UK House prices: News & Views

[ecoface]

 

Does anyone have the data on the average loan to values (ie debt to equity) on properties that were sold between 2005-2008 in the UK?

 

Secondly, do you have the quantity in £ of those loans made in the same years?

 

I would like to compare that under-water debt to the commercial property debt (which was about £50 billion last Autumn). The value of outstanding loans in mid 2010 was £215bn, aabout £160 bn of which needs repaying in the next 4 years.

 

I just wonder if we are focussing on a sector (resi) that is the little brother to a bigger problem.

 

According to DTZ:

 

"In 2011, banks will also be looking closely at any loans that are due to mature. The UK has typical loan terms of five years, so many of these maturing loans will be for property purchased in 2006 and 2007 at the height of the market. In many cases, current value will not match that paid for the property."

 

Also, returning to the resi market, if the size of underwater resi loans is say £20bn, and with another 10% falls is say £30 bn, its not that much to worry about if it can be financed at rates below 5%. Does anyone actually have any idea what sort of sums of money these falls are secured on? It's one thing making drammatic comments about price falls, but who gives a monkeys if (in theory) if the LTVs are say an average of 50%.

 

 

 

 

 

[BoldAsBrass]

Unfortunately for you and your argument the base rate does not necessarily determine mortgage rates. And it is these that determine the cost of the credit that flows into the UK property market. Swap rates are rising regardless of an ultra low base rate, and this is having a knock effect on mortgage rates for new lending.

You may remender that the correlation between swap rates and the base rate was also broken after the Lehman crisis, although I can't recall exactly when.

 

See the following article

 

 

 

So. you see that the cost new lending, which is what will ultimately drive the market, is under considerable upward pressure. When new lending is squeezed then this must put downward pressure on prices. Although you don't state it, I think what you mean is that existing mortgage holders on tracker mortgages must, and will be protected at all costs. I disagree. ZIRP served to prevent mass defaults when the financial crisis hit. Continuing it depends on what proportion of the banks total loan book consists of these kind of mortgages. When this proportion falls to a low enough percentage and the bank have enough capital to withstand the commensurate losses, it will be safe to raise rates and let some debtors sink underwater. People should be preparing for this event. Anyway, the rates on new loans is rising.

 

Okay, I'll rephrase - I think we will have low mortgage rates for years. Because higher mortgage rates will cause mass defaults and repossessions and will cause banks to have to revalue the assets against which their loans are secured - causing the bank that raises its mortgage rates too high - to fail.

 

I don't disagree with what you say - it is patently true. I just wouldn't describe rates as being under 'considerable' upward pressure. Some upward pressure - sure - but current SVRs are in the range of 4% to 6%, and I think they'll stay that way for years. Tracker rates may well move back up - but most people on a tracker for the last couple of years who have been paying some daft amount of interest like 2% - were previously paying in the 4% to 6% range and will, presumably, be able to cope if mortgage interest rates return to where they were a few years ago.

[BoldAsBrass]

A strange conclusion to reach - I would have said that there is simply too much money lent into overvalued housing for a collapse not to occur.

 

I don't think it's a strange conclusion. Surely it's the same thing as 'you owe the bank £100, you're at risk ... you owe the bank £1,000,000 - the bank's at risk.

 

Bank lends 50% LTV mortgages into a housing market - the borrowers are at risk.

 

Bank lends 100% LTV mortgage into a housing market - ignoring capital adequacy rules by use of the 'shadow banking system' (packaging debt into MBS's and CDO's etc - effectively lending the same money over and over again) - the bank is at risk. Isn't that why RBS and HBOS had to be bailed out?

[drbubb]

I don't think it's a strange conclusion. Surely it's the same thing as 'you owe the bank £100, you're at risk ... you owe the bank £1,000,000 - the bank's at risk.

 

Bank lends 50% LTV mortgages into a housing market - the borrowers are at risk.

 

Bank lends 100% LTV mortgage into a housing market - ignoring capital adequacy rules by use of the 'shadow banking system' (packaging debt into MBS's and CDO's etc - effectively lending the same money over and over again) - the bank is at risk. Isn't that why RBS and HBOS had to be bailed out?

That is crazy.

The borrower risks the first pound.

And I don't think there are many 100% LTV loans these days

[John Doe]

That is crazy.

The borrower risks the first pound.

And I don't think there are many 100% LTV loans these days

With a 20% fall in house prices, the 80% LTV mortgage the bank just gave out, is now effectively ~100%

[crushtherents]

A strange conclusion to reach - I would have said that there is simply too much money lent into overvalued housing for a collapse not to occur.

