Oak Tree Mortgages Blog

Can we call the bottom of the property market?

What can I say? "I'm sorry" - for having been away from our blog for so long!

"Where have you been?" I hear you ask. Well, I have been very pleasantly surprised by the level of activity in the market place since the start for the year. I notice this week that the National Association of Estate Agents has commented that demand from buyers is currently outstripping supply. This upturn in acitivity has left precious little time to update our blog!

Anyway, with a moment to spare this Saturday afternoon, I thought we should reacquaint ourselves with a previous entry I made in January. In this entry, I asked if some kind of stabilisation in the housing market was close?

To my mind, this year feels very different to last. This year, we have come to terms with the fact that we are in a recession and we are working our way through. 

We have adjusted our lives and expectations. The media spot light has shifted from property prices to MP's expenses, Michael Jackson,and Jordan's love life. So Life goes on!

Last year people were genuinely scared of the unknown. There was talk of banks collapsing and financial melt down. In America, the Bush Administration allowed Lehman Brothers to collapse in September 2008. This was the beginning of the turning point in the global banking crisis.

Following the collapse of Lehman's, the whole banking system was thrown into turmoil. Governments and Central Banks across the globe have been dealing with the aftermath ever since. Robert Peston at the BBC continues to provide an excellent commentary on the finer detail of the banking crisis and the attempts by governments and regulators to deal with the mess.

 As a result of the both the structural and attitude changes within the banking sector, we are now working with a very much changed mortgage market...

Gone are the heady days of mortgages for all, easy lending criteria and cheap rates. Good bye and good riddance! What has followed are higher mortgage rates and less choice. But before I induce some form of mortgage related depression, please read on...

This year has seen the return of so many first time buyers. Interestingly, the type of first time buyer has changed.

Prior to the 'Credit Crunch', the average age of a first time buyer was 34 years old. This year, we have seen a range of ages. A couple aged 18 and 19 who have been saving for a deposit since the age of 16, clearly ready and able to buy ~ through to people in their mid-20's.

These are the people who have have been priced out of the market for years because of the super charged property prices caused by the easy lending of the last 10 years. So, good riddance to all that...

Now, a young couple earning £16,000 each can afford to buy a house (yes, a house) within walking distance of our offices. I hope,  from the ashes of the banking crisis and the bonfire of the vanities shall rise the Phoenix of affordable, private home ownership with responsible mortgage lending. Now it's down to government, the regulator and the industry to usher in such a golden age. Let's hope they can deliver.

Considering that young first time buyers are now able to afford properties and the official statistics from the Land Registry, Nationwide and Halifax show house prices starting to stabilise; I hope we are now through the worse. The younger first time buyer is the very foundation of a sustainable property market.

For those considering buying now, it is a myth that "you can't get a mortgage".

Mortgage lenders are still willing to lend... at a price and with a big enough deposit!

You need to be on your guard as the bankers are trying to force first time buyer's to pay the price of their mistakes through charging much higher interest rates on mortgages.

Over the coming weeks, we will be devoting our attention to showing you ways to increase your chances of getting approved for a mortgage whilst at the same time opening up cheaper mortgage products to buyers.

It's time to take off the blinkers and think outside of the box as we play, "Beat the Banker"!

If you are a first time buyer and you need some advice and help, why not speak to the experts at Oak Tree Mortgages. Our contact details can be found on our main website www.oaktreemortgages.com

The fixed rate dilema... is 2 years too short?

As any good cook will tell you, timing is everything. The same is true with fixed rate mortgages at the moment!

Imagine you want a mortgage that allows you to budget for the next few years. You might be unsure which way interest rates are heading and you don't like nasty suprises. It's important that you know how much your mortgage payments are. After chatting through your mortgage requirements with an adviser, you decide a fixed rate matches your needs.

You've decided to stretch yourself a bit to get a nicer home, maybe with an extra bedroom or a bit more space downstairs. You can see yourself staying there for at least 5 years.

If you want a fixed rate, how long should you fix for?

You will probably look at 2, 3 or 5 year fixed rates. You might be tempted to go for a shorter 2 year rate for two reasons...

The rate may be (but is not always) lower over a shorter period of time AND you might want to 'review' your mortgage again in 2 years time.

Of course, in times past, shopping around again for a mortgage every couple of years could prove lucrative. Beware, 2 year rates may lead to some very nasty suprises in 2 years time!

Consider what the Bank of England forecasts are for economic growth over the next couple of years. Billions upon billions of pounds, dollars, yen and euro's are being pumped into the global economy to fend off the recession by governments across the globe. Whilst we are all experiencing pain in the shorter term, in time economic growth will return.

