HIPs Confuse The Market

Home Information Packs (HIPs) may have given the property market an unexpected boost in September. Property website Rightmove reported that asking prices jumped up from an August dip to record a 2.7% rise to £241,642 in the weeks leading up to the introduction of HIPs for three-bedroom homes. This was the biggest gain for six months. Unfortunately although asking prices were up, the final selling prices may suffer from the glut of properties onto the market when demand is falling.

Rightmove reckoned that the introduction of home packs was distorting the market. Everyone is expecting a fall in house prices, but fluctuations in asking prices and selling prices have confused the market.

After the 1 August launch of HIPs for four bedroom properties there was a shortage of top-end property on the market, which pulled down asking prices for that month. Conversely, an increase in three bedroom homes on the market saw asking prices for those rise in September.

Asking prices are often seen as an indictor of confidence in the market; over the last quarter asking prices have gone up by just 0.5%, the lowest rise for a quarter since quarter four 2005. The rise for quarter two 2007 was 1.5%.

Miles Shipside, of Rightmove, said: “Legislative tinkering involving future cut-off dates has a history of unbalancing markets. In a stable market this presents fewer dangers, but in today’s more sensitive financial environment the effects can be more exaggerated. It is very unfortunate timing that HIPs and their side-effects are straddling a period of record house prices, the highest interest rates for six years and a tightening in mortgage lending criteria.”

House price figures released on Monday 15 October by the Department for Communities showed that annual house price inflation slipped back from 12.4% in July to 11.4% in August. The figures lag behind other studies by one month and showed that the average UK house price in August was £219,528. UK first-time buyers are paying on average £167,070, which is an 11.9% annual increase, and former homeowners are reported to be paying £245,263, an increase of 11.2%.

Stamp Duty Net Widens

Eight out of every ten home buyers in England and Wales now has to pay stamp duty, according to figures from the Land Registry. The number of people paying the tax has more doubled to nearly a million under the Labour government.

In 1996, a year before Labour came to power, the number paying stamp duty was 424,000 – around 43% of property purchases. Just over ten years on, and the figures has reached 989,000 which is 78% of buyers, and the amount the Treasury receives from each transaction is £6,515 on average.

In five years the Halifax says that the total amount paid by home buyers in the whole of the UK has gone up from £2.7bn to £6.4bn – a rise of 140%. With price rises being what they have been those in London and the South East have been the worst hit, and Halifax estimated that they paid 73% of all stamp duty in 2006.

The Royal Institution of Chartered Surveyors says that the average first-time buyer purchase is now £162,000 – in the 1% stamp duty band, meaning that first-time buyers also have to find over £1,600 to hand over to the Treasury.

Meanwhile as people struggle financially to buy their next home, complaints about estate agents have risen by 23% this year. This increase comes after a 54% rise in the number of estate agents joining the Ombudsman for Estate Agents scheme, who said that membership is rising faster than the number of complaints.

The previous year saw an increase of 18% in complaints, but this year the number has gone up to 8,269 for all properties. Ombudsman Christopher Hamer said: “While membership is rising, sadly so are complaints against members, although at not such an incredibly fast rate.”

There are now around 11,800 estate agencies that are members of the scheme, which gives consumers more rights for redress when things go wrong

No Rush For Long Term Fixes

Chancellor Alistair Darling’s proposal to make it easier for providers to fund 10-year fixed rate mortgages has been met with a lukewarm welcome by experts.

Most borrowers have chosen two or three year fixed rate deals, but in the face of rising interest rates, the Government believed that borrowers would be keen to be tied in to known regular monthly repayments for longer periods, which would also help to stabilise the market.

Currently there are about 30 lenders offering fixed-rate deals for ten years or more. However, Halifax bank and Britannia, Norwich & Peterborough and West Bromwich building societies have found that take-up has been low.

One of the problems is that rates on long-term fixes are not so attractive, so borrowers are put off straight away. Another problem is that if borrowers want to end the deal before the period (ten years) is up, then they face escape penalty charges.

Director of independent mortgage broker Savills Private Finance, Melanie Bien, said: “Long-term fixes have been around for years, but have proved unpopular. However, rates have fallen and lenders have looked at ways of reducing early redemption charges, making them more flexible and more attractive.”

Malcolm Waldron of London estate agent Kinleigh Folkard & Hayward, says there are some benefits in longer deals. He said: “It is difficult to argue against the virtues of a long-term fixed mortgage in terms of the financial security it offers homeowners. Assuming financial stability, if a mortgage is affordable for a buyer when it is first fixed, it should still be affordable throughout the term whether that be two, five or 10 years.”

Of course the benefits of a long-term fixed deal depend on the interest rate at the time, and now may not be the best. When Mr Brown and Mr Darling first brought this idea to the fore, interest rates were on their way and seemed destined to go further. Now, however, with a number of things having happened (sub-prime crisis in US, Northern Rock, credit crisis, falling inflation, falling consumer confidence), it appears that interest rates may have peaked. Thus, it would not seem to be the right time to fix your mortgage interest rate.

Last week mortgage broker London & Country launched a 30-year loan fixed at 5.99%. It has no early repayment charges, but there is a potentially expensive set-up fee of 2%.

Chancellor Fails To Help First-time Buyers

If first-time buyers and home movers were hoping for some relief from the burden of stamp duty in the Chancellor’s Pre-Budget Report, then they were left frustrated.

Previous pledges to help first-time buyers seem like empty promises as there were no moves to alleviate the hurt that stamp duty causes, especially for first-time buyers.

Instead of increasing any stamp duty thresholds the Chancellor chose to follow the Tory line of increasing inheritance tax allowances. For married couples this now amounts to a tax-free threshold of £600,000.

Whilst following Tory ideas on inheritance tax, Chancellor Alistair Darling ignored the Troy lead on stamp duty, their idea being to scrap duty on properties worth less than £250,000. The rising price of houses has meant that more and more buyers are being dragged into the tax net, with the average price of a house for first-time buyers at £167,000, and the zero-rate threshold for stamp duty way down at £125,000. Families paying more than £250,000 for a house are hit by 3% stamp duty – on the whole amount. Calculations recently showed that if stamp duty thresholds had kept pace with house price inflation then the 3% threshold for stamp duty would start at £729,000.

Head of property at financial advisers Grant Thornton, Clare Hartnell, said: “Stamp duty is the best weapon the Government has at its disposal in helping people onto the property ladder and it is amazing that further help to first-time buyers has not been offered in the Chancellor’s latest pre-budget report.”

Paul Chafer, of Stroud & Swindon Building Society, said: “We expected great things from a potential review of housing taxes, yet once again there has been a missed opportunity to support the UK property market by reconsidering the stamp duty thresholds.”

Instead, Mr Darling said that there would be increases in grants to local authorities for new homes and he set a target of 240,000 new homes a year to be built by 2016. In 2006 185,000 new homes were built.

Bank of England Holds The Interest Rate

There had been calls for the Bank of England to cut its base interest rate from the level of 5.75%. In the end the Monetary Policy Committee (MPC) resisted, and left the rate unchanged. This was the first decision on interest rates since the credit crisis devastated Northern Rock.

Many though that the Bank would take the interest rate down by quarter of a percent to try and boost confidence in the economy at a time when everyone is beginning to suffer from the lack of credit.

Leading lights in the City, together with retailers and union leaders, had called for a rate cut, but the Bank held firm as it continued to concentrate on its brief to keep inflation under control rather than assist the economy. Actually, inflation is at 1.8% - under the Government’s target of 2% - but the Bank has worries that rising prices of food and oil will take inflation back above 2% in the coming months. Sterling fared well from the news of the rate hold and went a quarter of a cent higher.

Economists still reckon that a rate cut will be needed soon, and the next movement should certainly be down, not up.

Malcolm Barr, of JPMorgan, said: “An impact from credit market events may be in the pipeline, but it is taking time to express itself in actual growth and spending behaviour. We continue to anticipate an easing from the Bank of England in early 2008 rather than this year.”

James Knightley, of ING, was even more forceful; he said: “With the housing market moderating and financial market conditions a clear cause for concern, we suspect that the Bank of England will be cutting rates towards 5% in 2008.”

Lending amongst banks has almost come to a standstill in recent weeks, which caused Northern Rock to seek help from the Bank of England. In September, the US Federal Reserve cut its rate by 0.5% to increase liquidity in the markets, and it was suspected that the Bank of England might follow to the tune of 0.25%. It decided not to act precipitously.

There had been fears that the European Central Bank might raise eurozone rates, but it held them at 4%

Government told to stop criticising mortgage lenders

Continuing criticism by the Government of mortgage companies for ‘irresponsible lending’ could lead to a crisis in confidence by consumers, the Council of Mortgage Lenders (CML) has warned.

Director General of the CML, Michael Coogan, said: “The Chancellor’s continuing comments suggesting a lack of responsibility are not helping the reputation of the financial services industry. He is creating an environment where customers could lose confidence and that is wholly unnecessary.”

Coogan says that the problems at Northern Rock have already given financial services a bad name in the UK and damaged their wider reputation in Europe, and he would like the Government to help restore trust in the mortgage industry, rather than continue the messages of doom and gloom, which will lead to distrust.

All mortgage providers have revised their lending criteria and tightened up on processes. The days of carefree lending have gone.

Coogan wrote to Chancellor Alistair Darling on 28 September asking for a meeting to discuss mortgage industry issues, but is annoyed that he hasn’t yet received a reply. “I am angry that he hasn’t explained to the industry what they should do differently,” he said.

Coogan has the interests of mortgage companies at heart, but is frustrated at ongoing criticism without constructive comment. He warns that it is in the interests of consumers for the mortgage market to remain healthy so that lenders continue to develop innovative products. Recently there has been a withdrawal of 40% of mortgage products which will in no way benefit consumers.

Coogan also warns that levels of arrears and repossessions will probably rise in 2008, as many people will be coming off fixed rate deals this autumn. Coogan suggests that the Government should strengthen its support scheme for homeowners who get into difficulty, saying: “The number of people who are going to need help will increase.”

IMF says Britain heading for housing fall

The International Monetary Fund (IMF) has warned that Britain’s housing market is overvalued and could meet with a spectacular fall. The IMF, the world’s leading economic institution, reckons that British property is overvalued by as much as 40%, and the crisis with credit affecting all financial markets will have a ‘sizeable impact’ on property prices.

The IMF cited UK, Ireland and Spain as three countries with faster growing prices even than the US before its recent market collapse, thus the threesome were vulnerable to property market volatility.

The IMF’s latest World Economic Outlook report asked if a western Europe housing correction could be as deep as the US’s, and went on to say that house price overvaluation may be even larger. Since mid-2005 prices in the US have slowed considerably. The crisis this year with many borrowers left unable to meet rising interest payments caused the US property market to grind to a halt, and slip backwards. The report said: “There remains the concern that the US experience might presage steep housing downturns in other countries that have also experienced a rapid rise in house prices, with associated risks for output growth.”

The IMF report commented on British and European house prices have surged upwards beyond incomes. For instance, in the UK house prices stand at around nine times annual income. In 2001 they were only five times higher.

The IMF report added: “The steady increase in interest rates has already contributed to some cooling of these housing booms, and recent developments are likely to have a further dampening impact, particularly if credit availability were to be tightened. There would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch.”

On a more positive note the report did say that housing markets in western Europe have generally avoided the market  of ’sub-prime’ mortgages which caused so many problems in the US. In addition, factors like strong immigration and lack of housing stock are likely to continue to support prices in Britain.

Stamp Duty Revenue Has Rocketed

The past twelve months have seen a 40% increase in the Treasury’s income from stamp duty. Halifax reports that tax revenue from the sale of homes has rocketed by 140% in the last five years.

The rising cost of property and the unmoving thresholds of stamp duty mean that properties in the stamp duty brackets of 3% and 4% now account for 79% of the revenue – at £5.1bn. The 3% bracket starts at properties selling for £250,000. The nil-rate band goes only to £150,000. Properties selling for £150,000 - £250,000 are subject to 1% tax.

The lion’s share of stamp duty is earned from sales of property in the south of England. London, the South East and East account for 73% of total revenue. Sales in London contributed £1.7bn in stamp duty in the past year – that is 27% of the total for the UK. Northern Ireland has seen a huge increase – more than doubling – in its contributions as the region has seen amazing house price growth in the last year.

