Mortgage Advice Centre

To an outsider, the budget sounded quite promising – a few tax rises, a few tax cuts. Promises of ‘efficiency savings’ – and the tax on bank bonuses gaining £2bn more than expected. A casual glance at the speech may give the misleading impression the economy is not doing too bad. – Well that is if you missed the statistics about GDP and government borrowing. The twin threat of a weak recovery and higher government borrowing gives any chancellor an unenviable task of trying to reduce borrowing whilst at the same time maintaining the strong rate of growth that is necessary to help reduce the cyclical deficit.

The decision to raise the threshold on stamp duty form £125,000 to £250,000 is good news for those hoping to buy a house. Though given the difficulties in raising a deposit in the new mortgage climate, it is hardly going to cause a stampede into the market. It may just help maintain the recent house price gains.

One thing is fairly certain and that is the prospect of short term increases in interest rates are fairly low. This month, inflation fell back to 3%. Despite volatile factors like rising oil prices, the impact of GDP falling by 6% is to create spare capacity and reduce inflationary pressures.

The government hasn’t wanted to commit to spending cuts. But, there will be need to be some fiscal tightening after the election. With the deflationary impact of higher taxes /lower spending, the emphasis will be on a loose monetary policy to prevent the economic recovery fading away.

More Budget Analysis at Economics and Politics of the Budget at Economics Help

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.

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