Oak Tree Mortgages Blog

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.

Sleep walking on the Standard Variable Rate

As the Bank of England sets interest rates to an all time low of 1.5%, some borrowers who have come to the end of their fixed or tracker rate mortgage will take cheer in the fact they will be moving on to their lenders low Standard Variable Rate (SVR) mortgage.

Even before the announcement yesterday, the Cheltenham & Gloucester (C&G) said they would lower their SVR by the same amount as any reduction by the Bank of England. This means borrowers on the C&G's SVR will soon see their interest rate alter to just 3.5%.

For some, the temptation to do nothing and remain on the low SVR will be strong. But could your inaction mean you are sleep walking into danger?

We need to examine why rates have fallen so low and what the effects have been as well as what may happen over the coming year...

Firstly, it would seem obvious that the Bank of England are trying to play their part in pulling the country out recession by making borrowing cheaper. But the real problem is a lack of credit, the Banks don't have enough money to lend out, herein lies the problem. This problem will not be solved by lowering interest rates.

What have the other effects of low interest rates been?

With low interest rates our currency has plunged in value. Take a look at the graph below showing the value of the pound v the dollar. What a fall! This is good news for the few British manufacturers left (as our exports become cheaper) but it is very bad news for imports.

We import a great deal in this country - raw materials, food, clothing, oil, cars, all manner of things - all of them are now more expensive because of the the low pound. Eventually, this will lead to price increases in the shops. This will become a real problem as price increases will result in people buying less goods, which will make the recession worse! Exactly the opposite of what a low interest rate policy is trying to achieve.

We may have no choice to put interest rates up. Our government are going to be spending billions of pounds over the coming years. They need to borrow this money and the Bank of England interest rate is used to set the rate at which our government will borrow money. With such low rates on offer, who will want to lend to the UK government to receive a return of just 1.5%?

Think about the credit crunch, what does it actually mean?

Banks are desperately short of funds and have cut back their lending. Part of the money they lend comes from savers. As interest rates fall, savers will start to look for a new home for their savings... may be an account with a foreign bank such as ING or ICIC paying a higher rate than British banks, or maybe putting money into premium bonds or shares. As savers leave and take their money elsewhere, lenders will be even more short of funds.

Low interest rates are simply unsustainable as they do not tackle the problem of the credit crunch. Over a longer period they will make things worse. So people need to prepare themselves for the fact the rates will increase, we just don't know when.

You may be tempted to hold out for a while "lets wait and see what happens"...

Here's the most important point- What about the value of your house?

If you want to re-mortgage, a mortgage lender will look at the 'Loan to Value' of your new mortgage. [This is the percentage of the value of the loan compared to the value of your home.]

Right now, you could get a really good new rate at 60% or 75% or even 85% loan to value. But house prices are expected to fall further this year, at least on paper. This is important when you want to change your mortgage as lenders base the interest rate on the loan to value. By the time you get round to sorting out a new mortgage, how much equity will be left in your house? Will the loan to value be low enough to get a decent rate? Will you still be able to get a mortgage?

It's all very well enjoying the low SVR now, but you need to be aware of the dangers of inaction! 

We have a limited window of opportunity to take advantage of these low rates providing of course you have enough equity in your home!

UPDATE: 14th January 2009

We had an interesting meeting with the Business Development Manager of a large mortgage lender today. She made the following point...

Lenders have been put under huge pressure by the government to lower their Standard Variable rate in line with cuts made by the Bank of England. Some have followed, but not all lenders.

Given the current conditions, the lenders would not have necessarily passed on the full cut in interest rates left to their own devices. At the same time rates have been cut, savers have been leaving in search of higher savings rates from foreign banks such as INGand ICIC.

The dual effects of the above mean it is likely that at the point rates do increase, the SVR could be increased by lenders at a much greater rate than any increase in the Bank of England rate. Unless the mortgage is a tracker mortgage, lenders are able to increase their Standard Variable Rate by more than any increase in the Bank of England.

Whilst the ride down as rates have been cut may have been pleasant, as and when rates increase the ride may be a lot more painful!

FURTHER UPDATE: 4th February 2009

Ford and Vauxhallhave both announced they will be increasing the cost of new cars by 5% despite poor sales and government help. This has been blamed on the weakness of the pound. Ford is not increasing the cost of cars anywhere else in Europe. We need to brace ourselves for further price increases over the coming months and year as our imports all suffer at the mercy of the weak pound. Food, clothing, cars, in fact anything we import will increase in price as a result of the low value of the pound - caused by low interest rates. Low interest rates can only be sustained over a short period of time and will cause damage in the longer term. Our opinion is "Don't get used to low rates interest rates as they can not remain low for long!"