 

I agree that base rates will be low for years but why will that make any difference? - just look at Japan and the US. Rates fall along with everything else in a deflation, including rents. (I do however think we will get a blip in rates as the bond market signals no more QE).

crushed rents is my fav subject. its true. too much money was lent and it cant be sustained. credit is contracting fast. M4 has jumped off a cliff

[John Doe]

crushed rents is my fav subject. its true. too much money was lent and it cant be sustained. credit is contracting fast. M4 has jumped off a cliff

Sounds like a recipe for more printing.

[neil324]

Sounds like a recipe for more printing.

 

With inflation where it is, i doubt it will taste nice.

[John Doe]

With inflation where it is, i doubt it will taste nice.

At the moment yes, I would agree, a bit bitter perhaps.

 

But if/when credit really contracts that badly, then it wouldn't be long before inflation droped sharply.

 

Also depends a little on everyone (US EU UK etc) printing together.

[Delboy]

I was having a conversation about LTV and the size of the deposit required recently and explained that the LTV is effectively how much the lenders think at max house prices will fall. It then occurred to me to see when would it have been possible to have brought the house for cash with the deposit i.e. when were house prices 25% of what they were at peak. The answer is a surprising 1987!

[crushtherents]

Sounds like a recipe for more printing.

makes no difference. there not going to give the money to FTBs or BTLs so it wont help house prices go up.

[crushtherents]

I was having a conversation about LTV and the size of the deposit required recently and explained that the LTV is effectively how much the lenders think at max house prices will fall. It then occurred to me to see when would it have been possible to have brought the house for cash with the deposit i.e. when were house prices 25% of what they were at peak. The answer is a surprising 1987!

the lenders are stupid. they didn't see the crash staring at them in 2007 and they cant see it now. 50% minimum crash on the cards

[drbubb]

With a 20% fall in house prices, the 80% LTV mortgage the bank just gave out, is now effectively ~100%

That assumes no repayment has occurred.

If the 80% loan was made in 2007, there should be some repayment by now.

 

In leg two down, the wider market has so far fallen only 5%, so an 80% loan should not yet be in danger.

[drbubb]

...raising interest rates by 1% would cause, over a period of time, mass repossessions - a huge drain on the public purse as people have to be housed - and would expose banks' capital positions and force another bank bail out or a collapse of the banking system.

 

Which is my point - there is simply too much money lent into the housing market now (the boom is 10 years old in my area) for a collapse to be thinkable. Base rates are going to be low for years.

 

The following was posted on my Property Diary:

In my view, some sort of stress from higher rates, or sovereign defaults is IN MY BASE forecast,

and is not an "all bets are off" scenario.

 

I described it recently on PT, in response to this posting:

 

thomas gallagher said:

... if we were to imagine a scenario where all uk home owners owned their property unencumbered then i would be first to agree with your doomsday scenario of possible 50% falls as people would panic sell due to the present bad press. i may be wrong but i just dont think that the massive collapse that you predict is possible unless they all just hand the keys back to the lender and walk away

 

(My response):

Thanks for the comment, Tom.

 

For the record here: I still regard a 50% fall from the Pds, 192,000 top of 2007 (lets say to under Pds.100,000) as possible. But that is not my base forecast. At the moment, I would expect a low to come perhaps 25-30% under the recent high (£169,287 x 30% = £118,500) by 2013 or later as the most likely possibility. But I reserve the right to change my forecast without notice. And I will change it, if the "crash cruise speed" that we are seeing now morphs into something else.

 

I think "the real fun" for cash rich buyers will beginning when the complacency gives way to panic when prices fall below the 2009 lows, possibly later in 2011.

 

And, yes, I will expect many forced sellers, with banks foreclosing on many properties, and even some desperate borrowers walking away from their properties.

 

May I ask why you think the scenario I describe WILL NOT arrive? What can stop it? A steady rate of prices falls will eventually break complacency IMHO.

[John Doe]

That assumes no repayment has occurred.

If the 80% loan was made in 2007, there should be some repayment by now.

 

In leg two down, the wider market has so far fallen only 5%, so an 80% loan should not yet be in danger.

True, but I was referring to loans given out now and a potential 20% drop over a year or so (as happened 2008-2009). Also, 2007 had a lot of IO mortgages given out (and many >>80LTV).

 

People do not tend to sell their house in the UK when there are price falls (unless they are absolutely forced to) as they just do not see them as disposable assets. The vast vast majority see them as homes, which they are paying for over the 25 years of the mortgage. As long as they pay the mortgage, they don't have to sell and after 25 years they own it. That’s the overriding mentality here.

