When will house prices bottom?
As more evidence suggests the outlook for the housing market is on the up, the question on everybody's lips is when will house prices bottom.
The past month has seen an increase in "good news" stories regarding the housing market. Most recently, the Council of Mortgage Lenders (CML) has reported a rise in the number of house purchase loans approved in February; there were 24,300 house purchase loans during the month, compared with 23,400 loans in January.
The Royal Institution of Chartered Surveyors (RICS) also reports that buyer interest continued to grow in March, with interest in London picking up sharply. At the same time, the number of sales versus the amount of property on the market rose for the third consecutive month - indicating that some stabilisation in prices may occur later in the year.
Ian Perry, spokesman for RICS, says: "Buyer interest is starting to gain real momentum but will remain frustrated while mortgage finance is scarce. Accessibility for first-time buyers is likely to remain difficult [while lenders continue to demand big deposits]. The market is still in a fragile state but with demand continuing to pick up, there may be more signs of stabilisation in the coming months."
The two new sets of figures follow recent Bank of England stats that revealed mortgage approvals increased from 32,000 to 38,000 in February. At the same time, Nationwide's March house price index indicated a spring bounce - despite values being down 16.5% on an annual basis, prices increased by 0.9% during March and house purchase activity reached its highest level since May 2008.
The bounce in house prices in March saw the price of a typical house increase for the first time since October 2007, rising by 0.9%.
However, Fionnuala Earley, chief economist at Nationwide, said that despite some "moderation" in the rate of house price falls, rising unemployment and the weak economy means this is likely to only be a short-term change in direction of house prices.
So, while most commentators agree that house prices have not yet hit the bottom of the cycle, many are now looking ahead to try and forecast exactly when values will start to rise again.
Outlook for house prices
Despite its figures showing a 4% increase, the CML says that activity remains “very weak”, and is running at around one-third of the average February total of 76,000 loans for house purchase between 2002 and 2007.
The number of remortgages, meanwhile, fell by 20%. This is likely to reflect the number of homeowners unable to find new mortgage deals, possibly because of bad credit histories or low levels of equity, as well as those preferring to stay on their lenders’ standard variable rates.
The CML says tight lending policies remain a barrier to most first-time buyers, with lenders demanding 25% deposits as well as clean credit histories.
However, things could start to look up for homebuyers with small deposits or low levels of equity built up in their previous property, after HSBC launched a new range of mortgages priced at under 5% available up to 90% of a property’s value.
The deals are available to anyone buying a new home, whether they are a first-time buyer or a home mover, with a deposit of at least 10%. Since early 2008, the majority of low-deposit mortgages have come with hefty price-tags, with the more competitive deals restricted to people only looking to borrow 75% or less of a property’s value.
HSBC’s new range breaks with that trend, offering, for example, a two-year fixed-rate loan up to 90% at just 4.99%. However, borrowers must have a paid-for HSBC Plus or Premier current account to qualify for this deal, and will also have to pay a fee of £1,499.
In some cases, borrowers might be better off opting for a higher rate elsewhere and paying a smaller fee.
The new range of mortgages from HSBC are part of the banking giant’s £15 billion pledge to double the amount of mortgage lending it does in 2009, compared to 2007.
Lenders have been hesitant to lend to people with small deposits because of continuing house price falls and the risk of negative equity. However, Joe Garner, group general manager of HSBC's personal financial services, says: “Although house prices have fallen, and continue to fall, they won't fall forever.”
However, the deals are not available to remortgage customers looking to stay in their current homes.
Ray Boulger, senior technical manager at mortgage broker John Charcol, says the past month has seen several pieces of good news for the housing market, such as Nationwide's report of a spring bounce in house prices and an increase in mortgage approvals in February, as revealed in figures from the Bank of England.
“HSBC's attempt to liven up the market for first-time buyers and others with only a 10% deposit with its re-entry into the 90% market gave further hope to borrowers,” he adds.
However, Boulger remains cautious. “Monthly statistics are often volatile and there is still a long way to go before we see a sustained recovery, although there are increasing signs that confidence is returning to the housing market and the overhang of unsold new build flats is steadily being eaten away, albeit only by various forms of aggressive discounting.”
The Centre for Economic Business Research (cebr), an independent business consultancy, is more optimistic, predicting a post-Easter housing market recovery.
Ben Read, economist at cebr, argues that the long Easter weekend has long marked the start of a four-month ‘open season’ in the housing market. While activity this year is unlikely to achieve anywhere near the heights seen during the housing market boom years, Read says there has already been an uplift in new buyer interest in property.
“The reality is that the housing market is on a knife-edge,” he explains. “Despite the banking bail-outs and the onset of quantitative easing bringing slow but steady improvements, credit conditions will remain relatively tough for some time.
"But with the Bank of England base rate at an all-time low, even a relatively modest rise in mortgage approvals to, say, 60,000-70,000 per month may be enough to offset the impact of the meagre wage settlements and rapidly rising unemployment, and could lead to house prices bottoming out by the third quarter of this year.”
Read, however, thinks that mortgage approvals will only hit 50,000 per month by late summer. If this happens, then cebr predicts that house prices only have a further 8% to 10% to fall, bottoming out by the start of 2010.
“It is also highly likely that transactions will start to rise over the coming months as a combination of lower prices, low interest rates and slowly improving credit conditions entice buyers back to the market,” he adds.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.