Russia, Italy, France, and the Middle East.

"Our forecast that prices in prime central London will grow by 12 per cent this year could well be an underestimate," he said. "Prices have already moved higher by 5.6 per cent in the first two months of the year and we expect that the next two to three months will see the strong market conditions remaining."


via

Rise in UK House Prices in Feb 2007

U.K. property prices accelerated for a second month in February as a shortage of homes for sale mitigated the impact of higher interest rates, a survey showed.

Asking prices rose 0.9 percent after an 0.5 percent increase in January, according to Rightmove, Britain's biggest Web site for property advertisements. A 9.7 percent rise in values in the City of Westminster fueled a 1.1 percent increase for London.

``Everything is turning around in days or weeks,'' said James Gubbins, agent at Dauntons realtors in the London borough of Westminster and Pimlico. ``The current level of interest rates isn't going to affect the market as it is at the moment. They'd have to move another percent.''

from: http://www.bloomberg.com/apps/news?pid=20601102&sid=aTCi8qTZoomk&refer=uk

Map of Average House Prices in the UK

Average House Prices in the UK widely tremendously. If you look at this map by Yahoo
House prices They can range from £63,000 average in the west of scotland to over £400,000 in London, the South East and Home Counties.

However the house price differential has narrowed somewhat in recent years. For example house prices in Northern Ireland have increased the most. This is due to the resurgence in the Northern Irish economy and therefore housing market.

Effect of the UK Housing Market on the rest of the UK economy

The UK housing market can have a big impact upon the UK economy. With rising house prices there is a corresponding rise in the wealth of homeowners.

1. Firstly house prices are the biggest form of wealth in the UK. If house prices rise, then it has a significant impact upon consumer wealth.

2. If house prices rise it can lead to increased consumer spending for 2 reasons. Firstly increased house prices will lead to a rise in consumer confidence. As people feel more “wealthy” they have more confidence to spend. Secondly people can remortgage their house to take out equity from their house. This gives them more money to spend.

3. Therefore rising house prices lead to an increase in consumer spending. As consumer spending is the biggest component of Aggregate Demand (66%) higher house prices lead indirectly to increased rates of economic growth.

4. However it is worth bearing in mind that rising house prices, do not necessarily lead to higher growth rates, it depends upon what else is effecting economic growth, such as taxes and government spending.

5. Rising house prices can lead to inflation. If the increase in house prices causes a rise in consumer spending then it could cause inflation, especially if the economy is close to full capacity. For example in the late 1980s the UK economy witnessed very fast rises in house prices and this was a major contribution to the rampant inflation of the late 80s boom.

6. Higher house prices can lead to increased interest rates. Interest rates are set by the bank of England. There primary target of monetary policy is to keep inflation at 2% CPI +/-1 A rise in house prices doesn’t automatically cause interest rates to rise, but if the bank feel that increased house prices will feed through into higher inflation then they will raise interest rates to pre-emptively stop inflation.

7. Regional variations in house prices can affect local economies. For example very high house prices in London can cause a shortage of skilled labour like teachers and policemen. This is because it is too expensive to be able to buy houses in the UK.

More on UK Housing Market