Government figures say house prices are up

Figures from the Department of Communities and Local Government (DCLG) say that house prices went up by 2% during July, suggesting that the market remained robust despite the interest rate rise early in the month. According to these figures annual house price inflation is now at 12.4%, its highest rate since March 2005. From this source it is the third month in a row that annual growth has gone higher, with the average UK home now worth £218,479.

These figures contrast with others that have suggested recently that the property market has reached its peak. Figures from the Halifax just the week before suggested that prices were only up by 0.4% during August, and Nationwide’s figures suggested a 0.6% increase. Figures from the DLCG do, of course, lag behind the others so their figures may reflect a slowdown in August when those figures are released.

Industry expectations are for house price growth to show a gradual slowdown, with some odd movements seen at times, before settling down again to a period of long-term slow growth.

Northern Ireland continued to exhibit the strongest growth, with an annual rise of 46.8% to the end of July, down from its June figure of 55.9%. With prices now averaging £242,392, the province is now the third most expensive place to buy in the UK, behind London and the South East.

London’s house price growth rate was up again, to 19.1%, from 17.5% in June. In the South East the figure was 11.9%, and it was 11.3% in the South West. In the North East house price inflation was up to 8.5%, taking the average to £151,064, meaning that every region in the UK now has an average house price of over £150,000.

First-time buyers are now paying an average of £167,314, up 13.2% on last year.

Have interest rates peaked?

Has the interest rate tide turned? Has the Bank of England base rate peaked? Experts in the City are revising their interest rate forecasts after the Bank of England’s statement that accompanied last week’s rate decision which was to hold. The statement contained a warning that the impact of recent global market turmoil on the wider economy was uncertain. Meanwhile the IMF has said that global growth could slow.

Citigroup and Royal Bank of Scotland were two banks saying that the Monetary Policy Committee’s next move might be to cut rates after they were kept at 5.75% last week.

Recent surveys indicate that 80% of economists believe that rates have peaked for the year, and on the futures markets, traders are building in cuts for 2008.

According to Geoffrey Dicks of RBS, the case for lower rates was clear, and his forecast is for rates to be cut to 4.75% in 2008. The news of lower rates to come will be welcome news for beleaguered home owners in the UK, who are still struggling with the impact of five rate rises since August 2006.

The Bank issued a statement along with the rate announcement for only the third time since 1997 when it gained independence in decision-making from the government. This has caused economists to re-think their forecasts. Before the turbulence that has affected market since the middle of August, the popular prediction was for one more quarter point rate rise in 2007, with rates peaking at 6%, possibly in September or October, before beginning to come down again in 2008.

The European Central Bank also kept rates unchanged despite saying that it would have to increase them to keep inflation in check. In America the Federal Reserve is being encouraged to cut rates.

The IMF is cutting its forecasts for growth in both Europe and the US. Despite this apparent good news on rates, experts cautioned that poor harvests after the summer rains could push up food prices, sustaining inflationary pressures.

According to the Bank of England overall growth ‘remains solid’, while the National Institute of Economic and Social Research estimates UK growth eased only slightly in August to 0.7% from 0.8%.

Mortgage firm falls foul Of FSA

The Financial Services Authority (FSA) has fined a mortgage firm and its management for payment protection insurance failings.

Hadenglen Home Finance of Ashby de la Zouch, Leicestershire were fined £133,000 and chief executive Richard Hayes was fined £49,000 after selling potentially unsuitable remortgages or payment protection insurance (PPI) to nearly 4,000 clients. The FSA said that its customers had been exposed to an ‘unacceptably high risk’ of being mis-sold the insurance.

The watchdog appears to be sending a firm message to companies who look to be cashing in on the confusion of some customers surrounding their policies. It is the first time that both a firm and its boss has been fined in this way.

Hadenglen were found by the FSA to have exposed around 2,000 re-mortgage and 1,900 PPI customers to a high risk of being sold an unsuitable product. Mr Hayes was found to be responsible for the business practices of the firm and for making sure that the systems and controls in place were appropriate for selling re-mortgages and PPI. Sales practices for PPI were not found to be adequate, and the sales strategy for re-mortgages put customers at risk of paying fees and early redemption charges that were unsuitable.

Margaret Cole, FSA Director of Enforcement, said: “Firms must develop and maintain systems and controls that minimise the risk of providing unsuitable advice to customers. The penalty imposed on Mr Hayes should leave senior management within firms in no doubt that the FSA will hold them to account if they fail to treat their customers fairly. PPI has been a priority for the FSA since general insurance regulation began and it continues to be a priority for us. This is the first time we have taken action against a chief executive for PPI selling failures. The significant fines imposed on both Hadenglen and Mr Hayes reflect the seriousness of their actions.”

It is reported that Hadenglen have now implemented a remedial action plan without which the fines would have been significantly higher.

Property boom in Spain is over

It seems that the property boom in Spain may be over. Many estate agencies have been forced out of business in the south of the country as experts reckon that the buoyant housing market on the Costas has come to an end.

Supply has outstripped demand in overcrowded tourist resorts, leaving over 300 estate agents high and dry on the Costa Blanca alone, with more having closed down in other regions.

