Your survival guide to the year ahead
Is property in the UK heading for a crash? Or can we still prosper, despite the wobble? In the first of three special reports on the housing market in 2008, Phil Thornton pinpoints the issues and indicators that really count whether you're buying, selling, renting or investing
Wednesday 09 January 2008
The housing market has entered a weak period everyone agrees on that. Mortgage approvals are 30 per cent below those of a year ago, and prices have started to fall. According to Halifax, the largest lender, prices fell in September, October and November, a total of 2.3 per cent, and the first consecutive three-month fall in 12 years. The trend is unlikely to improve. Forecasters have pencilled in zero-growth for 2008 the lowest since 1993, when they fell 2.5 per cent.
The housing market is important, because it affects consumers' confidence and their willingness to spend. Previous dips in prices, such as in the summer of 2005, were met with cuts in interest rates to make buying more attractive. After September 11, the Bank of England (right) cut rates aggressively to 3.5 per cent, triggering a 26 per cent surge in house prices in 2002. In December last year, the Bank cut the base rate to 5.5 per cent. In the year ahead, analysts expect rates could fall to 4.75 per cent. Stuart Law, chief executive of property investment company Assetz, says that could bring base-rate tracker mortgages down to 5 per cent.
Those cuts could, of course, help people afford bigger mortgages, and in turn lead to a rise in prices. But it's worth remembering that zero growth could be good news. Nationwide says the ratio of first-time-buyer mortgage payments to take-home pay is close to an all-time high. Fionnuala Earley, its chief economist, says: "For affordability to come back to long-term norms, earnings growth needs to outpace house-price inflation, or interest rates need to come down." The only alternative is a sharp fall in prices. One caveat is that continued above-target inflation would prevent the Bank cutting interest rates as aggressively as it has in the past.
Watch out for:
Interest-rate decisions; monthly house-price indices published by Halifax and Nationwide.
The credit crunch
A key difference between this current wobble and the dips experienced in previous years is that mortgage lenders are being buffeted by factors other than bank rates.
The credit crisis that began in August is forcing all lenders to tighten their belts. They have become more careful about whom they lend to and on what terms.
Meanwhile the credit squeeze has made it harder for lenders to get hold of new funds at low interest rates. "This is bound to weigh down on housing market activity," says Howard Archer, chief economist at Global Insight consultants, which predicts a 3 per cent fall in house prices this year.
Tighter conditions will make mortgages unaffordable for even more first-time buyers, which will undermine demand at the bottom of the market. At the same time it will hurt homeowners coming off fixed-rate deals on to variable rates.
Watch out for:
The interest rate at which banks lend to each other. This is known as Libor (the London Interbank Offered Rates). Keep an eye on the best mortgage deals and track how they change.
Optimists say that recessions are triggered by major economic downturns and surges in unemployment, leading to rising repossessions. In the recession of 1991 and 1992, some 150,000 families lost their homes.
Currently, the number of people out of work and claiming benefit is at a 32-year low. Annual growth in wages chunters on at 4 per cent. But Howard Archer, chief economist at Global Insight, points out that the biggest risk is a sharp economic slowdown pushing up unemployment "significantly". "This would be liable to lead to a marked increase in the number of people having to sell for distress reasons," he says. Few expect such a dire outcome. Most City economists expect the number claiming benefit to rise by about 100,000, or 14 per cent, but this would simply wipe out the improvement in 2007. They also foresee the economy growing by 2 per cent next year much lower than last year's 3.1 per cent, but a mile away from the 1.4 per cent slump in 1991.
Even so, there will be job losses and lower bonuses in the City, which will sap demand at the top end of the housing market. And while it may sound heartless, a repeat of the repossessions of the early Nineties would create buying opportunities particularly at the bottom end of the market.
Watch out for:
Unemployment figures; news of redundancies; auction signs going up on homes which might be a buyer's big opportunity.
