Buying, selling and letting - February, 2005

Andrew Frankish, managing director of leading independent mortgage broker Mortgage Talk, has hit back at commentators who predicted gloomy times ahead for UK home owners.

‘Commentators who forecasted a housing market crash during 2005 are being needlessly pessimistic,’ states Frankish. ‘Our own figures showed a strong start to the new year, with further improvements in the trend for February. These statistics build on survey results from Nationwide that reveal seasonally adjusted house price rises of 0.5 per cent for last month, translating to a year-on-year rise of 10.2 per cent.’

Frankish sees this as a sign that a ‘reasonable balance’ has returned to a people’s expectations, following three to four years of extremely aggressive growth in the housing market. This also represents a turning away from the boom-and-bust cycle of the past few decades, he says.
‘It was clear that the rises we have experienced over the last few years could not be sustained, and had become self-destructive by precluding first-time buyers from the market,’ adds Frankish.
‘Our view at Mortgage Talk is that mortgage applications during the latter part of 2004 declined at least in part because of the industry’s inability to cope with the onset of the new FSA rules governing the selling of financial services. Out own preliminary statistics show that, even though January was a good month for us, February has proved to be even better.
‘Every indication is that there are still plenty of consumers looking to buy and sell property. Overall, it seems that the Bank of England has done well in manipulating interest rates to manage supply and demand in the housing market, with the indication that those predicting a crash will be proved wrong.’

Saving is back in fashion

Britons are back in the mood for saving, according to new research by Skipton Building Society.
Skipton has revealed with it believes to be a radical shift in attitudes towards finances, with nearly one in two (46 per cent) saving an average of £146 per month – which translates to £2 billion across the UK. Debt could become a thing of the past, finds the building society, as more than a third of people (39 per cent) putting by more money than they did three years ago.
Incentives for saving more include the prospect of working less; 16 per cent of those surveyed are saving for an early retirement, while 13 per cent have put money aside for more time off work, via sabbaticals and other breaks.
Skipton spokesperson Jennifer Holloway says the spend-spend-spend culture has had its day. ‘It’s good to see that thrift is back in fashion. Although the general rule is to aim to save ten per cent of your take-home pay, the main message is that every penny helps, so start saving today.’

New right-to-buy policy

The deputy prime minister, John Prescott, is to revive a plan which gives housing association tenants the chance to partially buy their homes – a policy that met with rejection from his own department less than two years ago on grounds of projected cost. Prescott unveiled a report into the policy, known as ‘social homebuy’ in the House of Commons this week.
Under the newly unveiled five-year housing plan, housing association tenants will be able buy a share in the value of their homes ranging from ten per cent to 50 per cent, effective from April next year.
And in an effort to ensure that social housing supply is protected, the scheme will also give the housing association landlords first refusal on buying back the stake in the home when new equity owners come to move.
Prime minister Tony Blair said the policy would provide ‘a more flexible way of acquiring and then building up equity in the value of homes’.

Market growth predicted

King Sturge Residential has predicted growth of up to three percent in the housing market this year and says that current uncertainty surrounding the residential property market could give way to opportunities in 2005 for both investors and first-time buyer, with knock-on effects for the rest of the market.
At a national press conference earlier this month, partner Avril Butt predicted that the historically low cost of borrowing and positive economic outlook could stimulate the market sufficiently to balance current negative sentiment. She pointed out, however, that some regions are experiencing a correction in price levels and will take longer to recover.

Confidence in the residential property market will be boosted by preparations for the expansion of Self Invested Personal Pension schemes (SIPPs) in April 2006, she said, adding that a further significant boost to confidence could be delivered through an increase in stamp duty thresholds.
‘Consumer demand in 2005 promises to improve,’ said Ms Butt. ‘Borrowing, in particular, remains affordable and developers are already prepared to be more flexible on pricing. Demand is always price-sensitive and could increase in a softening market in London and the South East. There is a growing pent-up demand, with a substantial well of people waiting to buy at the right price. Many of them are now renting, with implications for both the rental and investment markets.’
Ms Butt said the Government has not done enough to help to property market, instead imposing quotas and bureaucracy the housing industry could well do without. ‘The Government
Continues to fiddle at the edges of the property market … Other solutions need to be found.’
Like many in the industry, King Sturge called for an uplift in stamp duty thresholds to better reflect current market realities. This, it says, should stimulate the lower end of the market, in turn providing impetus throughout the market.

How will the housing and mortgage markets fare in 2005? Paula John of Your Mortgage magazine asks a panel of experts.

Interest rates rose in 2004 and house prices are finally slowing after a five-year boom. The boom lasted longer than anyone had predicted – including many of the experts Your Mortgage magazine asked in last year’s predictions. Everyone expected house price inflation to drop to single digits in 2004, with the notable exception of Savills, which forecast growth at ten per cent. The actual figure was in the high teens.

