How long can the housing market avoid a crash?
Wednesday, 30 June 2010
A potentially lethal combination of stagnant living standards and declining mortgage approvals is threatening to send the housing market into a precipitous slump.
In separate warnings yesterday, it emerged that British consumers face a four-year wait for an improvement in their living standards, while a "double dip" recession in the housing market is now "more likely than not", according to City economists.
Bank of England data released yesterday suggests that the revival in property sales seen during the second half of last year has gone firmly into reverse, with every indication that prices will fall by next year, as lending remains so sluggish.
The Bank reported that mortgage approvals by banks and building societies are running at about 50,000 a month – half pre-crisis levels, and still lower than they were during the early 1990s housing downturn. The news comes as Hay Group, a leading business consultancy, predicted stagnant living standards for the next four years – meaning families will find it harder to service existing home loans, especially if interest rates start to rise next year.
Steve Paola, a spokesman for Hay Group, said: "After a decade of real pay boom, recession and continuing uncertainty are having a negative impact on real pay for the UK workforce. It may be a number of years before we see living standards rising at pre-crisis levels."
The run-up to the toughest Budget since the Second World War, the Greek and eurozone crises and general nervousness in financial markets also seem to be undermining consumer confidence, essential to a more buoyant housing scene and the wider recovery. The FTSE-100 index of leading shares fell to a nine-month low yesterday, while the European Union's barometer of consumer sentiment in the UK fell for the fourth month in a row, to a 10-month low in May.
In the longer term, tax rises and minimal pay awards also seem certain to restrain the ability of consumers to service large mortgage debts, even when they can persuade banks and building societies to advance a home loan. Continuing fragility in the financial system means a continuing shortage of mortgages, especially for first-time buyers: Lenders routinely require deposits of £33,000 now, against £13,000 in the boom. Some 85 per cent of first-time buyers rely on parental help.
On Monday, the Land Registry revealed that house prices in England and Wales fell by 0.2 per cent between April and May; the general trends in other house price indices have also been slowing, suggesting that some further correction in house prices will be needed to restore the historical relationship between mortgage lending and house prices, given that there seems little chance of a radical improvement in the supply of mortgages from cash-strapped banks and building societies. Recent Royal Institute of Chartered Surveyors surveys have pointed to an increase in sale instructions in the past few months; the stamp duty holiday on properties costing less than £250,000 announced in Alistair Darling's last Budget in March appears to have had little impact.
Paul Diggle, property economist at Capital Economics, said yesterday that a double dip for house prices was "more likely than not" and predicted a 5 per cent decline over the course of this year: "The longer that mortgage lending remains soft the more likely it is that last year's house price gains will be reversed."
The unusual and unexpected strength in house prices last year – up by 6 per cent in 2009 – was put down by those in the market to a "shortage of supply". That, in turn, seems to have been because of an unwillingness on the part of many lenders to foreclose on homeowners in difficulties. Instead, and to avoid adding more write-offs to balance sheets already soaked in red ink, the banks and building societies exercised forbearance to borrowers in trouble, thus preventing a glut of repossessed homes being dumped on to the market, as happened during the 1990s slump, creating a downward spiral.
However, Mr Diggle added "lenders can't carry on doing that forever" and the Bank of England's last Trends in Lending report offered anecdotal evidence that such patience was coming to an end.
The pressure on the banks will be increased in the coming months in any case as about £400bn in official support to them is due to be withdrawn, and banks will have to turn to wholesale money markets to support their lending. This may prove expensive and scarce, as the sovereign debt crisis has heightened nervousness about their health. The European Central Bank will suck €142bn (£115bn) of its lending to the European banks on Thursday.
The extent of the squeeze on British living standards over the next few years was laid bare by the Hay consultancy group yesterday, who predicted that wage rises will fall badly behind inflation for the next four years.
With median salary growth forecast by Hay Group to reach just 2.4 per cent this year, and inflation rising to 5.3 per cent, according to the Retail Price Index (RPI), pay is falling in real terms for the average British worker for the first time in a decade. Although inflation will drop in coming months, the hike in VAT to 20 per cent in January next year will be an obvious hit to the spending power of family budgets. Reductions in tax credits and thresholds, new higher rates of income tax for the better-off and increases in other taxes such as capital gains tax (CGT) and insurance premium tax will wreak further damage. The higher rate of CGT will make the returns from buy-to-let investing even less attractive.
Hay Group predicts the outlook for the next four years is a bleak one, with typical pay increases likely to remain below inflation.
The forecasts represent a sharp break with the "nice decade": Consistent pay increases over the past 10 years amounted to a 37 per cent boost to salaries, or 9.5 per cent after inflation. In the Budget the Chancellor announced a two-year pay freeze for public sector employees earning more than £21,000 a year.
The Bank of England reported that mortgage approvals for house purchases edged back to 49,815 in May after rising modestly to 49,828 in April. May's level was well down from the recent high of 59,338 seen last November and substantially below the average monthly level of 91,300 since 1993. It is also well below the 70,000 to 80,000 level that has in the past been considered consistent with broadly stable house prices.
Estate agent: 'Sales have fallen by between 25 and 30 per cent'
Tim Mullenger, 57. The managing director of Mullenger & Co, an estate agency in Thetford, Norfolk, says the housing market is flat-lining, especially in East Anglia.
"The lack of mortgage finance is the killer for us," he said yesterday. "A lot of retired people have sold their family homes in and around London and want to use the equity to come to our part of Norfolk. But it's just not happening any more because of a lack of sales and mortgage finance in London.
"Sales have dropped off by between 25 and 30 per cent in just 18 months. The market will only start to move when there is an easing of the mortgage market and deposits of about 25 or 30 per cent come down to more like 10 per cent.
"Even with parental help, finding the value of the house to put down as a deposit is difficult for most people. Building societies may be offering lower rates, but they are charging extortionate fees instead.
"Buyers are looking more carefully for houses and you can't blame them at all – it's a buyer's market."
The sellers: 'We can't afford to reduce the price any further'
Helen Middlemast, 45. She has been trying to sell her house in Consett, Co Durham, for well over a year.
"My house has been on and off the market," she said. "I do not know how long it will stay there – how long is a piece of string?
"I first put it up for sale about 18 months ago. I advertised it on the internet, rather than putting it up with an estate agent, because I wanted an instant way of doing it. But I only had one enquiry.
"It is now on sale with an estate agent too but it has still not sold. There was a house across the street that was on the market for three years.
"I bought the place in 2006 for £154,000 and first advertised it at the end of 2008 for £139,950. I am hoping I will get a little bit more – maybe £142,000 – but it is absolutely horrendous that I have lost money and time.
"I cannot afford to reduce the price any further. I do not know if the house will sell any time soon. I am terrified that it will not happen, which is a realistic prospect at the moment."
Kathleen Sadler, 84. Mrs Sadler, and her husband David, 75, have been trying to sell their home for three years.
"We never imagined that it would take so long to sell it," she said. "It is a beautiful cottage with four double bedrooms and a great garden, and it is in a beautiful area with brilliant schools. But not a single person made us an offer.
"We have been forced to bring down our price. Originally, we were trying to sell for £700,000 but have revised that down to £630,000. We also had windows refitted and the property re-wired. You would think such a great house would have sold by now but it hasn't. It is stressful, particularly at our age."
Tom Rowley and Rachel Hovenden
No comments:
Post a Comment