Housing slowdown not over yet
Mortgage lending hit record lows in August official figures show today, suggesting the market slowdown still has some way to go.
The Bank of England reports that the number of mortgages approved by lenders fell from 33,000 in July to 32,000 in August - 75% below their peak. According to Capital Economics, this level of lending suggests house prices will fall by 25% a year as a lack of credit freezes the market.
However, it is also likely that the low level of activity in August partly reflects uncertainty about stamp duty, with potential buyers waiting to see what action the government would take. In September, Gordon Brown announced that the nil-band for stamp duty would be increased from £125,000 to £175,000 for one year only.
Paul Dales, economist at Capital Economics, says: “It is possible that the suspension of stamp duty for properties costing less than £175,000 at the start of September will support approvals in the coming months. But we are not convinced. Why would households borrow to buy an asset that might soon be falling in price by around 25% per year?”
Andrew Gall, business economist at the Building Society Association, agrees that a lack of consumer confidence about the future in house prices is a big factor in the slowdown of mortgage lending.
"[Our survey shows] more than half of people consider the prospect of future falls in house prices a barrier to house purchase, it is hardly surprising that demand for mortgages is so low," he explains.
The latest house price index from Hometrack, a property valuation firm, shows that prices have fallen by 1% during September, the 12th consecutive decline in prices. This means the average property is worth 6.2% less that it was 12 months ago.
Richard Donnell, director of research at Hometrack, says: "The number of homes set to change hands in 2008 is likely to fall to a level not seen since the 1960s. Weak demand continues to put a downward pressure on house prices and looking ahead it is very hard to identify the mechanisms by which the current cycle of weak confidence, declining sales volumes and falling prices can be reversed in the near future."
The credit crunch in America and resultant banking crisis in the UK has hit all British banks, but few harder than Bradford & Bingley with its high exposure to 'risky' buy-to-let mortgages and reliance on the money markets for funding.
As a result its profits took nearly a 50% hit in the first six months of this year. And unlike rivals such as Alliance & Leicester, Bradford & Bingley has been unable to find a larger institution to offer it a lifeline.
The future of the mortgage market continues to look grim, with little confidence about the future. A report by a mortgage trade body, the Association of Mortgage Intermediaries (AMI), predicts that mortgage lending for the whole of 2008 will be around £55 billion – half the 2007 level – and is not likely to increase in 2009.
Chris Cummings, director general of AMI, says: “The impact of the credit crunch is likely to be felt much longer and deeper than was expected 12 months ago."
Mortgage rates look set to soar again after banking giant HSBC announced it is hiking its fixed-rate mortgages from 5.97% to 6.27%.
The move by the bank, which also announced it is cutting 1,100 jobs worldwide in response to the banking crisis, follows Yorkshire Building Society upping its fixed-rate mortgage costs, as well as Woolwich and First Direct also increasing rates.
In recent months the cost of mortgages has fallen, in response to cheaper funding. Banks largely rely on money from other institutions to fund their mortgage operations, which is normally priced using either swap or Libor exchange rates.
However, the banking crisis – which resulted in HBOS being bought-out by Lloyds TSB and the US government planning a $700 million rescue package – has caused both swap rates and Libor to rise again.
A spokesman at HSBC says: "With swaps spiking over the last week by 40 basis points [0.4%] we have tried to maintain choice in the market, but also not reducing LTVs [the ration of the loan and the value of the property].”
According to Katie Tucker, technical manager at mortgage broker Mortgageforce, the swap rates (which are used to price fixed-rate mortgages) have jumped from 5.18% to 5.58% in just one week, while Libor (which is used for variable rate mortgages) has rocketed from 5.71% to 6.06%.
Tucker says: “Low rate mortgage choices were really looking bright before the drama last week, and the good news is many lenders still have money left on the rates they priced before funding shot up.
“However, this sharp hike will force lenders to re-price their new deals higher when these ones run out, to make up for the extra cost.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.