With a Huff and a Puff, They’ll Blow Your House Down
Over the last decade, the housing boom has been the lead driver of the UK’s economic growth. At the start of 1996 when the housing recovery began to take shape, the average house was valued at £62,453. Today, the national average is £210,578; an extraordinary increase of 237% in eleven years.
But the market is quickly heading towards a reversal of fortune. Rising interest rates, consumer indebtedness, and the global credit squeeze are all working against the property boom. And what’s more, the Government has recently enforced some impromptu bureaucracies, further adding to the stress of selling up – and putting many sellers off the idea altogether.
Home Information Packs
These new documents, called Home Information Packs (HIPs) were introduced by the Government on 1st August and apply to all houses with four or more bedrooms. Amongst other things, HIPs contain information about how energy efficient a home is on a scale of A-G. Your rating can be improved by installing loft insulation, for instance, thereby saving money on your heating bill.
A HIP is a mandatory requirement when selling your house. It involves giving various details of land searches and title deeds, and the Energy Performance Certificate costs up to £400. Significantly, when the new ruling was applied, the number of four bedroom houses on the market dropped dramatically.
It came as a surprise, then, that the Government extended HIPs to cover three bedroom houses on 10th September. Jeremy Leaf, a spokesman for The Royal Institution of Chartered Surveyors, told The Times: “We find it hard to believe that the Government is pressing ahead with this policy at such short notice without first conducting a proper market-impact study.”
The fear is that there will be a sudden decline in three bedroom homes for sale, further accelerating the property slowdown. HIPs are now compulsory for half of all UK homes, and The Association of HIP Providers is pressing ministers for an October launch for all remaining properties.
The Credit Crackdown
House prices will also be hit by the credit squeeze. The collapse of the subprime industry has left estimated bad debts of £15 billion in the global financial system. That is a major blow and will not go unnoticed.
In fact, the effects have already started to hit the UK with the devastation of Northern Rock. Since the building society relies on inter-bank lending to sustain its loans business, it was dangerously exposed to any crackdown in the money markets. Other high street banks will not suffer in the same way, although they are all acutely aware of the bad debt overhang.
Debt has to be well managed. If a bank lends you money, it has to know that you will somehow be able to repay it. You must be able to pay back the loan in full (with interest on top) or have assets of equivalent value that may be seized should you default.
So what happens when you buy a £200,000 house with the bank’s money, but during a property crash it’s devalued to £160,000?
That is what is happening in the US, and when homeowners started defaulting on their negative equity loans, someone was left short-changed. The value that everyone thought was locked into their house simply disappeared. However, it was not the banks that were left footing the bill – it was the poor old private investors, who put their money into AAA rated bank loans.
This has caused a real shake up of the industry; so it’s not surprising that mainstream banks like HSBC and Barclays are slashing credit card limits. Mortgage lenders are also reviewing their criteria and becoming increasingly stringent when issuing new loans. It’s not just those with poor credit histories who are struggling – now anyone with the smallest blemish on their record will be considered higher risk.
Meanwhile, wholesale lending rates (the interest rates between institutions) have shot up. That’s bad news for landlords since many buy-to-let mortgages are based on wholesale rates, forcing landlords into unprofitable contracts.
There was perhaps one reason to be cheerful this month: the Bank of England kept interest rates on hold. A further rise would have added salt to the wounds of typical mortgage payers. Because of rising rates, the annual interest payment on a £150,000 mortgage has risen by £1,450 in the last year alone.
Market commentators now believe interest rates have peaked in the current cycle, while the Bank is adopting a wait-and-see attitude towards the credit crunch.
In the US – which is suffering a housing slide and a wider economic recession – the Federal Reserve recently slashed interest rates by 0.5% in just one session. Likewise, there are calls for the Bank of England to reduce its rates to stem an economic slowdown next year.