As previously mentioned in our blog, it is our opinion that the Bank of England base rate will rise in the medium term. Just to repeat why we feel this...

Firstly, low rates have not helped savers who have withdrawn their savings from British banks to find a better rate of return elsewhere. This has left the banks with even less money to lend.

Secondly, the low exchange rate is leading to the price of imports increasing, which, in time will lead to higher prices in the shops (and higher inflation). This problem will be especially acute once the economy pulls away from recession.

The Bank of England will try to tackle these problems, when it is safe to do so, through increasing the bank base rate.

How will that effect you if you have chosen a 2 year fixed rate?

In our opinion; at the exact point a 2 year fixed rate comes to an end, interest rates could have already been increased to counter the threat of inflation and to halt the flow of savings out of the UK.

In two years time;

• How will you fair trying to renegiotiate a new interest rate at a time when interest rates could be increasing?

• Will the effects of the 'credit crunch' mean the mortgage market lacks competion at the point you are trying to find a new mortgage?

• What if property prices have fallen a little bit more over the course of 2009? If you started your fixed rate with say a 10% deposit, and your equity has been eroded by further falls in property prices, how likely is it that you will be able to find a new mortgage as your deposit has shrunk?

Very careful consideration needs to be given to these points before deciding the length of any fixed rate. None of us can be certain what is going to happen over the five years. Taking a shorter term rate exposes you to the risks that the next couple of years are likely to bring. Just as we are starting to think about our homes as somewhere we may have to live for a little longer than we would have done in the past, maybe now is the time to take the same view with our mortgage?

A cut too far?

The Building Society Association (BSA), representing the interests of the remaining building societies in the United Kingdom, warned today that they wish to see no further rate cuts from the Bank of England

As I have mentioned before - as the Bank of England cut interest rates to try and lower the cost of borrowing (with only limited effect); savers have found their savings rates slashed!

This is a real problem to Building Societies and other lenders. Savers place money on deposit with a bank or building society, who then lend out. This is how credit is created in a balanced economy.

Savers are now looking for a new home for their savings. British banks and building societies now offer very low savings rates. As a consequence, savers are placing money on deposit at foreign banks such as the Dutch bank, ING. This is making things worse for British lenders who are already short of money. Low rates will further damage the supply of credit. We believe in turn that this makes the low rates we will see in 2009 unsustainable.

As the lenders themselves start to warn against further rate cuts; borrowers who are "sitting on the fence" and are waiting for further rate cuts should take note. We await the Bank of England response which is due this Thursday.

UPDATE 24/2/2009

For many, it came as no surprise that the Bank of England base rate was cut further. Despite warnings from the lenders themselves that further rate cuts would have little or no effect on new borrowing rates. The minutes of the last Bank of England meeting suggest the Bank are going to look at other measures to help the economy and lending. In particular, they will be using a measure called 'quantitative easing'to increase the amount of cash in the economy. It is hoped that by flooding banks with cash, interest rates charged by lenders will ease and, at the very least, the amount of lending will increase. I think March will be a very interesting month as we see something other than rate cuts being utilised which will set the tone for mortgage lending for the rest of the year.

http://news.bbc.co.uk/1/hi/programmes/the_daily_politics/7925669.stm

Property prices - can we see the bottom?

Research issued today by property investment advisers Assetz® will make interesting reading for those trying to work out if property prices have reached the bottom. 

Assetz have made something of a name for themselves by helping investors identify worthwhile investment opportunities in property. They look around the so called "distressed" part of the property market; those properties that "must" be sold. Such properties are typically sold at auction and may be owned by someone in financial difficulties, a lender [having repossessed the property] or a developer desperate for some cash. The market activity in this "distressed" part of the property market has an implication for the rest of the property market...

Assetz report that developers have started to raise prices and that prices achieved on properties at auction have started to plateau since the New Year. Many house builders are running low on stock, having downed tools on sites back in the summer of last year. Future stock will only be built if prices are above cost, so it could be some time before new supply comes onto the market.

Assetz also say that House Price Indices (such as the Nationwide House Price Index) that showed falls last year of between 10%-16% will continue to show falls for some months to come. They go on to say that investors and home buyers should appreciate that these indices are significantly delayed in terms of data capture, by as much as three months. Why?...

Sales that are agreed now do not reach the house price data until the buyer moves in - this normally takes 3-4 months. Buyers who wait for the house price indices to show positive growth will have missed the bottom of the market by a number of months!

Stuart Law, chief executive of Assetz, said "If the distressed property market had a house price index, it would have already reached the bottom and there are clear signs that these prices are beginning to turn upwards. There are multiple bidders for much residential distressed property - an early indicator that the wider market trend will change in the near future. Savvy investors know they will secure best price while consumer sentiment is at it's worst, not when the press is reporting a market recovery."

