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Boom or bust?

  • 17/09/2001
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In the light of global economic slowdown is the housing market holding its own, or should we be bracing ourselves for an almighty crash?

It seems that everyone has an opinion on the state of the UK housing market and high street lenders, industry bodies and specialist housing organisations are fighting it out for the column inches that report the findings of their own surveys. But are we becoming slightly obsessed, or do economic indicators suggest we have reason to be concerned?

The economic slowdown in the US is already impacting on the UK economy. Across the Atlantic, the US Federal Reserve has been trying to steer away from a recession and has reduced its key interest rate for the seventh time to 3.5% ‘ its lowest in seven years. Despite this, business profits and capital spending in the US continue to weaken, which has had a knock-on effect in the UK.

Fears of recession and threats of a house price downturn have been rumbling around since early this year, yet we are still awaiting solid evidence. It seems that month in, month out, prices keep climbing and that recession and an industry decline is just talk. However, in sectors such as manufacturing, the indicators of problems are starting to become more real, with the past two quarters having produced negative figures.

From January to July this year, house prices rose by 10.9%. In fact, certain places in the south of the country have experienced rises of more than 30% and in parts of London, some homeowners who bought property three years ago have seen their investment double.

Fears of recession have so far been offset against employment growth, low mortgage rates and stable inflation ‘ all keeping the housing market afloat.

Looking back at the most recent and memorable recession, between 1984 and 1989, house prices soared by 116%. The Government offered generous tax relief on mortgages and people were borrowing more than five times their income. With the deregulation of the housing market, lending increased by 425%. In 1988, the Government announced the abolition of double Miras relief on mortgage interest. People rushed to buy, pushing up prices by 35% in one year and by 1989, people were spending more than 40% of their income on mortgages, with first-time buyers increasing this figure to 60%. Inflation was at 8.3% in July 1989 (compared with 1.9% for the same period this year). Once the recession struck, thousands were made redundant and interest rates rose to 15%.

But the story today is not as extreme. Prices have been rising, but steadily, up 45% over the last five years. Interest rates are low and inflation is stable. There is a large and growing number of people with mortgages that have been paid off and on average a more moderate 30% of household income is spent on the mortgage. Although the property market is sensitive to the wider economic fluctuations, it does not mean this more mature housing market will experience a severe reaction, similar to that of the early 90s, as we start to experience an economic downturn.

What goes around…

So, is it just a matter of the ‘housing market cycle’? In both the 70s and the late 80s, the house price spurt was followed by a collapse, as the economy forced an inevitable slowdown.

The Nationwide Building Society reached the front pages of the national press in early August with stark warnings such as ‘House prices out of control.’ The Nationwide stated that prices are climbing at an ‘unsustainable’ rate with prices now five times the average household income ‘ a level last seen just before the 1989 crash. The economy is also weakening and it seems to be this factor which is causing the greatest concern.

Consumer confidence still seems relatively high, mainly due to low interest rates. However, the expectations are that this is about to change ‘ especially in light of the recent spate of large-scale job loss announcements.

One of the industry’s biggest concerns is current homeowners over- stretching themselves. According to Land Registry figures, the average house price in early August was £110,570 with average earnings sitting at £22,000.

But these indicators have not appeared from nowhere ‘ the warning signals have been around for sometime. According to economists, the stock market usually displays the first signs of trouble and the main stock market indexes in both the UK and the US were showing warning signs as early as last autumn. As these concerns have gathered speed over the past nine months, the FTSE 100 Index is now 20% off its peak and the technology indices are more than 60% off.

This fall in share prices is often an indicator of future business collapse, followed closely by a fall in house prices. In fact, many would argue, house prices are one of the last indicators of a recession ‘ hence the reason we are still in a period of debate over this matter as house prices continue to rise and consumer confidence remains buoyant.

Buy-to-let opportunities

One area that seems to still be favouring the current economic climate is the buy-to-let sector, especially as people turn from the falling stock market prices and look instead to bricks and mortar as an investment opportunity.

The Council of Mortgage Lenders (CML) has said that mortgage arrears and repossessions could now be at their lowest point, with expectations that they will start to rise due to the uncertain economic future. The low interest rates (the lowest in nearly 40 years) have acted as a type of safety barrier for those homeowners who may be struggling to meet their current mortgage payments.

But over the coming months, as the prospect of a rise in unemployment becomes more real, there is a fear that more people will find themselves unable to pay their mortgage. Lenders repossessed 10,460 homes during the first half of 2001 ‘ 15% lower than the same period last year. Arrears are also down, with the number of borrowers with six to 12 months’ arrears falling to 43,540, around 9% lower than the first and second halves of last year.

Maybe because the last recession is still fresh in our minds we are starting to second guess the next possible crash ‘ especially as some of the worst-hit homeowners are only just beginning to recover from the last round of negative equity.

But from all the speculation and second guessing going on, it is hard, if not impossible, to state exactly what will happen, especially as history is not always an indication of what will happen in the future. However, it seems sensible to suggest that house prices will have to slow down ‘ they simply cannot continue on this upward curve at the same rate. In fact, if you look at the latest reports from respected commentators such as the CML and the Royal Institute of Chartered Surveyors, house prices are finally at their peak (in late August).

The picture today is a different one to that of 1989: low inflation, low interest rates and affordable repayments mean the market is more stable and ready to cope with a slowdown. Therefore, it is unlikely the word ‘crash’ or ‘recession’ will be used over the coming months in the same context as in 1989 ‘ the ride should be a lot smoother and a lot less dramatic.


Industry experts offer their views on the outlook for house prices

Mark Chilton, managing director of Savills Private Finance

‘Over the next 12 months there is going to be a slowdown in growth compared to last year, although there will still be an upwards trend. The disparity between the regions, which people incorrectly refer to as the North-South divide, will continue. In reality London and the South-East will outperform the rest of the country, but there will also be other hotspots doing well around the country. It is simple supply and demand economics. In London there are not enough properties and there is an oversupply in other areas, resulting in a struggle to maintain the pace of growth.’

Ian Davies, regional business director at Bradford & Bingley Estate Agents

‘We will see continuing levels of activity in the property market. Supply and demand is the key factor. The demand is still there but the supply is still squeezed. However, buyers are not going to be paying any price for property. They are already looking more before buying and so the rate of increase will tail off, but we will probably see a plateauing rather than a slowdown.’

Peter Walsh, director & general manager at Chelsea Building Society

‘We envisage a slowdown in house purchase activity during 2002 with annual house price inflation at much lower levels than in 2001 ‘ probably at 5% or less. Although we expect interest rates to remain close to current levels throughout next year, it is likely that the UK will follow the USA and Europe in experiencing lower economic growth in 2002. As a consequence unemployment may rise and for those in work, pay settlements and bonuses may be lower. As a result, consumer confidence will be hit, leading to less enthusiasm on the part of the individual for higher levels of mortgage debt to finance house purchase. Lower activity levels will in turn lead to lower price inflation but may fuel increased competition in the re-mortgage market as lenders try to compensate for lower business levels.’

Steve Cowdry, spokesman for Nationwide Building Society

‘We are seeing an annual change of 12%, but we do not think this is sustainable. We are predicting a slowdown in house prices next year, although there will still be growth. We have revised our prediction for the year up from 7% to 11%, which is a slight slowdown. And although we have not predicted how house prices will grow next year we cannot foresee them falling.’


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