House Prices To Fall In 2008

Houses will lose on average 10% of their current values over the next year, which will be the equivalent of wiping £20,000 off the value of every home in the UK. In total, this will add up to an amazing £400bn being knocked off the value of property in the country.

The figures come from accountants Grant Thornton who they warn that the fall in property values will be another massive blow to UK consumer confidence and could have an impact on the wider economy.

House prices have more than doubled in the last ten years, giving people a sense of wealth and well-being. A spending boom followed keeping retailers happy and boosting UK manufacturing.

A fall in house prices would mean the opposite effect, with homeowners feeling poor and stopping their spending, leading to problems for retailers and manufacturers, and the possibility of job cuts.

The projections were an analysis of the figures based on the ‘best available hard evidence’, according to senior tax partner at Grant Thornton, Maurice Fitzpatrick. He said: “It appears that house prices hit their peak in August. We can expect a fall of 3% by the end of 2007, followed by a further fall of 7% in 2008. This would wipe £400bn off the value of UK residential property or an average of £20,000 per household. A ‘burn off’ of this degree of personal wealth would tend to make people more cautious about borrowing. That would damage any feel-good factor and, potentially, economic growth.”

He also said: “The value of a person’s home is crucial in terms of the psychology of personal and financial well-being. Just as rising property prices promoted a feel-good factor and spending, so falls could have a powerful opposite effect – causing them to tighten their belts and limit spending.”

Capital Economics analysts suggest things could be even worse with house prices falling 5% in 2008 and 8% in 2009, thereby erasing all the gains of the last 18 months. The company has revised its forecast down after previously saying 3% would be lost in each year

Arnold Makes It a Two-horse Race For Rock

Ailing bank Northern Rock has managed to persuade the former boss of Abbey Luqman Arnold to stay in the running to take over the reins at the bank.

It is anticipated that the struggling bank will announce Arnold has having preferred-bidder status alongside Richard Branson’s Virgin, and they will have equal access to the books. Branson had hoped that Virgin would remain the sole preferred bidder.

After a difficult week, it should come as a relief that the takeover of Northern Rock is a two-horse race, and might give a boost to the share price which sunk close to all-time lows on Thursday after the banked admitted that it had been hit for £281m as a result of the global credit crunch.

Previously Arnold had said that he would take himself out of the running unless Rock chairman Bryan Sanderson agreed to complete the deal by Christmas, but Arnold has agreed to continue talking without such reassurance. There are still concerns in the City that any bidder could struggle to raise cash to fund the deal in the current credit climate.

Rock chief executive Adam Applegarth has stepped down ‘with immediate effect’ rather than stay on into the New Year to complete a strategic review.

On Thursday Northern Rock shares closed at 86p – down 13.2p. The bank is to take a £150m impairment charge from its structured investment vehicles (SIVs) and SIV-lites, which have suffered from the US sub-prime crisis. There is also a further £131m impairment from its collateralised debt obligations.

Applegarth has a contract entitling him to six month’s salary, but will get considerably less than that. Nevertheless he could still get £50,000 a month for the next five months.

Sanderson has changed his mind and will reinstate marketing boss Andy Kuipers onto the main board, and will take over as chief executive. Only a few week ago Kuipers was sidelined as Sanderson cleared out the old regime

UK Consumers Refuse To Be Beaten

As news filters through that retailers may have escaped the festive season with reasonable figures and sales have boosted results, it really begs the question: just how are consumers affording to spend so much?

It seems that, as better known providers are tightening their lending criteria, so UK consumers are turning to “sub-prime” lenders.

For example, BrightHouse, a controversial retailer that sells on weekly credit, has seen an 11.5% increase in comparables sales for 2007. With BrightHouse, consumers use a “rent-to-buy” scheme – crucially without any credit checks – but goods such as freezers and TVs could end up costing double what they’d cost in a regular retailer.

The increase in sales at BrightHouse shows how hard-pressed UK shoppers still want to spend money, and determined to get what they want – however much it costs. The “buy now, pay later” attitude refuses to be quashed.

