All is okay with UK house prices part two

Reply Subscribe

Thread Tools

Search this Thread

09 November 2006, 11:23 AM

GOLDMAN 555

Scooby Regular

Thread Starter

Join Date: Aug 2005

Location: Home of Sky cop shows SLOUGH

Posts: 331

Likes: 0

Received 0 Likes on 0 Posts

All is okay with UK house prices part two

On Monday we had the 5X salary mortgage on Tuesday we had the 125% mortgage and on Wednesday we have the 52 year mortgage.

The shadow MPC, which meets ahead of the real thing, under the auspices of Lombard, also voted for a rate rise this month. But two of its members actually voted for a half-point rise, which shows just how concerned some experts are about inflationary pressures.
And The Times’s own panel has also voted for a quarter point hike. Key concerns include the sharp rise in retail price index inflation (RPI), which now stands at 3.6%. RPI tends to be the focus of wage negotiators. If it continues to rise, growing wage inflation could be the result, particularly as pressure mounts in the public sector, where unions are already making threatening noises amid attempts by the Government to keep the coming round of pay rises to below 2%.
Even Roger Bootle, of Capital Economics, who wrote ‘The Death of Inflation’, predicting the current low rate, low inflation environment more than ten years ago, now believes that central banks around the world will have to keep interest rates higher, and for longer than most people expect, if we want to keep inflation down.
Another big worry is the ongoing buoyancy of the housing market. Even the Royal Institution of Chartered Surveyors is backing a rate rise, saying that cheap borrowing has helped to inflate house prices. Of course, the group may simply be accepting that a rise this month is inevitable - better one now than more further down the line. But not all the property pundits can bring themselves to accept the inevitable.
Stuart Law of property investment group Assetz reckons that rising house prices aren’t due to softer interest rates, but are in fact mostly a function of supply and demand. He admonishes Rics, saying: “It would take excessively high levels of interest rates to prevent the supply / demand imbalance from driving up prices.”
This is of course, much more in line with the typical response you’d expect from a business which relies on rising property prices for its profits. But the argument is clearly wrong. The fact that there are now so many weird and not-so-wonderful ways to overstretch yourself to get on the housing ladder shows that easy lending is the reason for the continued boom.
If buyers are unable to get a mortgage, they can’t then afford to buy a property. If enough people stop being able to buy property, then prices have to fall until they reach a point where they are once again affordable.
But lenders have continually relaxed their lending criteria, which has allowed prices to continue to soar. The trouble is, this means that the borrower (and the lender for that matter), is taking on increasing levels of risk.
Website MoneyExpert has reported that a third of lenders now offer mortgages with terms of 40 years or more. Tesco goes all the way to 52 years in some cases. And first-time buyers are among the groups most likely to be targeted.
One of the reasons why people often say buying is better than renting is “because once you’ve paid off the mortgage, it’s yours.” But nowadays, the average first-time buyer is in their thirties. How many of them will live long enough to see the end of a 52-year mortgage? How many will still be able to pay the mortgage bill out of their state pension?
The longer the term, and the larger the amount borrowed relative to income, the riskier the loan becomes,. As Keith Tondeur of Credit Action tells The Times: “Lenders are coming up with more ingenious ways to sustain a house price boom that is not sustainable. The only way to afford property now is to be saddled with debt for life. But if something goes wrong, such as a rise in interest rates or a fall in house prices, then these moves could prove catastrophic.”
And as Nick Gardner of Chase de Vere points out: “Longer terms are a false economy. The monthly savings are relatively small but result in vast sums of extra interest. The message to borrowers is, ‘Don’t do it.’”
As long as lenders keep trying to gather more business by lowering lending standards ever further, the housing bubble will continue to inflate. But at some point - possibly within the next few interest rate rises - those who have already overstretched themselves will start to feel the pain, and the default rate will rise more sharply. And then lenders - just as they did with credit card lending - will see their bad debts soaring, panic, and ditch all their ’innovative’ new products.
And that’s when house prices will have to fall towards more affordable levels.