Mortgage lending broke records again in 2004, passing the £300 billion mark for the first time. And interest rates remained low in historic terms, despite four increases through the course of the year.
The experts had predicted that Halifax’s base mortgage rate would be between six per cent and 6.5 per cent by 31 December 2004. In fact the rate ended the year at 6.75, higher than anyone predicted.
This year’s predictions for house price inflation range from minus two per cent to plus eight per cent, proving the outlook in 2005 is unclear. And interest rates are forecast to remain relatively low, with estimates for the Halifax base mortgage rate varying from 6.25 per cent to seven per cent by the end of the year.

So the experts think the market will slow but interest rates will remain around their current levels. But of course, as they have shown in the past, no one has a crystal ball.

Nationwide Building Society
Mortgage rate        7.00%
House price inflation    2.00%

As expected, 2004 was a year of two halves for the housing market, with the significant momentum of late 2003 carrying over to the first half of 2004. However, since the summer, house price growth has been much weaker. The price of the average property is likely to finish 2004 up just shy of 15 per cent.
Although there are risks around the outlook for the housing market, the most likely scenario is that house prices stagnate for a significant time rather than fall. With house prices more than doubling over the last four years, property values in relation to average earnings are now at record highs.
However, mortgage payments as a percentage of take-home pay remain below the peak of the early ‘90s and, in stark contrast to that period, the economy remains broadly supportive to the housing market.

Employment is set to remain high and even if interest rate rise once more in this cycle, the peak will have been low compared with past cycles. Uncertainty remains surrounding the impact of buy-to-let on house prices in general, with demand for buy-to-let set to moderate further during 2005. However, a large-scale sell-of of residential rental property looks unlikely.

Overall we expect annual house price inflation to slow significantly during 2005, with the price of the average UK property rising by two per cent during the year. In contrast to 2004, the pace of house price growth is set to become more uniform across regions with the sharpest slowdown coming in areas that have risen strongly in 2004, such as the North West, Yorkshire & Humberside and Wales.
Philip Williamson, chief executive

Charcol
Mortgage rate        6.25%
House price inflation    4.00%

At the end of 2003 we were in an increasing interest rate environment but today’s situation is very different. The Bank base rate looks relatively stable and house price indices showed small decreases towards the end of 2004.

However, the target the Chancellor actually set the MPC to aim at is the Consumer Price Index (CPI) and this has been bobbing along very close to the bottom of its target range of one to three per cent, with a very real danger it will fall below one per cent early in 2005. For these reasons we believe the next move in Bank base rate will be down, as the MPC will need to apply a modest stimulus to the economy in 2005. The first 0.25 per cent cut could well come in the first half of the year, with a further 0.25 per cent reduction in the second half. Halifax’s variable rate will fall in line with the Bank base rate, thus ending 2005 at 6.25.

The prospect of buy-to-let investors effectively being able to buy property at a 40 per cent discount by investing through their pension fund from April 2006 will be an additional boost to the market towards the end of 2005. House prices will start picking up in the second quarter of 2005 and over the year as a whole our prediction is that they will increase by four per cent.
Ray Boulger, technical manager

NatWest
Mortgage rate        6.79%*
House price inflation    3.00%

The Bank of England left interest rates on hold in December, in the face of weaker than expected GDP growth in Q3, further signs of a slowdown in the housing market and lack of inflationary pressures. We expect interest rates to remain on hold until February, when we expect a further 0.25 per cent rise to five per cent.

However, if GDP growth does not rebound and the housing market slows at a sharper rate than expected, then interest rates may already have peaked.
The housing market has clearly turned, and all market indicators point towards a period of subdued growth. Although some headline figures point to a sharper than expected slowdown, economic fundamentals remain strong, and we are confident that the market will achieve a ‘soft landing’.
Remortgaging will remain strong, supported by discount rates and a rising number of remortgagers. It will still be necessary for lenders to be innovative to help first-time buyers on to the property ladder. The continuing demand for rented property will also support to buy-to-let market, which is likely to remain popular with investors.
*based on NatWest’s standard variable rate
Charles Haresnape, head of mortgage sales and intermediary development

Yorkshire Bank
Mortgage rate        7.00%
House price inflation    8.00%

We see property price inflation falling from around 19 per cent in 2004 (using the Halifax index) to eight per cent year-on-year in 2005, which would be the weakest rate of annual growth since 1999.
We still see a soft landing in the housing market as being the most likely scenario, but it seems that the regional pattern could very significantly, with northern regions cooling after price rises of over 20 per cent this past year, while the South East market starts to strengthen. This will be helped by continued migration to the region, as well as the ongoing recovery in the Greater London economy.
The fact that the Bank of England seems to have stopped increasing rates may make tracker mortgages more attractive for customers in 2005. If the typical mortgage is held for five years, then a tracker would give customers the chance to enjoy the benefits of falling rates. The protection provided by a fixed-rate mortgage may look less attractive should the MPC signal in May 2005 that rates are high enough, and certainly lower than our present projections.
Gary Lumby, head of retail services

