It’s not all bad news

April 7th, 2008

Good news for a Monday. The International Monetary Fund, that bastion of global capitalism, has announce that it believes that house prices in the UK are overvalued by approximately thirty percent. It also predicts that in the current global financial climate that could be set to correct itself in what would be termed a house price crash.

The first portents of a collapse may already be here: approvals for new mortgages, an indicator of the strength of the market looking forward, are down 40 per cent on a year ago, and leading lender Nationwide has registered falling prices for five months in a row.

‘There is no doubt this is a very difficult situation,’ said one bank executive. ‘Some borrowers will really feel the pinch, and repossessions will rise, though they are low at the moment. We are already seeing house prices begin to fall across the country.’

Homebuyers who were once swamped with offers of credit are now desperately scrabbling around in the hope of grabbing an affordable deal and anyone not classed as an ultra-safe prospect will face a real struggle.

The mortgage panic was sparked last week by First Direct, owned by the international banking giant HSBC, when it temporarily withdrew its entire range after being deluged by five times the normal level of applications. It said it would continue to offer home loans to existing customers only.

Rival lenders are also scrapping deals, or increasing the cost of their loans. The Co-op, whose rates temporarily became the most attractive on the market last week, withdrew its cheap mortgages following the First Direct announcement. A number of smaller lenders, such as the Bath and the Earl Shilton building societies, had previously withdrawn many of their deals. Others, including the Melton Mowbray, Tipton & Coseley and Newbury building societies, have said they will now lend only to local people. The newly nationalised Northern Rock, which had been gobbling up new business before its collapse, is now actively seeking to shed borrowers.

For would-be first-time buyers, the situation is grim. Even before the mortgage famine struck, the high cost of property had slashed the number of novice homeowners from 970,000 in 1988 to 300,000 last year, and sent the average age of a first-time purchaser up from the mid-twenties to 34. Without a substantial deposit – £34,000 was the average last year before the market seized up – aspiring first-timers have been frozen out.

There is an upside to this, however. Those people ‘stuck’ in rented property may find that for the next few years they are much better off than their friends who have stretched themselves beyond their limits in a rush to get on the property ladder. Similarly, a house price ‘correction’ would ease the pressure on those same first time buyers who have been under such pressure recently.

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…and yet consumer credit continues to rise

April 4th, 2008

The amount that Britons borrowed through credit cards, overdrafts and loans has soared to the highest level in more than five years. This means two things, one of them a good sign, one of them not. Firstly, if consumers are borrowing then they are still spending, which is good for the economy. However, the higher borrowing also means that cash-strapped consumers are feeling the pinch, but refusing to reign in their spending.

Consumer credit rose to £2.35bn in February, the highest level since October 2002, according to figures released from the Bank of England.

The increase was driven by a £2 billion jump in lending through loans and overdrafts, the biggest increase since the Bank’s figures began in April 1993, while outstanding debt on credit cards increased by £350 million.

At the same time, the Bank’s figures showed that the number of mortgages approved for people buying a home fell by nearly 40 per cent during the past year.

Only 73,000 home loans were approved for people moving house in February, compared with 120,000 in the same month of 2007, making it the second lowest total since July 1995. Mortgage approvals dipped to 72,000 last December.

The latest figures confirmed the slump in activity in the UK property market and reinforced expectations that house prices will cool swiftly over the next year, with some analysts predicting a 5 per cent fall.

House prices have trebled in the last decade. The value of mortgages advanced also remained subdued in February with net lending remaining broadly unchanged at £7.45 billion. That was the second lowest figure since June 2005 and down on both the recent monthly average and the £10.03 billion advanced in February 2007.

A combination of falling house prices and tighter lending criteria by mortgage lenders is now causing potential buyers to sit on their hands.

Howard Archer, chief UK and European Economist at Global Insight, said: ‘The weak mortgage approvals data from the Bank of England confirms that the housing market was already under major pressure from the dangerous combination of stretched affordability and tighter lending conditions even before the recent escalation of the credit crunch.’

Richard Snook, an economist at the centre for economics and business research, said: ‘The number of housing transactions in the UK has taken a substantial hit from the credit crunch as banks have restricted lending. However, the extent to which this will affect house prices is not clear.’

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Baby Boomers face bust at last

April 4th, 2008

The post-war generation known as the baby boomers are beginning to face financial pressures just before they retire, for many the first they will have known in their lives.

This generation of people, now reaching their 60s, have had all the luck: rising house prices, free NHS medical care, cheap energy, final salary pensions (gold-plated and index-linked in the public sector), and free higher education.

However, a new report from Help The Aged and Barclays, with research by Bristol University’s Personal Finance Research Centre, says money worries are forcing many to delay retirement.

New retirees, it says, often face ‘the double whammy of living on a fixed income while managing existing credit commitments,’ because a quarter of all people approaching pension age have outstanding consumer credit commitments.

Half of households headed by someone in their 50s are still repaying a mortgage, as is one in eight over-60s. The picture on personal loans is worse. Credit users in their late 50s and early 60s owe, on average, at least four times as much in unsecured credit as their counterparts did a decade ago, says the report.

The report confirms a squeeze on older households which has intensified in recent months. The 65-74 and 75-plus age groups are seen by Alliance Trust as hardest hit by rising food, petrol and energy costs, and soaring council tax bills. It also throws a fresh light on the question of equity release, to unlock £1.37 trillion which over-60s have locked up in bricks and mortar.

Many financial advisers say equity release is a bid for security which some later regret. Once homeowners take equity release, it is extremely difficult, probably impossible, to buy another home. Some will see most of the equity in their home wiped out. The earlier you use equity release, the heavier the impact on your finances.

Leading providers of equity release plans including Prudential, Norwich Union, Standard Life, Stonehaven and Home & Capital Trust all belong to SHIP (Safe Home Income Plans) which operates a guarantee to ensure equity release cannot generate a debt greater than the value of the home.

Many baby boomers end up feeling that they have no choice but to use ill advised equity release schemes to provide for themselves in their old age. It is a matter for individuals whether or not to use these schemes, but I would advise against them. Just because you are experiencing financial strife for the first time in a long life does not mean you should start making bad decisions at the same time.

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