The bad news came thick and fast for the property market yesterday.The headline grabber was the fact that online estate agency Hometrack’s monthly survey had shown house prices falling in October for the first time in two years. To be fair, the drop was just 0.1%, and that was a month-on-month fall. Annual house price growth was 4.4%, down from 5% the month before.
Now Hometrack isn’t the most prominent house price survey, so it would be easy to ignore. But far harder to dismiss were figures from the Bank of England showing that mortgage approvals for new house purchase had fallen to 102,000 in September, from 108,000 in August. That’s the lowest monthly figure since July 2005, and 20% down on the same time last year.
And it’s only set to get worse…
Data from the Royal Institution of Chartered Surveyors suggests that mortgage approvals could fall well below the 100,000 mark in early 2008, says think tank Capital Economics. That sort of low hasn’t been seen since the housing slowdown of late 2004, a period where sales dived and annual house price growth nearly flat-lined.
Meanwhile, mortgages are getting more expensive, with the average interest rate hitting 5.94% in September - the highest in nearly seven years, reports The Telegraph. That’s a worry, especially when figures from the Mortgage Advice Bureau suggest that first-time buyers are stretching even further to buy homes. The number of 100% mortgages taken out in the first nine months of this year has apparently doubled compared to last year.
So it’s little surprise that the Council of Mortgage Lenders revised its forecast for 2008 house price growth down to just 1%. That’s now two major industry bodies who effectively are saying that house prices will fall in real terms next year - Nationwide reckons house price growth will be 0% in 2008.
The CML also believes that repossessions will rise by 50% in 2008, to 45,000. At their peak, in the 1991 recession, repossessions hit 75,000. That figure seems a long way off - but if repossessions were to jump by another 50% in 2009, then we’d be at 67,500. It’s becoming much harder to dismiss rising repossessions as coming ‘off a low base’.
There are already some pretty horrible stories coming out of the market, particularly at the buy-to-let end. The Daily Mail recently reported on one London-based twenty-something who had bought what she thought was a great deal from a Manchester property developer. The developer was giving her a 15% discount on the £175,950 buying price, taking it down to £149,500.
But 18 months later, the flat is worth just £140,000. Her mortgage is costing £900 a month, but she gets just £600 in rent. On top of that, the flat’s currently empty - so she‘s having to fund that whopping great mortgage herself.
She described her original decision to buy “as a long-term investment, but I hadn’t anticipated that the property would be so debilitating… now I can’t sell because there are so many apartments in the area. I’m at a desperate stage. I’ve lost an enormous amount of money - about £14,000.”
This really brings home the downside risks of investing with borrowed money – which is what buy-to-let is. People say that renting is dead money. But £300 a month on an interest-only mortgage is dead money too - you’re left with the same amount of debt after all. And if you’re still in your twenties, then putting £300 a month into a nice selection of shares in a pension or an Isa, would deliver you a very significant retirement pot.
The CML argues that “most borrowers will cope, but not everyone will escape unharmed from the effects of a slower market, so the government should make it a policy priority to overhaul the system of state support for homeowners, which has lagged pitifully behind the times.”
When the lenders start turning to the government for support, you know we‘re in trouble. The government is already propping up Northern Rock with an effective blank cheque from the taxpayer. Now it’s expected to do the same for the entire mortgage industry.
A lot of people - particularly those who have watched aghast from the sidelines as house prices have shot up - may feel little pity for those who are going to suffer as the housing market runs aground. But while we strongly believe that people should take responsibility for their own investment decisions, that extends to those who lend money, as well as those who borrow it.
The banks - far more so than naïve amateur landlords – should have known the risks they were taking when they dished out money to these people. Now we have the CML effectively asking the government to help people pay off their debts to lenders who shouldn’t have given them the money in the first place.
It’s easy to berate newcomers to the buy-to-let market as greedy amateurs looking for a get-rich-quick scheme. But these people have been ripped off by canny developers and given more than enough rope to hang themselves by banks chasing market share, both of whom knew the good times had to end at some point.
No one accuses the victims of share mis-selling scandals of being greedy and foolish – the finger is pointed squarely at the financial services providers who sold the products in the first place. Perhaps it’s time we started taking the same view of the ever-growing number of ruined lives that the buy-to-let collapse is going to leave in its wake.
source-Money Morning