 

They didn’t run for the exits in the 90-96 crash, nor do I believe they will now.

 

A tiny minority look at it purely as an investment.

[neil324]

True, but I was referring to loans given out now and a potential 20% drop over a year or so (as happened 2008-2009). Also, 2007 had a lot of IO mortgages given out (and many >>80LTV).

 

People do not tend to sell their house in the UK when there are price falls (unless they are absolutely forced to) as they just do not see them as disposable assets. The vast vast majority see them as homes, which they are paying for over the 25 years of the mortgage. As long as they pay the mortgage, they don't have to sell and after 25 years they own it. That’s the overriding mentality here.

 

They didn’t run for the exits in the 90-96 crash, nor do I believe they will now.

 

A tiny minority look at it purely as an investment.

 

Plenty of forced sellers though divorce,death,unemployment prices will be set at the margins.

[John Doe]

Plenty of forced sellers though divorce,death,unemployment prices will be set at the margins.

That's true and when volumes are low then it is these sales that can dictate the market and can result in much lower average prices. But, this has been the situation for the last 2-3 years and prices are still relatively flat.

 

Unemployment will surely rise but, once again, the young (non-home/mortgage owners) and poor will bear the brunt of it. Also, over the last couple of the banks have finally realised that it is just not in their interests to force repossessions any more. Unlike previous recessions, everything has/will be done to make this a last resort.

 

E.g. Nice affluent areas have hardly dropped below their 2007 peak, and some are even higher, while poor areas have seen huge % falls.

[drbubb]

updated charts and data

The Second Leg down in the great Bear Market for UK Property ... And the First major drop in London in decades

:

 

The "H&N Index"*

==============

The "H&N Index"* /mom:Hali/Wide :: Greater London-Rightmove

======================== :: ====================

Peak: £169,287 : Apr.10 : Cum'l . :: £421,822 :Apr.10 :

May : £169,183 - 0.06% : -0.06% :: £420,203 :May'10 :

Jun : £168,253 - 0.55% : -0.61% :: £429,597 :June10 : Cum'l.

Jul : £168,839 + 0.35% : -0.26% :: £422,248 - 1.71% : -1.71%

Aug : £167,698 - 0.68% : -0.94% :: £405,058 - 4.07% : -5.71%

Sep : £165,198 - 1.49% : -2.42% :: £399,019 - 1.49% : -7.11%

Oct : £164,828 - 0.02% : -2.63% :: £418,778 + 4.95% : -2.52%

Nov : £163,333 - 0.91% : -3.52% :: £417,279 - 0.36% : -2.87%

Dec : £162,131 - 0.74% : -4.23% :: £408,248 - 2.16% : -4.97%

====

Ave. decline for the UK since Apr'10 Peak is: -0.52%/month.

We have seen "crash cruise speed" since July 2010.

 

*(Average of Halifax & Nationwide, NSA)

More data: http://tinyurl.com/GPC-data

 

No wonder many Landlords are so complacent!

London prices remain stuck near the ceiling.

[geisaver]

At the moment banks seem to be successfully paying 2% to savers and charging borrowers anything between 4% and 20% depending whether they are lending to a mortgagee or a credit card user.

 

Bank margins at the moment are very high. Base rate could go up quite a bit and banks would not have to raise interest rates. Margins would fall - but they've had a couple of years of high margins now to boost their capital positions.

 

i.e. steal money from savers

 

Using interest rates to control inflation caused primarily by rises in global commodity prices will have no affect whatsoever - apart from a minor decrease in commodity prices as the currency rises. (As I said before, saving £10 a week on commodity prices will be more than offset (for most people) by paying £50 a week more on their mortgage ... so - no good to anyone).

 

most people? I know lots of people who want rates to rise. £10 a week on commodity prices and £50 a week on the mortgage? What if you have something to do with a business currently crippled by fuel prices?

 

And, of course, if interest rates rise, relatively speaking, in concert around the world - currency relationships will stay broadly the same. So, the only affect of raising interest rates will be to make sure that people have less money to spend. This will depress demand but it won't depress prices - because the price increases are caused by increases in global commodity prices. So we'll end up buying less stuff but at higher prices - which sounds deflationary in terms of jobs and economic activity but not in terms of prices.

 

lots of countries have higher interest rates than the UK. If interest rates rose like many people I would have more to spend

 

I think we'll have close to zero base rate for years to come. One of the factors in play these days, as opposed to previous recessions / crises - is that all the developed economies are in the same boat.

