Mortgage Advice Centre

Home Ownership has been an emotive and important political issue in the UK. Not for nothing do we have the phrase ‘ An Englishman’s home is his castle’.

In the post war period, rising affluence, enabled a marked rise in homeownership as more families could now afford to buy outright rather than rent.

In the 1980s, the Conservative government aggressively promoted the idea of a ‘home owning democracy’ – leading to a further growth in home ownership, helped in particular, by the policy of selling council houses cheaply to tenants.

source: CML – pdf

Home Ownership rates in UK

In 1953, the proportion of owner-occupiers in England was 32 per cent. In 1961 this was 43%

Homeownership rates peaked at just over 70% in 2000. As mentioned in post – ‘first time deposits’, they have now fallen to 68%.

Reasons for Home Ownership

Homeownership is the most popular form of living. The majority of people aspire to be a homeowner, even if they may not be able to afford one. The traditional benefits of homeownership include:

• Benefit from rising Prices and hence rising wealth – historically, house prices have exceeded inflation in UK.
• Potential of Living rent free during retirement years.
• Provides Greater Security, can’t be asked to move.

More: Benefits of buying own house.

However, there are also potential problems of this desire for home ownership.

• The 1980s, which saw a rapid rise in home ownership, also saw a boom and bust in house prices.
• In a bid to get ‘on the property ladder’ many people overstretched themselves getting mortgages several times income.
• Homes can be difficult to sell reducing labour market flexibility.
• Volatility in house prices can leave new buyers with negative equity
• Volatility in interest rates can make mortgage payments unaffordable – e.g. 1991, 1992 period.
• Increased wealth inequality between those who own property and those who don’t

More: Disadvantages of buying house

Homeownership per se is not a bad thing. But, the pursuit of ever increasing homeownership can be a problem when there is a shortage of housing and a volatile housing market. The UK, may well need to learn to lessen its obsession with home ownership.

The UK was one of the few countries which experienced a rise in house prices in 2009. Some countries like Ireland, Spain and Central Europe experienced record falls of between 27 and 53% (according to RICS European Housing Review 2010)

However, the rise in house prices will come as little comfort for first time buyers based in the UK. Expensive house prices and the continuation of mortgage rationing means first time buyers are being asked for a record level of deposit before getting a mortgage.

The Council of Mortgage lenders state that the average first time deposit is £34,000 – equivalent to a full year’s salary. This is nearly triple the average deposit of three years ago, when the average deposit was a more manageable £12,000.

The Council of Mortgage Lenders predict that this trend of a large deposit is unlikely to change. Banks are still repairing their balance sheets (despite high profits from some such as Barclays) They also predict that home ownership rates are likely to fall. Home ownership rates have already fallen to 68%, after peaking at 71% in 2000.

Last month saw the first reported house price fall for 10 months. But, although prices may slip back a little this year, it is unlikely to solve the long term problem of supply shortages and expensive house prices.

Unsurprisingly 80% of first time buyers received help from their parents in getting their first deposit.

Related

• 10 Tips for getting first mortgage

At the moment, it is very difficult to protect savings from being eroded by inflation.

CPI inflation is 3.5%. A broader measure of inflation RPI is 3.7%. Yet, with base rates very low (0.5%) it means we have a negative real interest rate.

Real interest rate = nominal interest rate (0.5%) – inflation (3.5%) = -3%

This is one of the highest negative real interest rates on record. Furthermore, there is no sign of a rise in interest rates. At least later in the year, inflation should fall back a little. – Some of the spike in inflation is due to temporary factors such as VAT and petrol.

But, the unfortunate reality is most savers are seeing a decline in the real value of their savings.

If you paid tax on your saving income, you would need a saving rate of around 4.2%. But, the average saving account is currently paying 0.88%. It’s not a good time to be a saver.

What Can you Do to Protect Savings from Inflation?

• Diversify into Government Bonds which offer higher interest rates. The drawback is that this is a volatile time for the value of bonds sold on open market.
• Look for a fixed-rate cash ISA.  from Leeds Building Society pays 4.6pc. THe drawback is that your cash is tied up for five years.
• Offshore Investments. Barclays are offering offer shore investment accounts which promise upto 6% AER.
• National Savings & Investments’ Index Linked Certificates. These offer savers a guaranteed inflation plus 1%
• Buy into Gold. The ultimate protection against inflation. Gold will hold its value and become more attractive during periods of inflation. However, G.Soros has described Gold as the ultimate bubble. It’s value can go down as well as up.

Recent Data showed a marked rise in inflation and a unexpected rise in unemployment.

CPI inflation is now 3.5%. Unemployment also rose. Those claiming job seekers allowance rose 23,500 to 1.64m in January. A broader measure of inflation – ILO method showed a small fall in unemployment to 2.46 million.