Big-ticket retailers depend on consumer finance to maintain their sales levels, and they have reported a drop-off in acceptance levels, causing buyers to turn to companies like BrightHouse.

Costs of goods at BirghtHouse are on an APR of around 29%, but this rises with service cover – which allows buyers to return hired goods at any time – and nearly all customers take out service cover. A Nintendo Wii could end up costing £519 with service cover over a year, but is advertised in Argos for £294.

Retailers have complained of a drop in trade and point to the reduced acceptance rates for loans, and credit card providers have also tightened their lending criteria. In the past six months there has been an increase in application rejections – numbering 3.27m. Rejections are around 40-50% where they were 33% in 2006.

Consumer finance group GE said: “GE Money regularly reviews its lending and risk policies as part of its standard operating procedure.

Armed Forces To Be Given Housing Assistance

First-time buyers have never had it so tough, but one group of prospective buyers are going to get a helping hand. Serving soldiers and other members of the Armed Forces, together with their families, can apply for a shared equity loan to help them get onto the property ladder.

At current market rates a family on an income of £40,000 would be able to get a regular mortgage of around £160,000, but this would be pushed up to £210,000 under shared equity, so buying power is increased by nearly a third.

The loans are offered under the Government’s HomeBuy scheme for key workers, and are provided by the Department for Communities, in conjunction with four private lenders, and give interest-free repayments of part of the debt.

Housing Minister Yvette Cooper said: “This new support recognises the vital contribution our Armed Forces make to our communities. We want to help more key workers, like service personnel, and other first-time buyers get a foot on the property ladder. That is why we have set out investment of £10.2 billion to provide thousands more affordable and social homes.”

There have been complaints for a long time by service personnel about their accommodation. Barracks have been called cramped and decaying, and top army personnel have called for an improvement.

Conservatives have warned that soldiers would leave the Forces unless the Government made some changes for the better.

Currently some former services personnel end up without housing because they have no proof of a “local connection” in an area, and are not eligible for assistance as a result. In future personnel will be granted a connection with the area where they were stationed or were living when they left the services.

Mrs Cooper added: “It is only right that we provide our servicemen and women with the best possible support as they move back to civilian life. The service our Armed Forces give to their country must not place them at any disadvantage when applying for council housing.

Interest Rates To Fall Further In 2008

Interest rates may come tumbling down in 2008 as the Bank of England admitted that it had been surprised by the scale of the downturn in the housing market, and that there was a risk of a severe reduction in the credit available to families.

The Bank said that it may have to cut interest rates ‘aggressively’ next year in order to avoid a recession in the UK as the economy looks set to continue its downward trend.

The news came from the minutes of the Bank’s Monetary Policy Committee rate setting meeting in early December which cut the rate to 5.5%. The comments will give hope to homeowners who will need to remortgage next year.

Cuts in interest rates may help to avert the forecast by the Royal Institution of Chartered Surveyors that 123 families a day might have their homes repossessed in 2008 – 50% up on this year’s figure, and a throwback to the early days of the 1990s and the recession.

The Bank’s last interest rate cut to 5.5% has not yet been followed by mortgage rate cuts by all providers, and the Financial Services Authority has suggested that lenders hold on to more of their cash, saying their lending practices had been too lax in the past. Even tighter lending criteria will dry up the credit supply for many families, so the pain is not due to ease yet.

Minutes from the MPC meeting said: “The worsening financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity and inflation in the medium term. Signs of slowing growth in the industrial world were already apparent. That suggested a substantial loosening in policy might be needed.”

Some economists are now expecting the Bank to cut back rates to 4% or lower over the next 12 months, and many see next downward move coming as soon as January 10, the date of the Bank’s next rate-setting meeting

Scrooge Banks Delay SVR Rate Cut

There are still many lenders who have their standard variable rate (SVR) under review since the Bank of England cut its base rate last week.