One reason why house prices have trebled since 1997 is a long-term mismatch between supply and demand as households grow, there are not enough new properties being built to accommodate them. While this is a problem for many buyers, it could prove to be the housing market's saviour. The Government's Housing Green Paper says current house building is falling short of projected figures by 38,000 units a year. The Green Paper pledges to deliver 240,000 new starts by 2016, but Nationwide says this won't alleviate shortages this year.
Martin Ellis, chief economist at Halifax, says revisions to population projections mean demand could soar. "The shortfall could be even higher," he says. Steve Cox, operations director at Spicerhaart Financial Services, believes this will underpin a 2 per cent price rise. "As affordability constraints are eased and demand continues to outstrip supply, the long-term future is set to be bright," he says.
A related prop for the market has been strong interest from overseas buyers. There are trillions of pounds swilling around in the Asian tiger economies and the oil-rich Arab world. Those economies are set to perform well as the West slows, making it likely that more foreign investors will buy properties.
Watch out for:
Any signs of anything other than luxury apartments being built. If no one is building "normal" homes, demand at the bottom of the market could soar.
The credit crunch will put many households under severe pressure. The Council of Mortgage Lenders forecasts the number of home repossessions rising from 30,000 in 2007 to 45,000 in 2008. This would be the highest since the mid-1990s, although it is still well off the peak of 80,000 in 1991.
The CML, which forecasts a 1 per cent rise in prices this year, says the Government's safety net for hard-pressed homeowners now provides the lowest level of support in 20 years.
Currently, the Government can contribute towards someone's mortgage payments in certain circumstances, but there's a limit to the size of the mortgage that can qualify. That limit stands at 100,000, but it hasn't been raised since 1995.
The CML urges the Government to raise the maximum mortgage that can qualify for relief to 300,000 to match house-price inflation. The pressure will intensify in the run-up to the 2008 Budget.
Watch out for:
Repossession figures are bound to be big news in the months ahead. Much will depend on Alistair Darling's Budget, in the spring.
The boom in investors buying homes to rent out may be the housing market's Achilles heel. In 1998, there were just 29,000 B2L mortgages; now there are 895,000, or 10 per cent of all mortgages. Falling house prices, rising mortgage bills and tighter lending conditions will discourage investors from entering the market, and act as another brake on demand.
Meanwhile, investors who took on too much debt or made foolish assumptions about rental yields could be forced to sell. This is why some pessimists dub B2L as Britain's "subprime" a reference to the loans to poor American homebuyers that sparked the global credit crisis.
Given that prices have only fallen in the last few months, however, the drop will only affect the most recent entrants. The majority of investors are sitting pretty on a capital gain.
Nationwide's chief economist, Fionnuala Earley, says that B2L was driven by households seeking to bolster their pension position rather than attempt to play a speculative game. "Most landlords are long-term investors rather than speculators, and would not exit the market abruptly," she says. "Those in it for the long-haul can expect satisfactory returns."
Stuart Law, of Assetz investment advisers, says that despite recent falls, the history-high house prices will encourage people to rent, which will keep rental yields stable.
Watch out for:
A sudden outbreak of 'for sale' signs in key B2L areas, such as university towns and cities. Keep an eye out for headlines about falls in rents.
So, what's the overall verdict?
There is no doubt that 2008 will be a bumpy ride for homeowners. The consensus is for at least one year of below-inflation growth, but a slump cannot be ruled out. As Fionnuala Earley puts it: "The future is inherently uncertain."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
After the election: What will Britain's financial future look like on 8 May?
General Election 2015: How you vote next week could affect your finances
Social tenants locked into energy tariff for 40 years
Five Questions On: GB Energy's new tariff
- 2 General Election 2015: 14-year-old boy asks Nick Clegg – 'can you kill Katie Hopkins?'
- 3 University student in court for allegedly covering housemates' food in window cleaner and spit
- 4 Ryan Gosling posts tribute to 'Ryan Gosling Won't Eat His Cereal' creator Ryan McHenry
In defence of liberal democracy
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
iJobs Money & Business
£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...
£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...
£215 per day: Ashdown Group: Junior Project Manager (website, web application ...
£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...
Day In a Page
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings