Mortgage Advice Centre

One feature which makes it difficult to examine state of house prices is the difference between the asking price and the actual selling price. Data on asking prices can be misleading because in times of falling house prices asking prices can often lag behind the real selling price. Conversely in a period of rising house prices, houses may end up going for more than asking prices. This is a feature of gazumping - the phenomena of people offering a higher price at last moment before sale is completed.

This difference is of vital importance for people considering putting an offer on a house.

Hometrack found that in March 2009, on average, sellers were receiving 88.8 per cent of their asking price. Slightly higher than the all time low of 88.3% in Jan 2009. This is still a big discount. For a house on sale for £200,000 = £177,600.

The variance between asking and selling price can vary significantly between different regions of the economy.

In a period of rising house prices, this difference invariably narrows as people have to offer more. The difference between asking and selling prices often reflect the time lag between putting the house on the market and selling it.

Currently the average time on the property market is 11 weeks. So in a period of falling house prices, market prices are falling during the long wait. The longer you take to sell, the lower offers you will receive. This is why it is advised to always set a realistic asking price rather than try to remember past values.

For buyers, it is crucial to have an awareness of current selling prices and asking prices to help you make the right offer. It is worth finding out how much house prices actually go for. In the current climate, you could be saving yourself 10-15% on the asking price - a big saving!

After a year and half of depressing statistics, tentative signs show some positive news returning to the housing market.

Hometrack, which studies estate agents found House prices fell by only 0.6% in March, the slowest monthly decline for a year.

The Association of Residential Letting Agents said that the number of landlords looking to buy properties has risen from 3 % to 8%. At the same time the number of landlords looking to sell properties fell from 7% to 4%

The lower house prices are encouraging people to look for good value properties.

Also, the record low interest rates are encouraging homeowners to ‘overpay’ their mortgage and repay their loans. Britons repaid a net figure of £425 million in march. This suggests that people are becoming risk averse in the recession and attempting to save and repay debt. The repayment of debt will boost bank and building society funds.

Also, according to propertyfinder.com consumer confidence is starting to improve. The % of people who expect house prices to rise has risen from 25% in Dec to 38% in March.

Finally, the Bank of England stated mortgage lending showed a 19% rise in the month of February 2009. However, this was from a very low base. Mortgage lending in February 2009 was £1,214 million, compared to £3,861 million in February 2008.

Problems Ahead

Despite positive signs, the overall activity in the housing market still remains very subdued. Housing transactions are near record lows and with the economic recession likely to persist for most of 2009, there are still many factors pushing house prices lower. Also, the slowdown in house price falls doesn’t mean we are necessarily coming to an end of house price falls. The rate of house price decreases is often volatile.

At the same time, the worst case scenarios of house prices falling another 50% seem increasingly unlikely - especially given long term demographic trends towards larger number of households.

• Why House prices are falling
• How long do house price falls last?

• Housing recovery - Independent

source: ONS

The last time the UK has inflation rate (measured by RPI) as low as this was nearly 50 years ago.

The fall in RPI inflation to 0% is mainly a reflection of falling interest rates which reduce mortgage payments. As mortgage interest payments are not included in CPI, CPI inflation is still higher.

However, CPI inflation is forecast to fall in the coming months as the recession and large amount of spare capacity pushes prices lower.

Because we are used to moderate levels of inflation a period of zero inflation or deflation will impact many aspects of the economy.

Real House prices. When measuring house prices, we tend to focus on the nominal house price. E.g. between 1989 and 1995 UK house prices fell by over £11,000 from £62,000 to £51,000. However, in that period there was a  higher rate of inflation than now. Therefore real house prices in the last housing crash fell by more than actual figures suggest. If we enter a period of zero inflation, it will be much more difficult for nominal house prices to rise.

Real value of Debt. One of the biggest concerns of deflation is the impact on debt levels. Inflation reduces real value of debt, deflation increases the value of debt and makes it harder to pay off. Given high levels of debt in the UK, falling prices and stagnant / falling wages would be a real problem.