To name and shame the institutions, they include big name such as Alliance & Leicester, Bristol & West, HSBC, Northern Rock, Skipton Building Society and Standard Life. As the “review” their SVRs, they are trying to reduce the impact of the US sub-prime mortgages that have collapsed and left many of them with insufficient cash resources. Some independent financial advisors say the banks are to blame for their own misfortune and should not try to rceover their losses at the expense of the UK homebuyer.

Melanie Bien of mortgage broker Savills Private Finance, said: “Many homebuyers will be left disappointed this Christmas because they will not benefit from the Bank of England rate cut and find some extra money in their pocket to help them get through this expensive time of year. Lenders are looking to retrieve some profit margin so they hit their end of year targets and are reluctant to pass on the full benefit of the rate reduction to borrowers.”

Two of the biggest lenders did cut their SVRs immediately. Halifax cut its rate straight away from 7.75% to 7.5%, and Nationwide cut its SVR from 7.24% to 6.99%.

Nearly half of all lenders have not cut their rate by the 0.25% base rate reduction. Estimates suggest that around £100bn of mortgage debt is subject to 0.25% more interest than it should be, meaning a total of £250m over a year, or around £10m a month, is being paid by homeowners.

Borrowers on SVRs could make significant savings if they transferred to other deals, such as fixed rates or tracker mortgages. However, fixed rates work best when the base rate is going up, and the popular forecast is for the base rate to fall further in 2008.

A rate linked to the Bank’s base rate may deliver the best deal for the next couple of years, such as a tracker. A tracker mortgage linked to the Bank of England base rate moves up or down with Bank rate. These could deliver good value in the nest 12 months

Mortgage Holders Are Struggling To Keep Up

A survey for the Bank of England has revealed disturbing facts about UK mortgage holders. Nearly a million families are struggling to pay off their mortgages, and another 1.8 million say that they have had repayment problems ‘at least occasionally’.

In 2007 the annual mortgage payments of UK homeowners have gone up by a total of £3.6bn as interest rates have soared. The problems with payments are expected to get worse as the credit crunch means banks have to tighten their lending criteria as they seek to repair their own battered finances.

More households are likely to be tipped into insolvency in the next two years say experts, and the housing market and wider economy will suffer a sharp downturn.

The survey comes as part of the Bank’s Quarterly Bulletin, and shows that many families are cutting spending or borrowing more money from other sources. Nearly half of families with higher repayments are being forced to cut spending on every day items.

The poll was carried out in September, and the global financial crisis has worsened considerably since then. The survey shows how finances of families are now vulnerable after a decade of easy borrowing which has taken personal debt over £1.3 trillion.

In the last few months fixed rate borrowers have seen their annual mortgage repayments go up by an average of £708 as they have come off good fixed rate deals, and more than a million more borrowers are facing the same problem in 2008.

The Bank report said: “Higher house prices have meant that new entrants to the housing market have had to borrow larger amounts to finance house purchase than did their predecessors. The increase in mortgage repayments represents a loss in disposable income that requires some adjustment to household budgets.”

People who rent are having more trouble repaying their debts than those who have mortgages, because they are often on lower incomes, according to the survey. Around 28% of renters said they had trouble paying their debts ‘at least occasionally’.

Chief economic adviser Ian McCafferty said: “It’s fair to say that the direction of the economy is clear into 2008 - the economy will slow quite markedly. While the slowdown may appear dramatic set against this year’s strong growth, the fundamentals of our economy remain sound and talk of a full-blown recession is overstated.

House Prices Down With HIP effect

The latest news on house prices has them falling at 3.2%. The property website Rightmove’s figures showed that house prices fell by an average of £7,590 to come down to £232,396.

Along with the regular trend of a slowdown in December the ‘HIP effect’ is being blamed as sellers appeared to be rushing to put their properties on the market to beat the Home Information Pack deadline.

Home Information Packs were extended to encompass all properties on 14 December, following a phased introduction for larger properties since August. The extension for HIPs to one and two bedroom properties last week appeared to add an extra 1.1% to the fall in house prices and added ‘further confusion at a sensitive time for the property market,’ said Rightmove. HIPs were introduced for four-bedroom-plus and three-bedroom homes on 1 August and 10 September respectively. A Pack costs in the region of £300 to £500 for a one or two bedroom property.

There was a surge of one and two bedroom properties onto the market in London where the fall was higher than elsewhere. In the capital property prices fell back by 6.8%, and Rightmove suggested that this figures would have been only 4.5% without the effects of the HIP deadline. Data from the property website group showed that 38% of fresh sales in the week starting 2 December last year were two bedroom properties or smaller, but in the same week this year that figure was much higher at 48%

Miles Shipside of Rightmove, said: “New listings are low at this time of year so the artificial wave of ‘low-end sellers’ has really distorted the average prices of properties new to the market.” He added that house sales were entering ‘uncharted territory’ with the credit crunch showing no signs of abating, and said, “The market is likely to see a period of stagnation next year rather than a crash.

Prospect Of Further Interest Cuts Pushes Pound Down

More interest rate cuts in 2008 look more and more likely after the Building Societies Association (BSA) said that mortgage lending fell in November as house buyers retreated from flattening house prices and the higher costs of taking out a mortgage. The Council of Mortgage lenders (CML) said that lending was 8% less than in the same month last year - £30.7bn compared with £33.2bn.

The BSA also reported an increase in savings at building societies as savers carried on moving their money away from Northern Rock. Around half of the £24bn held with Northern Rock before its problems came to light has now been withdrawn.

BSA members lent £4.1bn for home loans in November, down from £4.6bn I November 2006. Director general Adrian Coles said: “This cooling of activity since 2006 is likely to be a consequence of higher bank rates and a tightening of credit conditions more generally.”

The base rate went up from 4.5% in August 2006 to 5.75% in July 2007, but was reduced to 5.5% this month as the Bank of England feared that the economy was lurching downwards too fast. The Bank admitted that it was surprised by the severity in the downturn in the housing market.

Economists now expect at least three further rate cuts in 2008, which would take the rate down to 4.75%, and the first cut could come as early as January. The pound fell in the aftermath of the rate cut, and fell below $2 for the first time since September.

BSA members took £2.3bn in savings in November – three time higher than in November 2006. Figures were £3bn for October and £2.8bn for September. Coles said: “In the last three months, building societies have received new deposits of roughly the same value as they received in the entire 12 months of 2006.

House Prices To Come Down In 2008

What is the outlook for property prices in 2008?

The second half of 2007 has seen a slow down in the housing market, and most experts are forecasting a stagnation of even a fall in house prices in 2008. Yet, despite all the signs, the Bank of England said it had been surprised by the sharpness of the downturn and immediately lowered interest rates in early December. Will that help?

Chief economist at Morgan Stanley, David Miles, warns that house prices may drop by 10% in 2008. He says that much of the rise in house prices has been a self-fulfilling prophecy – they’ve gone up because they were expected to go up – but now a fall is coming, and it’s not necessarily a bad thing, as affordability has meant most people now struggle to get into the market.

Capital Economics are forecasting a 3% fall in 2008. The housing downturn has been caused by the five interest rate rises and the fact that property has become too expensive.

The International Monetary Fund even felt compelled to comment, saying that UK house prices were 40% overvalued, leaving them – along with Spain and Ireland – vulnerable to market volatility. House prices in the UK now stand at nine times average earnings – much higher than the five times in 2001.

The HSBC tends to agree with the IMF, reckoning UK house prices to be overvalued by 30%, driven by people buying in the hope of continuing house price inflation.

Falls in house prices are likely to vary by region. London has seen sustained increases for a long period, but could now be in for a fall. Spread betting in the City suggests that a 15% fall in London prices is possible in 2008. Current London average price is £320,000, while the national average is around £195,000, by Halifax figures.

While forecasters and punters are not always right, it is hard to see anything but a ‘correction’ in 2008. Pockets of regional rises may occur, but the overall picture has to be one of a fall in house prices, probably between 3% and 5% across the country

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