Abbey
Mortgage rate        7.00%
House price inflation    2.00%

On current projections for inflation from the Bank of England and latest trends in data, it is possible that Bank base rate could rise by a further 0.25 per cent to reach five per cent during 2005.
The monetary policy committee (MPC) judges all the possible influences on inflation and, with output seen as being close to capacity, it seems a little too early to conclude confidently that Bank base rate has already definitely reached a peak.
If the base rate does peak at five per cent, this will still be a full one per cent below the previous peak at the start of the decade.
There is now emerging evidence that the rate of house price growth is slowing. We expect annual house price growth to slow markedly during 2005 – by the end of the year we predict it to be around two per cent.

In such a slowing price environment it is quite possible that house prices overall will show falls in some months in 2005, and particular features of local housing markets may become more important in determining house price trends. It is not our expectation that there will be widespread house price falls – overall economic performance is strong, with employment high, and we expect that to continue. There is, however, always a risk that prices for any asset will fall and the Bank of England has drawn attention to its view that the risk of house prices falling is now higher than it has been in the past.
Barry Naisbitt, chief economist

Halifax
Mortgage rate        6.25%
House price inflation    -2.00%

The fundamentals supporting the housing market are sound. The economy’s strength, the high level of employment and low unemployment, together with the lowest interest rates since the 1950s, have been key factors behind the exceptional growth in house prices over the last few years.
However, the increased cost of borrowing over the past year, combined with the increasing difficulties that aspiring first-time buyers have faced in getting on to the housing ladder, have combined to put downward pressure on housing demand. This has resulted in a small fall in house prices over the past few months.
Halifax forecasts that house prices in the UK will fall by two per cent in 2005. This slight fall follows nine years of rising house prices when the average home has increased in value by almost £100,000, a 160 per cent rise.
Beyond 2005, we expect the market to record modest price increases; affordability will also improve, especially for first-time buyers, who will return to this market in larger numbers than in recent years.
The housing market is easing from the exceptional growth of the last few years, but it is important to remember that the market is underpinned by very strong fundamentals: low interest rates; high levels of employment; and shortage of housing supply. There is no sign of any significant change to any of these underlying factors. Overall affordability remains good and will improve in 2005. The expected modest reductions in both house prices and interest rates in 2005 are calculated to reduce mortgage payments as a percentage of earnings for new borrowers from its current 19 per cent – in line with the long-term average and well below the peak of 34 per cent in 1990 – to 16 per cent.

Savills Private Finance
Mortgage rate        6.25%
House price inflation    7.00%

I am broadly optimistic about the prospects for the property market next year. I don’t buy into what the doom mongers are saying about there still being a chance of a crash.
Instead, I expect the gradual slowdown in house price growth, which we have been witnessing, to continue. Prices will become more modest but I don’t see them crashing. We have already seen a significant correction, particularly in the prime London market, which has stagnated over the past couple of years. But given that January to March is bonus time for the City banks – and bonuses are likely to be up in 2005 – it’s encouraging for the property market. There is likely to be plenty of competition at the high end of the market, particularly in London, while the gradual slowdown will continue across the rest of the UK.

One feature of 2005 is likely to be the continued absence of first-time buyers, as prices will continue to be beyond most of them, even though they are falling. Lenders and brokers will need to be increasingly innovative with the products they offer to help them on to the property ladder.
Mark Harris, managing director
 
Purely Mortgages
Mortgage rate        6.60%
House price inflation    3.00%

There is an increasing consensus that the MPC may have overshot with the regular increases in Bank base rate seen during 2004.

Housing transactions have already slowed down and evidence is emerging that consumer spending is now back under control. With a strong likelihood that the Government will be re-elected in 2005, the Budget will carry significant increases in the tax burden, whether by stealth or not.
The MPC is now probably anticipating that any further suppression of consumer demand will be taken care of by increases in the personal tax burden. This, combined with the uncertain global economic outlook dominated by the massive funding deficit in America and the increase in oil price, will contain pressure on UK interest rates. I therefore expect to see a small easing in interest rate policy, with Bank base rate ending the year at 4.50 per cent, with the downward adjustment happening in the third quarter. Recent interest cycles have shown lenders widening their margins when rates fall and holding the widened margin when rates increase. With the prospect of few further decreases in rates and the impact of their ever-declining back books I don’t believe the decrease will be passed on in full and so I project the Halifax variable rate will be 6.60 per cent at the end of 2005.
Mark Chilton, managing director