Spanish homes have been very popular with Britons over the last couple of decades, but some will now be looking at major losses as the property market is said by some experts to be as much as 30% overvalued.

The Spanish coastline has been overwhelmed with developments in the last ten years in construction expansion that saw Spain become one the fastest growing economies in Europe. House prices in Spain rose by over 200% in the last decade, which encouraged foreign investors – including Brits – to jump on the bandwagon and wait for their property to rise in value. However the second quarter of this year has seen property prices slip under the rate of inflation – the first time that has happened in ten years.

The lack of regulation and low interest rates over a long period tempted developers to come into the market and it has become saturated. In 2006 over 800,000 homes were built – more than in France, Germany and Britain combined. The downturn in the market has been long anticipated, and the big cities on the Costa Blanca and Costa Del Sol will be worst hit. Here Brits own more than 250,000 homes.

In 2005 there were 7,000 estate agents on the Costa Blanca, but the closures seem to indicate that the bubble has burst. Demand is now 10% down on 12 months ago.

The Spanish government agrees that the housing boom has come to an end, and is expecting a rise in unemployment and an uncertain economic future as a result.

Baffling number of mortgage products

If you want a mortgage you are spoilt for choice. In fact, there are so many mortgage products available that consumers are bamboozled by them. Some providers have over a hundred products, and their so-called bargain deals sometimes turn out to be more expensive than standard products.

The number of mortgages available, together with the proliferation of different fees attached to them leaves customers shaking their heads in confusion.

Abbey currently offers 89 different mortgage products, Scottish Widows has 97. Cheltenham & Gloucester just beats three figures with 101, and Standard Life has an amazing array of 219 different homeloan products!

Because mortgages can be so complex it is easy for customers to fall for apparently bargain rate deals, only to end up paying more than they would for higher interest rate products.

One example is Yorkshire Building Society’s 4.99% two-year fixed rate. If you took out a £150,000 repayment mortgage, you would have to pay a 2% fee of £3,000 and your monthly repayments would be £876. However, compare this to Cheshire Building Society’s two-year fixed rate deal, at a higher interest rate of 5.69%. This would mean monthly repayments of £938, but the fee is only £899. The total cost of the Yorkshire deal over two years would be £24,024 whereas the total cost of the Cheshire deal would be £23,411, a saving of £613.

The number of mortgage products available is baffling and even those from a single lender are too many to get to grips with. Some have come about as lenders try to design mortgages for specific situations, for example remortgage packages, first-time buyers and large loans.

As well as the mortgage rates and fees, there are also valuations, legal fees and higher lending charges to consider. Higher lending charges are levied on homeowners needing to borrow above certain loan-to-values. These can often prove more expensive than taking a slightly higher interest rate product without no charge.

First-time buyer mortgages top £120,000

First-time buyers have got it tougher than ever. Prospective new home owners now have to borrow an average of £120,500 to make their first step on the property ladder.

Eleven years ago, in 1996 the average amount a first-time buyer had to borrow was £39,811 – so the amount has increased by 202% in eleven years.

The figures, from a report by online mortgage comparison website mform.co.uk, suggest that if the same growth rate is maintained, then by 2012 would-be house buyers would have to take out mortgages of over £200,000.

Eammon Rice, chief executive at mform, says: “First-time buyers are increasingly having to borrow larger sums to get on the ladder. This is worrying given that interest rates and the cost of servicing a mortgage have risen steeply and could rise again.”

In 2007, if a first-time buyer were to take out the average starter mortgage at three-times their salary, they would need to be earning £40,190. If growth is maintained as suggested then by 2012 the chief earner would need to be earning £66,806. That’s a 66% increase in earnings compared to today’s requirement.

“When costs are rising it is even more important for borrowers to look at the total outlay of their mortgage deal taking into account the mortgage rate and any fees and charges over the term,” Rice added.

It is no surprise, therefore, that the number first-time buyers fell at its fastest rate for three years during July. They will now hope that interest rates have peaked as the Bank of England kept interest rates at 5.75% in September – the rate has been the same since its quarter point rise in July.

A recent report published by Alliance & Leicester found that parents are forking out more than £21,000 to help their children buy homes – up £3,500 since a year ago.

Homes for sale at auction increase

An increase in the number of house repossessions has resulted in a rise in the number of homes being put up for auction, the numbers reaching their highest level for over two years.

Figures from the Royal Institution of Chartered Surveyors (RICS) show that between March and June this year, a total of 5,120 home were under the hammer, an increase of 22% on the previous three months.

The increase appears to have been driven by the increasing number of repossessions, as homeowners have struggled with household expenses after seeing the base rate rise five times since August 2006.

RICS sees a bleak 2008, with forecasts that over 45,000 home could be repossessed by mortgage lenders. That amounts to 124 per day, and the number of properties on sale at auction will inevitably rise as a result.

