D
Damian George
New Member
Found this Article in the Independent think it highlights further losses and i would agree - eventually cash buyers will run out of cash and as the mortgage market is very slow prices will stagnate or fall 10%+...
What on earth is happening in the housing market? Of the many economic puzzles thrown up by the recession, this is the most mind-boggling – for homeowners, first-time buyers and the wider economy.
The conundrum is this. Unemployment is close to 2.5 million and will go higher. Pay rises are rare. People fear debt. The credit crunch has hardly gone away, meaning that mortgage finance, especially for first-time buyers with slim deposits, and movers with little equity, is expensive, if available at all. Mortgage approvals may be up on last year, but the new money going into the market isn't sufficient to secure rising prices. Values are steep by long-term historical standards in relation to earnings, especially in London.
So prices ought to be tanking. And yet ... the Royal Institution of Chartered Surveyors sees a gathering wave of optimism among surveyors watching their local property scenes, and the Nationwide has just reported rising prices for the sixth month in a row. Prices are stabilising, even rising – 0.4 per cent during October, up 2 per cent on last year (though prices are still about a fifth off their peaks). Why? And can it last?
The immediate answer given by all those involved is "shortage of supply". Owners are just not putting their properties on the market, and those that are are often asking unrealistically high prices, though the chill of recession has jolted more into narrowing the gap between what they ask for (as monitored by Rightmove) and what they settle for (as recorded by the Nationwide, Halifax and the Land Registry).
This is not just a question of sellers being in denial about negative or inadequate equity, though there is a psychological reluctance on the part of sellers to accept a loss. That lack of equity in many homes has a more concrete effect – it means that moving is difficult at a time when lenders are imposing more demanding terms, such as lower loan-to-equity ratios and more conservative multiples of household income. New rules from the Financial Services Authority that tighten up rules for self-certified and other unconventional customers will exacerbate this trend.
Plainly, banks are only really willing to take on the best credit risks: their precarious balance sheets and losses prevent them from shouldering risks that would have been routine three or four years ago. So, perversely, the lack of mortgage finance has actually pushed prices higher by artificially constricting supply.
Second, the waves of repossessions during the property slump of the early 1990s hasn't materialised, and seems to be another perverse product of the credit crunch. Again, such is the fragile state of many bank and building society balance sheets that few want to crystallise losses by foreclosure. One of the reasons why the bad debts being reported by the banks aren't as high as they might be is because they can't afford any more write-offs – so they just let the arrears run. Possibly also because of political pressure, lenders are exercising extreme leniency with wayward mortgage holders. This unprecedented forbearance is blocking another source of ready supply – auction sales from distressed sellers.
Third, there are signs of increased demand. Confidence is better, after the apocalyptic mood of much of the past year or so. And there are those out there who are cash-rich. Very cash-rich. At one end, Russian oligarchs and other wealthy foreigners and investment funds are attracted by Britain's real-estate double whammy – depressed values plus a sharply depreciated pound adds up, in crude terms, to a 40 per cent discount on peak 2007 prices. Tempting, for some, including speculators who buy some of the best real estate in the capital and allow it to crumble or be squatted.
Banking bonuses seem hardly dented this year, another underpinning. Other pluses are opportunistic buy-to-let investors seeking yields (compared to gilts or deposit accounts, say); those whose parents can supply a cash injection; and those who sat out the bubble and are ready to pounce on bargains now. Much of this activity is in the South, one reason why this part of the country has enjoyed a healthier market.
Yet it is in the nature of markets that most, if not all, of these perverse effects are short-term, and that the fundamentals will eventually re-assert themselves.
There will come a point when the pound exchange rate stops falling; a moment banks can no longer let arrears run; and when the Bank of Mum and Dad runs out of funds.
Other factors, too, are liable to grow more difficult next year at least. The stamp duty holiday on homes costing up to £175,000 will end in the new year, as will the cut in VAT. Next year will see more tax rises, modest pay rises, if any, and interest rates begin to return to slightly more normal levels – perhaps 2 per cent by the end of 2010.
The Countrywide chain of estate agents says that the average interest rate for mortgage applicants is 5.13 per cent, down 0.31 per cent from September but still high in real terms. The average deposit required for mortgages monitored by Countrywide is 25 per cent – 6 per cent up on September. The 125 per cent mortgage is but a distant memory.
We'll also see higher fuel and energy prices as demand from China and other fast-growing emerging economies push them back towards their old peaks. Unemployment will also be higher. All this means a tight squeeze on people's disposable income – their ability to service a home loan.
So there is plenty to suggest that the stabilisation and small rise in values now being witnessed may be no more than a false market, a short-term "boomlet" that will dissipate as the market faces new problems. Prices seem back on their long-term trend level now, but there is every reason to think an undershoot may also be possible, as in the past.
The truth is that the credit crunch is still a reality – wholesale money markets remain dysfunctional and only tiny quantities of mortgage-backed securities are being issued. Those markets and the now-disappeared foreign banks are what funded the housing boom. They have been largely replaced by money from the Treasury and the Bank of England. That cannot last for ever, as schemes such as the Bank's Special Liquidity Scheme expire next year and in 2011. Economists are almost unanimous that the bottom of the market has not yet been reached; then again, only a couple of years ago they told us that prices would be flat in 2008 before resuming their upward march this year ...
