House rules: The truth about today's property market

House prices are falling, land sales booming – what does it all mean, asks James Daley
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The Independent Online

Making sense of what's going on in the housing market has been hard work over the past few months. Depending on whom you believe, we're either in the middle of a prolonged slump or just around the corner from a remarkable recovery.

On Monday, the National Housing Federation (NHF) published a bold prediction that house prices would rise by 25 per cent over the next five years. Just three days later, the Nationwide Building Society revealed that prices were falling at their fastest rate since its house price index began in 1991, prompting some analysts to predict that prices could fall as far as 35 per cent from the peak of the market over the next few years.



So what's really going to happen to house prices?

With the greatest respect to the NHF – which just so happens to have a rather significant vested interest in the prosperity of the housing market – there aren't many analysts and economists who subscribe to the theory of a rapid recovery. Though the NHF bases its claims on the plausible argument that there is a lack of supply and growing demand for housing in the UK, most economists argue that this is something of a myth.

"The supply shortage is greatly overstated – there isn't a shortage," says Ed Stansfield, a property economist at Capital Economics. "There may be in certain locations, and we're creating a problem by not building at an adequate rate. But if housing shortage was a genuine problem, why aren't rents rising much faster than they are?"

Stansfield argues that easy credit and something of an irrational exuberance among the British public were the two main factors behind the rapid rise in property prices during the decade leading up to the market's peak last year. The inevitable correction might have come sooner had the banks not fuelled the boom by continuing to lend ever greater amounts of money to would-be buyers. At the market peak, it was not rare to see mortgages worth more than six times the borrower's salary.

The credit crunch pulled the plug on this game. By May this year, there were around half the number of first-time buyer purchases than there were three years ago. Mortgage approvals as a whole are down more than two-thirds since the same time last year.

This situation is not about to change any time soon. While house prices are down almost 10 per cent from their peak, the salary multiples that lenders are willing to hand out have reduced by a much greater degree. Most prospective first-time buyers simply can't borrow enough – and even those who can are being forced to think hard about whether they can afford their mortgage repayments, as lending rates are considerably higher. Meanwhile, many of those who can both borrow enough and afford the repayments are holding back: they believe they could now get a better deal by waiting.

Among those who already own a home, it's a similar story: families are postponing their move, realising that they're not going to be offered anything like what they believe their house is worth.

Buy-to-let investors are holding back, too, in hope of further falls in house prices. Those investors who are still keen to buy, meanwhile, are struggling to raise the finance.

This combination of factors has meant that there are now significantly fewer buyers – and the ones there are have learnt to strike a hard bargain.

Is it the same wherever you live?

Jon Heron of Paragon, one of the UK's largest buy-to-let lenders, says that the British have a bad habit of talking about house prices in homogeneous terms when, in fact, different regions and types of properties can behave very differently. Stansfield agrees, pointing out that regions such as Northern Ireland and England's South-west and North-west are likely to perform worse than the average over the next few years, because prices were driven up far too quickly in these regions. In London, however, where prices cooled off slightly a few years ago, they may now be slightly more resilient, Stansfield believes – perhaps falling only 20 per cent rather than 30 or 35 per cent.

Rents can see even greater regional differences, Heron says. "You can visit some student towns and there are really severe shortages of accommodation," he says. "I recently spoke to a parent who said their child had to sleep on the common-room floor for six weeks in their first term at Exeter University, because they couldn't find accommodation."

He adds, however, that while some areas are certainly seeing faster rises than others, the slowdown in the housing market appears to be pushing rents up to a greater or lesser degree across all areas of the country.



Can I still get a mortgage if I need to move?

Despite all the talk about credit drying up, it remains perfectly possible for most home owners to remortgage. Furthermore, though mortgage rates are still some way above the five per cent Bank of England base rate, some evidence in recent weeks suggests that they are easing.

"The mortgage market is tough, but there are glimmers of hope," says Melanie Bien of the independent mortgage broker Savills Private Finance. "A number of the big lenders – Abbey, Halifax, Lloyds TSB and Nationwide – have reduced some of their fixed and tracker rates in recent weeks. However, while rates have been easing, lending criteria has not, and the best rates are still available to those with significant equity in their homes or a decent deposit – at least 25 per cent." He says that lenders are keen on improving margin rather than chasing market share. "Falling house prices mean they are avoiding borrowers who they regard as being higher risk – ie, those who have limited equity in their homes."

If the value of your home has fallen to the point where you have less than 10 per cent equity in your home, you may well struggle to find a new mortgage. In this case, you'll be forced to pay interest at your lender's standard variable rate until conditions improve. This could add hundreds of pounds to your monthly payments. Visit a broker, such as London & Country (www.lcplc.com) or Savills (www.spf.co.uk), to ensure that you have explored all your options.



Investing in land

While property prices have been falling, farmland prices have been rising at record rates, driven by the sharp spike in food prices. During the first half of 2008, the average price of farmland rose by 24 per cent, according to the Royal Institution of Chartered Surveyors. Arable land prices jumped by 32 per cent.

However, don't confuse farmland with farmhouses. Demand for residential farmland has been falling, just like the rest of the housing market. "Ever-rising commodity prices have pushed the price of farmland to record highs, as farmers and investors compete for arable land," says Julian Sayers of RICS. "However, the days of the lifestyle buyer are on the wane. The credit crunch is putting an end to city expansion into the country as the precarious financial situation has made city slickers rethink their lifestyle priorities."

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Is buy-to-let now looking attractive?

Rents have risen across the country as a whole more than nine per cent over the past year, according to Paragon. However, these figures are gleaned solely from Paragon customers, who tend to be professional landlords, and don't necessarily provide a fair reflection of the whole market. Nevertheless, the figures go to show that rents are definitely on the rise – and that in parts of the country, these rises have been significant.

But Heron says that while rents may be rising, this may have little bearing on the price of property, which tends to be driven by the owner-occupier market.

For those who already own buy-to-let properties, it's not a bad time to be a landlord. But Heron says that few landlords are actively buying at the moment. "I don't think there's much in the way of buy-to-let investment out there," he says. "But I do hear a lot of existing landlords talking about how attractive some deals are starting to look now – but they're holding off, because they think that they're going to get cheaper again."

For those who do want to take the plunge, the problem is the lack of finance. Bradford & Bingley and Paragon – the buy-to-let sector's two biggest lenders – have massively scaled back their amount of business. "There's no question that landlord demand for mortgages is higher than the level of supply," he says.

Get your hands on the money, however, and you might pick up a bargain. Even in a market with few buyers, there will always be those who must sell – even at a big discount to the asking price. Bien also points out that, although it can be a more risky sector, some new-build flats are being sold off cheaply. "Developers are keen to offload these properties and many are offering hefty discounts," she says. "Again, it is important to negotiate on price – and, if you are planning on using it as a buy-to-let, not to buy in a building or area where there is oversupply, particularly if you are buying a flat."

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