Prices have reached such a point in this sector of the property market that it now makes financial sense for investors to invest in property in order to earn a return from renting (referred to as the yield) of between 8-10%. Compare this to the miserly rate of interest now paid by most banks! Similarly, many of the people we see who are currently renting find that their new mortgage payments are less than their rental payments.

We don't want to herald the arrival of the "Green Shoots of Recovery"; it is interesting to note the opinions of others in the market place - especially those that look to the longer term and see this market as representing an opportunity.

UPDATE 29/1/2009

There is little surprise today that the Nationwide have reported a further fall in house prices for January of 1.3%. This really reflects activity at the back end of last year. As the "completions" (people moving into their new home) that took place from sales agreed in November and December last year, expect further falls to be reported over the coming months.

Nationwide note that the drop over the past three months has eased a little, but it is too early to draw any conclusions from this.

They also report, as I have in my previous blog entry, that new buyer registrations at estate agents are up significantly. Again, we would point to the huge demand that has not yet translated into activity as people may feel insecure about their jobs (take redundancy cover!) or they think getting a mortgage is difficult. It will only take a few items of good news and slightly easier lending criteria on mortgages to get the whole thing going again!

As we trundle along the bottom of the market, there are some great buys to be had.

Is the housing market like a coiled spring?

I am sure you don't need me to tell you that according to the Halifax, property prices fell by around 16% in 2008. I am also sure that unless you have been cocooned away from the media you will have some appreciation that the fall in property values has been caused in large part by the sudden and prolonged fall in the availability of mortgages. Without the stuff that allows buyers to express their demand for property (money in the form of mortgage funds), then the laws of economics dictate that prices will fall.

According to research by the Halifax, house prices compared to earnings are now at their most affordable level for five years and this situation will improve further over 2009.

With high property prices over recent years, many first time buyers have found themselves priced out of the property market. We are seeing large numbers of first time buyers who can now afford to buy based on what they earn.

Because of the fall in house prices and the lack of mortgage funding which started with the failure of Northern Rock in August 2007 (yes, it really was that long ago!), could the housing market now be like a coiled spring?

At Oak Tree Mortgages, we have seen more first time buyers in the last three months than in the whole of 2008. More and more of these first time buyers can afford to purchase a property based on their wages. Buyers are attracted to the lower property prices and see this as an opportunity to get a foothold on the property ladder. These factors are an indicator to us that there is huge unsatisfied demand.

Currently, not all first time buyers can get a mortgage and not everyone has a 10% deposit as demanded by mortgage lenders.

We all know that the government have invested vast amounts of our money in supporting the banking system. The support offered prevented a near collapse of the banking system in the autumn of 2008, however, those efforts have not yet worked their way into the mortgage system. Measures taken last year and the continued support offered by the government are likely to have an effect on the mortgage market in 2009.

We strongly suspect that there will further government intervention in the banking system to encourage mortgage lending in the spring of 2009. Why?

The recovery in the housing market is now so closely linked to a recovery in the wider economy. Also, no mortgage lender can act unilaterally by lowering the deposit required of a first time buyer; that would be commercial suicide. However, with a number of lenders acting together, lending to first time buyers can be encouraged again. This is the point we all want to get to as this is the point that prices will stabilize.

So for those considering buying, don't put your life on hold; life goes on...

With so many properties for sale a smart buyer will buy a house that has a wide appeal, which is likely to hold it's value and that ticks as many boxes as possible in terms of what you want from a home. With many sellers offering flexibility on their asking price, any price reduction achieved now will help to protect against the effects of any price falls during 2009.

If you are buying, look to the longer term. That way you will not become fixated with trying to call the bottom of the market. The signs are that when mortgage funding eases, even a little, new buyers will be bought into the market and this will help prices to stabilize. As David Dalby, residential faculty director of RICS (the surveyors professional body), said: "Because we have slumped so quickly the likelihood is the recovery will be very quick as well and the great danger is people being left behind, waiting that bit too long and suddenly finding prices are starting to move up again and being left behind, particularly first time buyers.”

Our experience of the market over recent months adds weight to this view. Do you really want to gamble on calling the bottom of the market in 2009 or do you want to get on with your life and do something less broing instead?

UPDATE 21st January 2009

As we suspected, the Government has announced a range of measures designed to kick start lending within the economy. Our local estate agents, Melvyn Danes and Smart Homes, both report very much increased activitiy.

Over time, the measures taken by the government will have an effect on the mortgage market. With President Obama poised to spend billions of dollars to stimulate the American economy, over time we will see government action on both sides of the pond reshape our economies and breath new life into the mortgage and property market.