The property conundrum remains unsolved.
written by Sean O'Grady - Independent
Anyone else thoughts???
What on earth is happening in the housing market? Of the many economic puzzles thrown up by the recession, this is the most mind-boggling – for homeowners, first-time buyers and the wider economy.
The conundrum is this. Unemployment is close to 2.5 million and will go higher. Pay rises are rare. People fear debt. The credit crunch has hardly gone away, meaning that mortgage finance, especially for first-time buyers with slim deposits, and movers with little equity, is expensive, if available at all. Mortgage approvals may be up on last year, but the new money going into the market isn't sufficient to secure rising prices. Values are steep by long-term historical standards in relation to earnings, especially in London.
So prices ought to be tanking. And yet ... the Royal Institution of Chartered Surveyors sees a gathering wave of optimism among surveyors watching their local property scenes, and the Nationwide has just reported rising prices for the sixth month in a row. Prices are stabilising, even rising – 0.4 per cent during October, up 2 per cent on last year (though prices are still about a fifth off their peaks). Why? And can it last?
The immediate answer given by all those involved is "shortage of supply". Owners are just not putting their properties on the market, and those that are are often asking unrealistically high prices, though the chill of recession has jolted more into narrowing the gap between what they ask for (as monitored by Rightmove) and what they settle for (as recorded by the Nationwide, Halifax and the Land Registry).
This is not just a question of sellers being in denial about negative or inadequate equity, though there is a psychological reluctance on the part of sellers to accept a loss. That lack of equity in many homes has a more concrete effect – it means that moving is difficult at a time when lenders are imposing more demanding terms, such as lower loan-to-equity ratios and more conservative multiples of household income. New rules from the Financial Services Authority that tighten up rules for self-certified and other unconventional customers will exacerbate this trend.
Plainly, banks are only really willing to take on the best credit risks: their precarious balance sheets and losses prevent them from shouldering risks that would have been routine three or four years ago. So, perversely, the lack of mortgage finance has actually pushed prices higher by artificially constricting supply.
Second, the waves of repossessions during the property slump of the early 1990s hasn't materialised, and seems to be another perverse product of the credit crunch. Again, such is the fragile state of many bank and building society balance sheets that few want to crystallise losses by foreclosure. One of the reasons why the bad debts being reported by the banks aren't as high as they might be is because they can't afford any more write-offs – so they just let the arrears run. Possibly also because of political pressure, lenders are exercising extreme leniency with wayward mortgage holders. This unprecedented forbearance is blocking another source of ready supply – auction sales from distressed sellers.
Third, there are signs of increased demand. Confidence is better, after the apocalyptic mood of much of the past year or so. And there are those out there who are cash-rich. Very cash-rich. At one end, Russian oligarchs and other wealthy foreigners and investment funds are attracted by Britain's real-estate double whammy – depressed values plus a sharply depreciated pound adds up, in crude terms, to a 40 per cent discount on peak 2007 prices. Tempting, for some, including speculators who buy some of the best real estate in the capital and allow it to crumble or be squatted.
Banking bonuses seem hardly dented this year, another underpinning. Other pluses are opportunistic buy-to-let investors seeking yields (compared to gilts or deposit accounts, say); those whose parents can supply a cash injection; and those who sat out the bubble and are ready to pounce on bargains now. Much of this activity is in the South, one reason why this part of the country has enjoyed a healthier market.
Yet it is in the nature of markets that most, if not all, of these perverse effects are short-term, and that the fundamentals will eventually re-assert themselves.
There will come a point when the pound exchange rate stops falling; a moment banks can no longer let arrears run; and when the Bank of Mum and Dad runs out of funds.
Other factors, too, are liable to grow more difficult next year at least. The stamp duty holiday on homes costing up to £175,000 will end in the new year, as will the cut in VAT. Next year will see more tax rises, modest pay rises, if any, and interest rates begin to return to slightly more normal levels – perhaps 2 per cent by the end of 2010.
The Countrywide chain of estate agents says that the average interest rate for mortgage applicants is 5.13 per cent, down 0.31 per cent from September but still high in real terms. The average deposit required for mortgages monitored by Countrywide is 25 per cent – 6 per cent up on September. The 125 per cent mortgage is but a distant memory.
We'll also see higher fuel and energy prices as demand from China and other fast-growing emerging economies push them back towards their old peaks. Unemployment will also be higher. All this means a tight squeeze on people's disposable income – their ability to service a home loan.
So there is plenty to suggest that the stabilisation and small rise in values now being witnessed may be no more than a false market, a short-term "boomlet" that will dissipate as the market faces new problems. Prices seem back on their long-term trend level now, but there is every reason to think an undershoot may also be possible, as in the past.
The truth is that the credit crunch is still a reality – wholesale money markets remain dysfunctional and only tiny quantities of mortgage-backed securities are being issued. Those markets and the now-disappeared foreign banks are what funded the housing boom. They have been largely replaced by money from the Treasury and the Bank of England. That cannot last for ever, as schemes such as the Bank's Special Liquidity Scheme expire next year and in 2011. Economists are almost unanimous that the bottom of the market has not yet been reached; then again, only a couple of years ago they told us that prices would be flat in 2008 before resuming their upward march this year ...
The property conundrum remains unsolved.
written by Sean O'Grady - Independent
Anyone else thoughts???