This is important issue for people with mortgages. When people take out a mortgage, they would expect inflation to reduce the relative cost of mortgage payments over time. However, if this expected inflation fails to materialise people will find it more difficult to pay off mortgages than they anticipated.

Real Interest rates. Alot of attention is focused on nominal interest rates. The fact interest rates is 0.25% is often used as evidence savers are getting a bad deal. However, if we had a period of deflation. Savers would see a relatively high real interest rate. E.g. if interest rates are 10% and inflation 9.5%. Then you only have a real interest rate of 0.5% so there is little incentive to save.

Will Deflation Perist for A Long Time?

On the one hand we have the largest decline in economic output since the Great Depression. This amount of spare capacity and unemployed resources means that there will be a strong downward pressure on interest rates.

However, the Bank of England’s decision to cut interest rates and in particular pursue quantatitive easing means they are trying hard to avoid deflation. In particular quantitative easing increases the money supply and this is likely to be inflationary at some time.

However, we still are uncertain about how much extra money supply is needed to avoid deflation. The example of Japan in recent decades show how difficult it can be to rid an economy of deflation once it takes hold.

An interest only mortgage can save a significant sum for households. But, at the same time, he can leave a headache for dealing with the capital repayment.

The basic idea of an interest only mortgage is that you just pay interest payments and rather than making capital payments you find another investment method for repaying the outstanding debt.

In reality, people often switch to an interest only mortgage to provide a short term reduction in mortgage payments. In times of recession and economic hardship, the attraction of making the switch to an interest only mortgage increases.

For example, if you have a 30 year £150,000 mortgage with an interest rate of 6%.

Your normal capital+interest repayments will be: £908

If you switch to interest only, the repayments will fall to: £750

Interest only mortgages could be seen as a convenient way to save money, if you were experiencing a year of financial hardship (e.g. if your partner left work to study for a year). They can also be useful if you are anticipating higher incomes / wealth in the future.

The problem is that once you get used to the lower monthly repayments it can hard to go back to the higher payments.

In the current climate, the temptation to choose an interest only mortgages might be higher. But, with falling house prices it can be more problematic. Falling house prices increase negative equity and with interest only mortgages the negative equity will be greater.

Some mortgage lenders offer an ability to switch between interest only and repayment mortgages (though this has probably become less common since credit crunch).

See also: Other ways to deal with sruggling to pay mortgages

UK Interest Rates March 2009

With Bank of England Base rates reaching more or less rock bottom (0.5%). The big question is how long will rates stay so low?

In the experience of Japan, interest rates remained close to zero for over a decade. Basically, Japan got stuck in a deflationary spiral. With asset prices falling for over 12 years the authorities struggled to boost demand, economic growth and any inflationary pressure. If the UK were to get locked in a deflationary spiral, we would see a similar period of zero or very low interest rates.

Interest rates have fallen to 0.5%, but so far there seems no end in sight for the steepest recession since the Great Depression. This suggests conventional Monetary Policy has become ineffective because of the steep asset price falls and stagnation in bank lending.

However, interest rate cuts usually have a time lag (upto 18 months). Combined with expansionary fiscal policy, low value of sterling and new policy of quantitiative easing, there is a good chance of an economic recovery within a year.

The effects of quantitative easing on inflation is hard to quantify. Traditional analysis (in normal times) suggests printing money causes inflation. This link is not as simple though. With falling velocity of circulation, it is possible to increase money supply without inflation. For more details see: effect of printing money on economy

However, when the economy recovers and therefore velocity of circulation increases (number of times money changes hands) we are likely to see an increase in inflationary pressure. The extent of inflation depends on whether the Bank of England can easily reverse the boost in the money supply. This might prove difficult.

When the economy recovers, there is the prospect of inflationary pressure coming back quite quickly. Therefore, we could soon see interest rates increase quickly.

Note: interest rates have fallen so much because rate cuts have become less effective. Therefore, when inflation returns, interest rates may increase to 5% as quickly as they came down.