 

From the Daily Telegraph today:

 

"Three million people would struggle to pay their mortgage if interest rates rose by just 1 per cent, new research has disclosed."

 

So, raising interest rates by 1% would cause, over a period of time, mass repossessions - a huge drain on the public purse as people have to be housed - and would expose banks' capital positions and force another bank bail out or a collapse of the banking system.

 

Which is my point - there is simply too much money lent into the housing market now (the boom is 10 years old in my area) for a collapse to be thinkable. Base rates are going to be low for years.

 

3m? So what? There are more savers than mortgagees and over 60m people. If policy is formed to help a feckless minority you get moral hazard on top of moral hazard. Personally I think all this stuff about people cannot afford mortgages if rates go up is propaganda put about by banks. If people have to pay more on their mortgage they cut down on other spending. Why should they be having meals out on what used to be my savings income?

 

[John Doe]

Why I think it might not be doomsday. (from Br B's property cycles)

 

I think a steady, slow reduction in prices over a few years (10 to 15% maybe) coupled with continued ultra low rates (which is currently a high probability) and inflation bubbling away in the background, would put things on a much more sustainable path.

 

This would still hurt a few, but would not result in the death-cycle of falling prices = bank losses = bank bailouts = more pain for tax payer = more cuts = higher unemployment = more falls = more repos = more bank losses........ etc etc.

 

Who benefits from this? No-one, no-one at all, and the banks and (most importantly) the bondholders and the government and most of the country realise this.

 

We are not Ireland or the US, we never had the massive oversupply (I know it's not just about supply demand etc and all about credit, but it still does have some effects) and new building (which wasn’t keeping up even in the boom years) has practically stopped in the UK now. There is a housing shortage in the UK, there has been for years, this is one of the causes of the high rents.

 

The vast majority of people who buy houses in the UK are not investors. They have a simple understanding that you get a mortgage then buy a house, live in the house and then, after ~25 years your house is yours, no landlord, no rent to pay, ever.

 

This is a simple and very effective idea. Unless you are one of the poor soles to lose their jobs, and not be re-employed before your benefits/savings expire, you will not lose your house.

 

If you are an investor, then yes, Dr B's arguments make perfect sense. Sell properties and buy them back cheaper later. But the vast majority still won't, and after all the discussions he has had with them, he must know that now. That’s their problem, but again, if they have tenants paying the mortgage, after 25 years, the landlord owns the property.

 

I don't see a major problem arising from the sov debt either. Europe will mess about, but then will bailout Portugal and Spain if they have to. They are not going to let them go down.

 

It took a once in a lifetime global meltdown to cause the last crash. Even with all the global imbalances and problems still existing from the, the most likely course is a gentle muddling along again for several years.

[neil324]

Why I think it might not be doomsday. (from Br B's property cycles)

 

I think a steady, slow reduction in prices over a few years (10 to 15% maybe) coupled with continued ultra low rates (which is currently a high probability) and inflation bubbling away in the background, would put things on a much more sustainable path.

 

This would still hurt a few, but would not result in the death-cycle of falling prices = bank losses = bank bailouts = more pain for tax payer = more cuts = higher unemployment = more falls = more repos = more bank losses........ etc etc.

 

Who benefits from this? No-one, no-one at all, and the banks and (most importantly) the bondholders and the government and most of the country realise this.

 

We are not Ireland or the US, we never had the massive oversupply (I know it's not just about supply demand etc and all about credit, but it still does have some effects) and new building (which wasn’t keeping up even in the boom years) has practically stopped in the UK now. There is a housing shortage in the UK, there has been for years, this is one of the causes of the high rents.

 

The vast majority of people who buy houses in the UK are not investors. They have a simple understanding that you get a mortgage then buy a house, live in the house and then, after ~25 years your house is yours, no landlord, no rent to pay, ever.

 

This is a simple and very effective idea. Unless you are one of the poor soles to lose their jobs, and not be re-employed before your benefits/savings expire, you will not lose your house.

 

If you are an investor, then yes, Dr B's arguments make perfect sense. Sell properties and buy them back cheaper later. But the vast majority still won't, and after all the discussions he has had with them, he must know that now. That’s their problem, but again, if they have tenants paying the mortgage, after 25 years, the landlord owns the property.

 

I don't see a major problem arising from the sov debt either. Europe will mess about, but then will bailout Portugal and Spain if they have to. They are not going to let them go down.

 

It took a once in a lifetime global meltdown to cause the last crash. Even with all the global imbalances and problems still existing from the, the most likely course is a gentle muddling along again for several years.