The higher thresholds for stamp duty have not been raised since 1997, yet in that time average house prices have gone by 191%. In March 2005 the 1% band was put up from £60,000 to £120,000 and last year it was raised again – to £125,000. Even that has not matched house price inflation.

If thresholds had gone up with house price inflation, the 3% threshold would now start at £729,000, and the 5% thresholds (currently £500,000) would start at £1.46m.

An average first-time buyer in the UK now has to find £168,770, which means a stamp duty bill of £1,688. In London the average price of a first home is £279,659, meaning 3% stamp duty and a bill of £8,390. Only in North, North West, Yorkshire and the Humber, East Midlands, Wales and Scotland would average first-time buyers avoid stamp duty.

Chief economist at Halifax, Martin Ellis called on the Government to raise all stamp duty thresholds to reflect the increase in house prices in the last ten years.

HBOS scraps mortgage share target

In a sign that all is not well in the mortgage market, HBOS has scrapped its target for mortgage market share.

HBOS chief executive Andy Hornby said: “Now is the time for the clear leader in the mortgage market to deliver the right balance between volume, margin and credit risk.” Hornby believes that the ready availability of credit has meant that the risk of bad debts has become ‘mis-priced’, and HBOS plans to be more cautious.

In the past three years HBOS has aimed for a 15-20% share of the mortgage market, but it is now easing back from such targets. The higher cost of borrowing will lead to a slowdown in the mortgage market, Hornby says. HBOS will be making judgments between volume and margins as each month passes, rather than growing its share of the market for the sake of it.

When credit was cheap in recent years, the mortgage market was flooded with cheap loans as lenders tried to get as many borrowers on their books as they could. As a result profit margins on mortgages have fallen to very low levels. Now, lenders are increasing rates to try and increase their profit levels on mortgages as credit elsewhere becomes harder to come by.

Meanwhile the affect of rising interest rates means that less young adults are able to own their homes. In 1993, 60% of 25-29 year-olds owned homes, but now the figure has fallen to 47%. Housing Minister Yvette Cooper said the figures demonstrated the national housing shortage which has pushed up prices. Miss Cooper said: “In the last few weeks and months, we have seen councils in the South-East and Yorkshire oppose proposals for increased housing. Today’s figures show that every region needs more homes and every council needs to do its bit to help future first-time buyers.”

Other critics, however, blame the government for not re-igniting the industry. New building levels are at their lowest since the Second World War, and revenue from stamp duty is at record levels, giving home buyers a major headache when trying to finance a purchase.

Where next for property prices?

Where is the property market going? Are house prices going up, slowing down or falling? There are several surveys each month and the information coming from them often seems to be contradictory.

Recent surveys for August said the following: Halifax has the annual house price inflation at 11.5%; Nationwide’s was 9.6%; Hometrack’s was 5.4%; Rightmove’s rate was 12.8%; and the Land Registry’s was 9.4%. Prefix these with jumping, tumbling, crashing, soaring and easing and it is easy to sensationalise the market’s movements.

Incredibly, average house prices in the UK cover a staggering range from £176,300 to £235,176, and in London the range is from £292,409 to £384,439. So, while some are many months away from a £200,000 average house, others see the £400,000 as ‘just round the corner’ (maybe in both senses!).

Differences occur for a number of reasons. One is the actual point at which a house price is measured. For example, Halifax and Nationwide look at the value of the mortgage they approve for their customers; the Land Registry looks at the actual price paid for a completed deal. Rightmove uses the asking prices of houses on its websites. The figures from Hometrack are based on answers to questions of their surveyors – not on actual prices at all.

It would be logical, therefore to expect Rightmove to see the highest prices, followed by the Land Registry, with Halifax and Nationwide behind. Hometrack’s figures will be more of a forecast than an actual measure. A further problem with the Land Registry figures is that they are published a month behind, so they tend to have an out-dated feel to them.

Most City experts trust the figures from Nationwide and Halifax, with the Land Registry’s figures as back-up.

There are also figures regarding mortgage approvals published by the Bank of England, which give an indication of where house prices will be in around six months’ time. If the number of mortgage approvals falls, then a fall in demand is expected, accompanied by a reduction in house prices.

As ever, the truth will be in between. Regional variations can skew the overall average, but most recent evidence does point to a house price inflation slowdown, but not a crash.

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