This rise in unemployment and inflation is an unwelcome combination suggesting a period of stagflation. However, the rise in inflation is mainly due to factors such as a rise in VAT rates and higher oil prices. There is no sign of underlying inflationary pressures. Spare capacity in the economy should keep inflation low.

With the economy still very weak, and some economists fearing a double dip recession, there is no likelyhood of any increase in interest rates in the near future. After the general election, the UK is likely to see some form of fiscal tightening (higher taxes, lower spending) to help reduce the budget deficit. This will keep the pressure on interest rates to remain low.

The economy could face a further slowdown this year because of:

• Recession in southern Europe – UK exports twice as much to Spain as China.
• Fall in Confidence following problems in Eurozone
• Rising unemployment in the public sector
• Expiration of stimulus packages.

The UK banking industry has become increasingly concentrated following difficulties of credit crunch. Numerous mergers have changed the nature of the banking industry. The top 5 UK owned banks by market share (Jan 2010) are:

1. HSBC – £122.29bn market value
2. Lloyds Banking Group – £36.26bn market value
3. Barclays – £35.51 bn market value
4. Standard Chartered – £31.42 – bn market value
5. Royal Bank of Scotland Group – £20.71 bn market value

6. Co-operative Bank -£39bn
Also Tesco Bank – owned by Tescos

The other major financial institution is the Nationwide building society. It has assets of £202.3 billion April 2009. Building societies are not listed on stockmarket, but, the difference with banks is less than it was.

HSBC

• also owns First direct)

Lloyds Banking Group

Lloyds banking group comprises:

• The UK Government owns a controlling stake of 43%.
• Lloyds TSB.
• HBOS – Halifax and Bank of Scotland
• Birmingham Midshires:
• Cheltenham & Gloucester:
• 50% of Sainsburys bank

Barclays

• acquired Woolwich)

Standard Chartered

• - few customers in UK, mostly in Asia

Royal Bank of Scotland

• 84% of the bank is owned by UK government.
• Subsidiaries include:
• Royal Bank of Scotland
• National Westminster Bank
• Ulster Bank
• Direct Line
• Coutts & Co.

Major Foreign Banks on UK High Street

Santander

• acquired Abbey,
• Alliance and Leicester
• and savings branch of Bradford & Bingley

Santander

Whilst the Spanish economy struggles with unemployment approaching 20% and a painful housing boom and bust, its major bank – Santander has made great strides in capturing market share in the UK.

Many of the large UK banks have been seeking to improve their balance sheets and have held back from lending new mortgages. Santander is one of the few banks which has been actively seeking new business – taking advantage of market conditions to increase their share of the UK mortgage market.

Santander recently published figures which showed its net lending had reached £7.6bn in 2009. This is almost 50% of the new market for mortgages. It gives the bank a market share of 20%.

It’s relatively new brand image on the UK high street seems to have been a blessing in disguise. With uncertainty over existing British banks, Santander has benefitted from £14.9bn of new savings.

Santander is in the process of rebranding Bradford & Bingley and Abbey branches with the distinctive red logo.

Santander are currently offering a  rate of 4.39% on their, no fee, two year fixed mortgage. This is better than by own mortgage company – Alliance & Leicester who recently offered me 4.99% for a three year fixed.

Related

• Guide to Mortgages
• Santander Mortgages

Source: B of E – Economic Recovery and Housing Market (pdf)

A few interesting questions in the current climate is:

- Why have UK house prices started to rise – despite house price to earnings ratios being above long term average?

- Why are UK house prices rising after only 18 months of decline – whearas after the 1990 crash, prices fell for four years?

- Why are UK house prices showing signs of recovery whearas Spain and US faced much longer and more persistent house price falls?

The above graph from the Bank of England goes someway to answering these questions. As house prices started to fall, homebuilders immediately started cutting back on new house builds.

Also, in the boom years (00-07), there wasn’t a boom in house building. There simply isn’t a large surplus of unsold housing stock that you see in the US, Spain or Ireland.

Strict UK Planning restrictions and shortage of land meant that when prices were accelerating there was no speculative bubble in house building.

In the 1980s, there was a greater rate of housebuilding that meant there was more unsold stock depressing prices through the 1990s.

There are still factors which will weigh down on UK House prices

• Threat of rising interest rates
• The fact house prices are still expensive for many in a climate of low real wage growth.
• Continued high unemployment.
• Recovery in market could attract more sellers who had been holding on.

Nor, is it necessarily a good thing if house prices rise sharply on the basis of very thin supply.