At the moment, we cannot say with certainty how long interest rates will stay low. The fundamental issue is how long the economy remains in recession. As long as the economy is contracting or we have deflationary pressures, interest rates will stay low. But, as soon as economy recovers and inflation returns, interest rates are liable to rise quite quickly.

So if you can get a good fixed rate deal in the next 12 months, it could prove a very good investment.

I notice that if you have a large deposit some banks like the Woolwich are offering very competitive fixed rate mortgages of under 3%. For a £170,000 mortgage over 30 years, this leaves mortgage payments of £722 for a standard repayment mortgage. The interest payments are only £425. If interest rates went back up to 6%, the monthly cost would rise to £1029.19.

Natwest offer a pretty good fixed rate mortgage of 3.49% for 2 years, with £800 set up fee. The deposit is 25% which will still be out of the reach of many first time buyers, but for those who have a deposit it represents a very good deal for 2 years.

The Alliance and Leicester also offer fixed rate deals of less than 4%, but, these fixed rate mortgages are requiring a deposit of 35%. A & L Fixed rates

Looking for fixed rate mortgage deals with low deposit, I was interested to see Northern Rock offering one of the best rates. Northern Rock offer a fixed rate mortgage of 6.79 for 2 years %, but only require a 15% deposit. Northern Rock mortgages

If you have a 20% deposit, First Direct offer a very good deal at just 2.89%

Is This A Good Time To Take a Fixed Rate Mortgage?

There are very good deals for people with substantial mortgages, but for people with deposits of just 10 - 15%, fixed rate deals are quite high.

Base rates are not going to fall anymore, and in the medium term could rise as the economy starts to recover.

If house prices stabilise and start to rise, mortgage rates on low deposit mortgages may improve, but, that prospect is still hard to see at moment.

Despite a slight improvement in house price statistics in January, the annual rate of house price inflation in the UK slumped to -16% for 2008-09. Source: BBC

The best forecasts for 2009, suggest falls of 5-10%. The worst forecasts suggest falls of 25% or more.

On the Negative side. Many factors are pushing house prices down

1. House prices fell for four years during last slump

2. Economic Recession The recession continues to worsen threatening more unemployment and therefore more home repossessions.

3. Lack of Funds for Mortgages. The Banking Sector is still fragile after more bad debts exposed from credit crunch. Lending conditions likely to remain tight.

4. House prices still expensive. House price to earnings still higher than long term averages

5. Lack of Confidence as falling prices and recession put people off.

• Why House prices are falling

Positive Aspects for House Prices

1. Government encouraging new lending from Northern Rock
2. Nationalised banks may have more stability for lending.
3. Low interest rates make mortgages relatively attractive to renting (if you can get mortgage that is)
4. Long term shortage of housing may come into play at some stage.

• Housing Market Statistics
• Historical house prices

With most attention being focused on falling house prices and the difficulty faced by those selling houses, it is revealing that over 4million people are currently on a waiting list for social housing. A report predicts this could increase to 5 million within the next year.

In the post war period, the UK embarked on an ambitious scheme to build new council housing. However, the 1980s saw a change of philosophy as council houses were sold off to tenants and the building of new council houses declined. The term ‘council housing’ became almost a perjorative term.

Last year the UK built only around 300-400 new council houses. This compared to the 345,000 new council houses built in 1954 alone.

Currently, UK councils own 1.9m homes. Housing associations also have 1.9m. However, waiting lists for ‘affordable social housing stands at over 4 million and is growing at a faster rate than new supply.

Local Government Associations have backed government plans to build 70,000 affordable homes by 2011 including 45,000 for rent but this, even if implemented is insufficient to deal with the growing waiting lists of people wanting somewhere to live.

With house prices falling, private house builders have withdrawn from the market. Meaning that now more than ever government intervention is needed to deal with a looming housing shortage.

The government still has an ambitious target to build 3 million new homes by 2020, but, it is difficult to see where they will come from

Related

• The return of council housing at Guardian