RICS economist Oliver Gilmartin, said: “With the full impact of interest rate rises in 2007 yet to filter through into higher mortgage costs, we continue to expect a rise in the number of homes going under the hammer into 2008. The auction house will continue to be a quick means to foreclose mortgages where properties have been repossessed. Encouragingly, the annual growth rate in repossession orders has eased back in 2007, having risen quite sharply during the back end of 2006. However, RICS estimate that repossessions will continue to climb higher into 2008 and could exceed 45,000, a rise of 50% from current annualised rates.”

The area with the largest number of homes put up for auction in the second quarter of this year was the North West, with 826 up for sale. The region also had the biggest quarterly rise in repossession orders in early 2007.

The South East and the home counties also saw a high degree of auction sales, along with London and the West Midlands. Activity was lowest in Scotland and East Anglia.

Number of home loans down

The latest set of figures from the British Bankers’ Association show that the number of people taking out mortgages has fallen. Nevertheless, economists say it is still too early to say that the UK housing market has cooled dramatically.

In July there were 66,965 housing loans taken out. It is the lowest figure for three months, but experts say it the fall had actually been less than expected, and the Bank of England may consider it not sufficient to prevent it from raising interest rates to 6% in the coming months.

Mortgage approvals in July numbered 182,950 for a value of £21.5bn, which was 6% lower than in June. Compared with 2006, the number of people remortgaging was up by 12%, which is seen to be an indicator that the huge number of households coming off two-year fixed rate mortgages has begun.

David Dooks, statistical director at the BBA, said: “With customers seeking to replace deals or fix their mortgage costs, increased remortgaging activity boosted the banks’ lending in July. Lower approvals volumes simply reflected the seasonal patter, so we expect the stable trend in the banks’ lending to continue over the next couple of months.”

There have been other indicators recently that the housing market has gone past its peak. Activity and price rises have both slowed down. According to Hometrack, prices stalled in August, and the Royal Institution of Chartered Surveyors (RICS) said there had been a drop in demand for housing.

It does seem that the fall in approvals in July suggests that households are having to realign their thinking following the raft of interest rate rises. Coupled with the RICS figures there does seem to be a shift towards more moderate housing demand.

In addition, BBA figures showed that credit card borrowing was down by £82m in July.

House prices may suffer says Nationwide

Britain’s biggest building society, the Nationwide, has warned that house prices will suffer if financial markets fail to recover from recent turmoil created by the credit crunch. This is the first time a leading mortgage lender has made a comment on the possibility of a housing price collapse in London.

The society’s chief economist Fionnuala Earley said: “The impact on London property prices can only be negative compared to the current situation - particularly at the top end.”

Although house prices have remained fairly robust during the month of financial market upheaval, Ms Earley said there was a danger in the medium term that they could be hit as the economy of the UK is so heavily reliant on financial services.

House price inflation in London was a strong 15.5% in the year to July , but if City bonuses were to dry up or there were significant job losses then capital house prices would surely be hit. In prime London some homes have seen prices rise by over 50% on the last two years.

Nationwide’s latest house price data showed a slight slowdown across the country. House prices were up by just 0.6% in August, giving annual house price inflation of 9.6%, down from 9.9% in July.

Ms Earley said: “The US sub-prime crisis has created turmoil in international financial markets but this is unlikely to have a significant additional effect on the rate of growth of house prices in the UK in the short term. We still expect house-price growth in 2007 to come in close to the middle of our forecast range of between 5% and 8%.”

But she warned that things could become less predictable, and the fallout from the US sub-prime crisis might have a more severe impact on the UK housing market in the longer term.

“A prolonged market downturn would be uncomfortable for the overall economy, given the importance of this sector to economic growth over several years,” she said. “Such a downturn would not only affect investment bankers but would also have negative knock-on effects for legal, accountancy and other professional services that have benefited from the structured credit boom. On top of this, jobs in restaurants, cafés and other services catering for City workers would also be affected.”

Fees fees fees - borrowers suffer most

You probably knew it, or suspected it, already, but research has confirmed that the financial product that has more fees attached to it than any other is the mortgage.

In spite of the supposed clampdown by the Financial Services Authority on exit fees, lenders simply rename a fee that has been frowned upon, and in this case, they are renaming it a ‘core fee’.

Borrowers face the most swingeing off fees for the most straightforward administrative tasks. For example, simply asking for a copy of their title documents can result in a charge of £40. Requesting a change in repayment method can cost a charge of up to £75.

Just this week Cheltenham & Gloucester, having scrapped its £225 exit fee, has announced the introduction of a £99 up-front fee for mortgage applications.

Credit card holders suffer too. The Office of Fair Trading (OFT) imposed a £12 cap on penalty fees, but that hasn’t stopped providers bombarding card users with fees. There may be no fee that exceeds £12, but the number of different charges has gone up from 17 to 19 in the last 12 months.

Personal loan customers now face up to 11 different charge types, ranging from early settlement penalties to late payment fees. These can be up to £30, and an unpaid direct debit or returned cheque can cost up to £35 each.

People with savings accounts get off lightly with only four different types of penalty. Anyone with a current account has seen the number of charges actually reduce in the last year, but don’t get too excited – the number has gone down from 29 to 27! Fees on current accounts can be as high as £35 for a single “offence”.

The OFT is seeking a High Court judgment on the legality of such fees.

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