Mortgage Advice Centre

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.