 

Erm wasn't house prices falling before Lehmans. It took a global problem to postpone it, thats all.

 

I know plenty of people who have multiple properties who are leveraged to their eyeballs. All done through RBS. They even embraced it 110% buying property in Bulgaria leveraging their UK properties. All in their 30's, average wage.

[geisaver]

Who benefits from this? No-one, no-one at all, and the banks and (most importantly) the bondholders and the government and most of the country realise this.

 

Bankers benefit - £7bn bonuses this year?

 

We are not Ireland or the US, we never had the massive oversupply (I know it's not just about supply demand etc and all about credit, but it still does have some effects) and new building (which wasn’t keeping up even in the boom years) has practically stopped in the UK now. There is a housing shortage in the UK, there has been for years, this is one of the causes of the high rents.

 

Isn't about a million empty houses? High rents are the direct result of housing benefit and tax breaks supporting BTL landlords.

 

The vast majority of people who buy houses in the UK are not investors. They have a simple understanding that you get a mortgage then buy a house, live in the house and then, after ~25 years your house is yours, no landlord, no rent to pay, ever.

 

The number of properties switching from owner occupied to BTL is increasing every year.

 

[John Doe]

Erm wasn't house prices falling before Lehmans. It took a global problem to postpone it, thats all.

Lehmans collapse was just one of the outcomes of the problems that started way before. For example, Northern Rock Collapse was more than a year earlier.

 

 

I know plenty of people who have multiple properties who are leveraged to their eyeballs. All done through RBS. They even embraced it 110% buying property in Bulgaria leveraging their UK properties. All in their 30's, average wage.

 

And those are the few who will suffer most no doubt. How are they coping at present?

[John Doe]

Bankers benefit - £7bn bonuses this year?

 

Isn't about a million empty houses? High rents are the direct result of housing benefit and tax breaks supporting BTL landlords.

 

The number of properties switching from owner occupied to BTL is increasing every year.

 

 

Yep, and with a better market their bonuses will increase, with a collapse, they won't. They know this.

 

It doesn't matter how many empty houses there are, if the owners don't want to have them occupied (for all the talk of the gov). Hence, still a shortage.

 

And BTL will increase further, and possibly be more profitable, as more people need to rent.

[Joe]

Why I think it might not be doomsday. (from Br B's property cycles)

 

I think a steady, slow reduction in prices over a few years (10 to 15% maybe) coupled with continued ultra low rates (which is currently a high probability) and inflation bubbling away in the background, would put things on a much more sustainable path.

 

This would still hurt a few, but would not result in the death-cycle of falling prices = bank losses = bank bailouts = more pain for tax payer = more cuts = higher unemployment = more falls = more repos = more bank losses........ etc etc.

 

Who benefits from this? No-one, no-one at all, and the banks and (most importantly) the bondholders and the government and most of the country realise this.

 

We are not Ireland or the US, we never had the massive oversupply (I know it's not just about supply demand etc and all about credit, but it still does have some effects) and new building (which wasn’t keeping up even in the boom years) has practically stopped in the UK now. There is a housing shortage in the UK, there has been for years, this is one of the causes of the high rents.

 

The vast majority of people who buy houses in the UK are not investors. They have a simple understanding that you get a mortgage then buy a house, live in the house and then, after ~25 years your house is yours, no landlord, no rent to pay, ever.

 

This is a simple and very effective idea. Unless you are one of the poor soles to lose their jobs, and not be re-employed before your benefits/savings expire, you will not lose your house.

 

If you are an investor, then yes, Dr B's arguments make perfect sense. Sell properties and buy them back cheaper later. But the vast majority still won't, and after all the discussions he has had with them, he must know that now. That’s their problem, but again, if they have tenants paying the mortgage, after 25 years, the landlord owns the property.

 

I don't see a major problem arising from the sov debt either. Europe will mess about, but then will bailout Portugal and Spain if they have to. They are not going to let them go down.

 

It took a once in a lifetime global meltdown to cause the last crash. Even with all the global imbalances and problems still existing from the, the most likely course is a gentle muddling along again for several years.

 

I agree completely. I dont think the gov or banks will let this happen. Esp in London and the SE. Maybe in real terms the drop may be a bit more but nothing scary. Remember the UK IS still a tax haven for the rich, and when you add to this all that the UK and London has to offer, its still very attractive for the big overseas money. If you are making £60k a year on your non CG investments, and keep them offshore, you are a winner in the UK. Even if you are living here for more than 7 years and have to pay the 30k charge. This will trickle down the market and screw the FTB.