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Steve Parlett
Director - Thirsk/Morpeth Offices
Sub prime markets, global credit crunches and a
1% fall in monthly property sales figures; what
does this mean to every Englishman and his
castle. More specifically what does it mean for
those owning, buying or selling such a castle.
I hope the following gives an insight into the
issues that affect all property owners and would
be property owners.
Credit availability
As has been reported vigorously for the past
couple of months the present market conditions
have been caused by the reducing credit
available from Lending Institutions. Banks over
exposed in insecure overseas markets have seen
cash resources run dry. The net result is less
money available for you and I to borrow.
Loan terms
As with any business that has just made a loss
or seen profit fall the next course of action is
to clawback some of the losses. Those
institutions in a position to continue to make
capital available are doing their utmost to
ensure that all loans are as secure as they can
be by ensuring they do not exceed 90% or less of
the property value. Large deposits or large
equity valuations are more attractive
propositions. There is also clear evidence that
mortgage rates are now increasing faster than
the Bank of England rate as lenders take
advantage of shortages of available credit to
push up their margins.
Falling sales figures
The RICS (Royal Institution of Chartered
Surveyors), reported that the value of annual
High Street sales fell by 1.6% in March and 1.5%
in April. At first glance a 1.5% reduction in a
house valuation may not be the end of the world.
However, this tells only part of the story,
would most of us even notice a 1.5% reduction in
property values? A more relevant figure is that
the volume of sales recorded by the Land
Registry in February was 40% down on the volume
recorded a year earlier and it is my view that
this figure is going to worsen in the coming
months. The single conclusion is that there are
only half the buyers out there compared to this
time last year. With twice the options available
a purchaser will naturally drive the price down.
First time buyers
With twice as much property available and prices
falling things are on the face of it looking
rosier for first time buyers. However, this is
probably only the case if you have saved up or
are saving up a good deposit and currently live
with your parents. With the rental market still
strong most tenants will probably pay a mortgage
sized rent and struggle to save a deposit. For
those who have saved a deposit it is probably a
false economy to continue to rent while values
trickle down. A rent of £6000 per year will
almost certainly outstrip the reducing value of
a £120k property.
Buying to let
A phenomenon of the last decade has been
investors purchasing property to rent out.
This has produced a regular monthly income |
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and more often than not capital growth. Yields
have always been poor but virtually guaranteed
capital growth often in excess of 20% a year has
led to a strong market. However potential
capital losses and continuing poor returns have
led to this market in most parts of the country
disappearing. Changes to CGT (Capital Gains Tax)
rules have also accelerated the volume of buy to
let property entering the market.
House Builders
The last 12 months has seen a dramatic change in
the house building programmes of many of our
largest developers. At their AGM in April
Persimmon Homes announced that they would not be
opening up any new developments in the
foreseeable future. All developers in the north
east of England are now slowing production in
all but the most popular locations. At least 30%
of sites are now purely building houses to
order. Even after these measures on many
developments there is still a large stock of
houses ready for occupation with incentives to
buy.
Estate Agents
In May it was widely reported that of 13,000
Estate Agency branches nationally in the first
quarter of this year the UK had lost 1,000. With
the number of Estate Agents on the High Street
increasing by at least 50% over the last 10
years competition for instructions had led to
commissions falling below 1%. So with decreased
commissions and falling numbers of sales lean
times are ahead and only the best will survive
unscathed.
Later in 2008
The profession is not yet lined up on the cliff
edge and there will undoubtedly be good to come
out of the current climate.
a) It is unlikely the crash of the early
nineties will be repeated, two important
differences remain. Firstly, we still have very
low unemployment and historically we still have
reasonable borrowing rates which should keep
down repossession numbers. However this is very
much dependant on unemployment remaining low.
b) With house prices rising far faster than
incomes over the last 10 years a correction in
sales prices was inevitable, loans hugely in
excess of incomes hideously exposes borrowers to
any small uplift in interest rates. A 5%
devaluation across the market would do the vast
majority of the market no harm.
c) Insistence on borrowers having equity in
their property can only be hugely stabilising on
the whole market.
d) The cull of Estate Agents can only lead to
improvements in the quality of service provided
to buyers and sellers alike with clients being
the ultimate winner.
e) With a little luck the Government will look
at abolishing the H.I.P. What this has to play
in improving the conveyancing process is beyond
me.
My own view is that although there is going to
be a house price fall over the next year or so
that could exceed 10% and force people who
bought recently with no deposit into negative
equity, the housing market will eventually come
back stronger for the correction.
The greatest cause for concern would be if the
economy generally were to move into decline. If
inflation was to rise and unemployment was to
increase this would leave less money in the
economy to pay house loans and put further
downward pressure on the market.
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