Money Insider: House prices artificially high
Saturday 06 February 2010
The latest Nationwide building society house price survey reveals that average house prices in the UK rose by 1.2 per cent in January, nudging the annual rate up to 8.6 per cent, with some experts predicting that this figure could soon reach double figures.
This was followed by a similar set of positive data courtesy of the Halifax, which this week reported the seventh consecutive monthly increase in UK property prices. These latest statistics highlighted that the average price of a UK home is now almost a tenth higher than the low point last April.
Considering we're barely crawling out of what has been the deepest recession in almost a century, these house price numbers are somewhat surprising.
However with job security still a major concern for many, it is a lack of confidence that is contributing to a lack of supply in the property market which in turn is keeping prices artificially high.
On top of this, many standard variable mortgage rates are still far cheaper than new fixed rates on offer and some consumers are reluctant to up roots and move home as in some cases they'll have to switch to a new more expensive product with less flexibility.
With interest rates predicted to rise later this year, and the potential of government spending cuts on the horizon, it's difficult to see where the stimulus will come from to increase the number of transactions from their current low levels.
Personal loan rates hit nine-year high
A report issued this week revealed that the cost of unsecured borrowing had reached its highest for almost a decade.
With unemployment at a near 13 year high of almost 2.5m, it's no real surprise that the level of competition in the unsecured loan market has all but vanished.
Not only is the risk of defaults higher in the current economic climate, lenders can no longer rely on making huge profits from payment protection insurance which effectively subsidised lower loan rates.
With banks and building societies still adopting a far more cautious stance even when it comes to mortgage lending, where they have your property as collateral, it's no surprise that the appetite for unsecured lending has pretty much dried up.
In January 2007 before the credit crunch took hold, personal loan rates were being offered at 5.8 per cent which was just 0.55 per cent above base rate at the time. Clearly with such ultra thin margins these rates were not sustainable and any defaults would soon wipe out the profit margin on the loan itself – it would have been the PPI income that made lending viable at that time.
If you're looking to borrow £5,000 over a three year term, Alliance & Leicester is currently offering the cheapest personal loan at 8.9 per cent APR which involves monthly repayments at £157.97. The majority of loan rates are now in double figures and you'll need to a spotless credit record to be in with a chance of being accepted for the headline rates.
The days of cheap unsecured borrowing are unlikely to return any time soon, with more realistic margins and tighter credit scoring becoming the norm in the post credit crunch era.
Lenders focus on fixed rates
The fragile property market and subdued demand for new borrowing has failed to dampen the level of activity amongst mortgage lenders, with another stream of competitive products being launched this week.
First Direct has been a market leader in the tracker mortgage sector for a while now and this week trimmed pricing even further. The improved 2.39 per cent deal to 65 per cent loan to value with a fee of £999 is the current best buy and still looks an attractive option at 0.9 per cent cheaper than its own very competitive two year fixed rate product.
The fixed rate market is where lenders continue to focus their attention with costs still edging lower. Sub five per cent five year deals are becoming more common and this week Leeds Building Society launched an attractive 4.7 per cent product with a £999 fee for those with a 40 per cent or more stake. If you have a smaller deposit, there is a 4.85 per cent rate on offer with the same fee up to 80 per cent LTV.
If your preference is a shorter fixed rate deal, Santander is offering a 70 per cent LTV 3.44 per cent mortgage with a £995 fee while the latest Chelsea building society two year fix is competitive at 4.44 per cent for those seeking a home loan to 80 per cent LTV.
Andrew Hagger is a money analyst at Moneynet.co.uk
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