Severely depressed UK mortgage market heralds price collapse
Posted on 30 November 2010 with 4 comments from readers
UK house prices will drop off the edge of a cliff if interest rates start to go up as a knock on effect of the growing euro zone financial crisis, and the lowest mortgage approvals in 20 years may already herald a price collapse.
After all the UK is suffering from exactly the same problem as the euro zone. Interest rates have been held artificially low for far too long leading to an accumilation of debt, mainly as mortgage debt, as low rates have encouraged buyers to bid house prices up and up, and up again.
Rising interest rates
Now countries like Ireland and Spain have reached the point where lenders require more return to justify the risk of holding their debt in the form of bonds. That means the cost of borrowing has gone up for these countries and that means higher interest rates on mortgages.
It should not take too much imagination to see what this just has to mean for house prices. House prices in Dublin are down by up to 60 per cent.
For as the cost of owning a house goes up then people cannot afford to pay as much as before for homes. House prices have to come down or they stay empty, and even then the owners will face an escalation of mortgage costs if the houses have been bought with finance as most will have been.
In October just 47,185 mortgages were approved for buying a home in the UK, a severely depressed level well below the 70,000 approvals required for a stable market.
Housing markets run on supply and demand and finance. Not enough demand or finance and prices fall. In September the average house price had its biggest fall since records began of almost $10,000, although the market recovered a little in October.
Low mortgage rates
Ironically UK mortgage rates are not yet a problem. Five year fixed rates of 4.86 per cent in October are the lowest in seven years. But mortgage lending conditions are much tighter because banks fear job losses and owners defaulting on loans.
Indeed, perhaps that is why house prices have not fallen further just yet. It is going to take higher global interest rate levels to really bring prices back down to more normal price-to-income rates. But that could be far closer than most borrowers appreciate.
4 Comments posted by readers:
Looking forward to seeing a bit of normality coming back. There may not be much lending or buyers, but vendors are holding out for ever higher prices. The housing market has turned into a high cost, low turnover market where we live.
This scenario requires interest rates to rise. All the indications are that the Bank of England is not going to fight inflation by increasing interest rates. It’s just going to let the inflation happen. Inflation has been over target (>2%) for most of of the last two years but interest rates have not been increased.
Ed Note: the point of the article is that bond market sets interest rates not the BoE and if you look to Ireland you see what lies ahead, i.e. higher rates as bond prices drop.
Hoping that the propaganda men at the BoE can keep mortgage rates a rock bottom levels for years to come with their spin and printing presses is very wishful and foolish thinking.
Yes, if you have a fat deposit and a good credit score you can stil getl a reasonable fixed rate for 5 years ( if you call 20x base rate reasonable!) But the price you’ll pay for your property is still way overinflated…which is why lending is so low as prudent buyers dont want to be fleeced.
A pillar of support for this housing bubble is the reluctance of banks to foreclose…If the banks foreclose on a property in an area and auction it off and take a hit on their valuation…then they are obliged to reduce their valuation of their entire loanbook in that area! (using GAAP). This would affect their liquidity ratios & put their solvency under stress. Hence their reluctance to foreclose unless they are confident of recovering their loan. They have swathes of ‘lameduck’ lenders occupying properties where there are huge arrears but no recovery action is taken while they try and cajole some interest out of them! What happens when rates rise by even a fraction? With the economy contracting spawning job losses? How long can the banks hold out before these loans need to be written off? Not too long is my guess..This is not going to end well…