After the longest recession since the Great Depression (6 quarters of negative economic growth), the UK economy stuttered into action with a increase of 0.1% of GDP in the last quarter. Though technically this brings the UK economy out of recession, it may not feel like that for the majority of British consumers. Unemployment remains high with the prospect of rising further in 2010. Real incomes are likely to remain stagnant or even fall as the inflation rate (CPI 2.7%) exceeds weak wage growth.

Yet, despite the grim economic situation, the housing market continues to post house price increases. House prices increased by a seasonally adjusted 1.2 per cent during January, Nationwide figures showed today.

The latest increase, left the average UK home costing £163,481, a level last seen in August 2008. The annual house price inflation rate is now 8.6%.

The British Bankers association recently revealed that the number of mortgages increased in December. They suggested many were rushing to get a mortgage before the end of the stamp duty relief. However, the continued rise in house prices for January suggests there is a continuing imbalance between supply and demand.

After market experts were largely wrong footed by the unexpected house price rises in 2009, the consensus for 2010 was largely pessimistic (though with only small falls being predicted). Some like the Council of Mortgage Lenders stated they felt market too unpredictable to make forecasts. – Quite a sensible approach if not particularly helpful.

Perhaps more interesting than expert predictions is the expectations of ordinary consumers. If consumers are anything to go buy, the UK Housing market will be buoyed by an upswing in market sentiment, with a majority of respondents now expecting house prices to rise this year.

A survey by Rightmove, the property website, found that 53pc in the UK believe house prices will rise over the next 12 months, compared with just 10pc last year. That is quite a significant improvement in expectations and has important implications for housing market.

To some extent expectations of house prices can be self-fulfilling.

• If people expect prices to rise, it encourages people to buy, rather than wait for them to fall
• It encourages buy to let investors back into market.
• Prospect of rising house prices makes banks more keen to lend (and avoid negative equity of falling house prices)

Of course, consumer expectations of house prices can often be proved wrong. As the above data shows, only 10% of people expected house prices to rise in 2009, but, house prices did rise.

I doubt a majority of homeowners were expecting the slump in house prices until it actually occured.

Expectations of house prices are often based on past and current data. Thus if house prices have been falling, this strongly influences expectations, the fact house prices have risen recently has helped boost confidence.

There are factors which may make the present confidence appear misplaced – recovery is weak, prospect of fiscal tightening, house price to earnings ratios are still expensive. But, the improvement in confidence is an important factor in moving the housing market back to more normality.

It’s been a strange couple of years. The UK housing market is no stranger to booms and busts, but the recent credit crunch and recent recession has been one of the most testing experiences for the UK property market.

After falling 20% from their 2007 peak, house prices unexpectedly rose in 2009. – According to the Nationwide, house prices were 6% higher at the end of 2009 than the start. Many point to house price to earnings ratio’s and point out they are significantly higher than at the end of the last bust. This will certainly be a factor keeping house prices low; it will prevent any rapid increase in prices and could lead to a further downward correction. But, against this backdrop, there are some encouraging signs of a return to more normal lending conditions.

The first positive sign is the improvement in housing transactions (admittedly from record lows). When housing transactions were very low, it meant changes in house prices were more a reflection of the unusually shortages of property on the market.

Banks gave 60,518 loans to buy homes, up from 57,718 in October, this is highest level since 2008. The amount of net mortgages rose to £1.5bn the most for nearly 11 months. Whilst there will be no return to the boom conditions of the naughties, there are signs banks are slowly expecting to increase the number of mortgages.

Disposable Income Spent on Mortgages

The proportion of disposable income spent on mortgage payments, by first time buyers has fallen from 50% of average earnings in June 2007, to 27 per cent by November 2009. This is below the long term average of 35% and will definitely encourage more into the market.

The stabilisation in house prices may well encourage people to sell who have been holding off. But, on the other hand, the end of dramatic falls may also encourage buyers back into the market.

How Long 0% Interest Rates?

Since we talk of returning to normal, we can’t expect interest rates to remain at 0% forever. Yet, forecasts for growth suggest the Bank of England has no plans to raise interest rates in the foreseeable future. It is likely in 2010 we will see an end to quantitative easing and efforts to reduce fiscal deficit. Both these will keep pressure on the Bank to maintain low interest rates.

Certainly, 0% interest rates have done wonders for avoiding repossessions. The number of repossessions is much lower in this recession than in the last. When the economy returns to normal growth, and interest rates rise to 5%, many who have been hanging on may suddenly start to struggle.

Overall Outlook

The overall outlook for 2010 looks for a period of consolidation. I think the most likelyhood for house prices is to remain static. They may go down a little, they may even go up. But, it is hard to see wild swings in house prices this year.

This stability is no bad thing. After the roller-coaster ride of the past couple of decades, a period of consolidation could be just what the housing market needs.