The Royal Institute of Chartered Surveyors (RICS) believes that the latest increase in UK interest rates to 5.75% will further dampen housing demand as first time buyers find their borrowing constrained and households who are coming to the end of their fixed rate deals face a big increase in their monthly payments.
David Stubbs, senior economist at RICS, said: “In fact, someone with a £100,000 mortgage who is coming off a two-year fixed rate deal in the next few months will face an increase of around £100 in their monthly repayments.
“Furthermore, this may not be the end of the pain. With economic growth, strong both at home and abroad, a resilient housing market and elevated inflation expectations, it is likely that the Bank of England will choose to push interest rates up again in the coming months.”
Tony McGough, head of forecasting and the economy at Jones Lang LaSalle, said: “The move is expected to continue to cool the real estate market and remove the more speculative and leveraged investors from the market. As this rise was expected, the long term financial markets have already priced this move into their financing rates. Expectations are for another rise before the end of the year, but with a pause for a month or two, as the bank evaluates financial figures following the rises to date.”
Short-term fixed rate mortgages still going strong
New data from the Council of Mortgage Lenders (CML) shows that the appetite for short-term fixed rate deals is still strong among first-time buyers and home movers.
The survey revealed that 89% of first-time buyers and 73% of home movers took out a fixed rate loan, albeit mostly on a short-term basis, in May up from 88% and 72% respectively in April.
In addition, the mortgage survey also found worsening affordability continues to impact all home-buyers as well as existing borrowers. It does not take into account either of the 0.25% rate rises in May and July so it is inevitable that affordability pressures will become even more pronounced in the coming months.
Michael Coogan, CML director general, said: “For anyone wanting to get a foot on the property ladder or move house, each month affordability is becoming worse. The number of borrowers who are now paying stamp duty makes a difficult situation even worse despite the financial windfall to the treasury. This needs to be addressed urgently.
“Taking out short-term fixed rate mortgages may provide some reassurance, but eventually the loans will revert to a variable rate and the risk of a payment shock is real. Planning ahead for higher payments is as important as the initial decision to shelter from the risk of higher borrowing costs.”
First buy-to-let AVM
Hometrack has launched Realtime Buy-to-Let which claims to be the UK’s first buy-to-let Automated Valuation Model (AVM), which can be used for both individuals and large portfolios.
The new model which incorporates both an assessed and market rent output will revolutionise the buy-to-let market, as lenders can now instantly gain an enhanced and objective risk assessment of a loan and potentially better inform their landlords.
David Catt, commercial director at Hometrack, said: “The resultant output on each property is individual to the specific property and its associated characteristics. This represents a quantum shift from historic approaches to estimating area average rents or implied yields.
We have already received significant commitment for this product from lenders that have benefited from the market leading AVM, Realtime. The model will offer lenders a distinct advantage over existing practise, delivering invaluable additional information for the buy-to-let market, within an objective risk assessment tool.”
North East’s economy lags behind
Middlesborough, Sunderland and Newcastle are in the bottom five of a national survey measuring economic growth by Centre for Cities, which is part of the Institute for Public Policy Research.
Glen Athey, the report’s author, said: “The North East economy is still lagging behind the rest of the country. These cities still have problems. The regional development agency, central government and the councils are doing a lot, but they could do more.”
North Yorkshire faired better in the report, with York named as the country’s fifth best performing city, behind Cambridge, Southampton, Bristol and Reading. The chart was compiled using data covering the decade leading up to 2005.
The chart ranks England's largest 56 cities and towns in terms of jobs, population growth and skills base.
More cost effective to extend property then move
According to property search engine Zoomf.com, the average price difference between a three and a four bedroom property in London is £161,221.
Zoomf claims the average price of a three bedroom property is £396,387 and a four-bedroom home at £557,608, many home owners will be forced to look at alternatives such as lift conversions and extensions rather than moving to a larger place.
Moving from a one bedroom flat to a two bedroom property will cost an additional average of £89,751. According to the search engine, currently there are only 5,698 one bedroom properties on the London market compared to 13,655 two-bedroom, 10,636 three-bedroom and 7,916 four-bedroom properties.
Mike Carter, co-founder of Zoomf, said: “The price gap between an average three bedroom and four bedroom property is so great that it is difficult to see how many people will be able to make the jump.
“What we will probably see is more and more people using the space they currently have to develop and extend their properties.”
House price inflation more than halves says RICS
House price growth eased in June to half the pace of the previous month and demand weakened due to the impact of rate hikes, according to the RICS UK Housing Market Survey.
House prices rose for the 20th consecutive month in June but the rate of growth more than halved, falling below the survey’s long run average of 21.6%.
10.6% more chartered surveyors reported a rise than a fall in house prices, down from 22.5% in May.
In England, London remains the region with the strongest price rises but Scotland is equally as buoyant. Northern Ireland continues to lead the way as the peace premium remains a boost to price growth.
New buyer enquires declined at the fastest pace since February 2006 as the interest rate cycle began to weigh heavily on first time buyer affordability. New buyer enquiries fell across all regions, except for Wales, the West Midlands and Scotland.
New instructions to sell property fell sharply, as forecast in last month’s edition of the survey. Many vendors brought forward their instructions into May, in order to avoid the upfront cost of Home Information Packs.
Four interest rate rises and the prospect of more to come have dented surveyor confidence in the house price outlook. Surveyor confidence in the sales outlook almost halved, falling to the lowest level since June 2004.
UK sub-prime mortgage market still growing rapidly
Homebuyers in the UK may soon be feeling the effect of a bad debt crisis in the US. On the other side of the Atlantic, property prices are falling because banks have lent money to people with a poor credit history who are increasingly defaulting on their loans. This is causing huge instability in the US market which has seen house prices fall and the dollar weaken against other currencies.
The dollar fell to a record low against the euro this week and the pound has been trading above two dollars for more than a week. Analyst Datamonitor says that the UK sub-prime market, as it is known because it lends to those who have poor credit ratings and have often defaulted on repayments, increased in size by 28% during 2006, to a total of £24.6bn.
This side of the market is likely to continue expanding at nearly twice the rate of the traditional mortgage market but is also at risk from people defaulting on their loans. It is expected to be worth some £31.5bn by 2011, after growing at an annual rate of nearly 5%.
Report author Maya Imberg said: “More consumers are unable to cope with meeting their financial commitments. High levels of consumer debt coupled with more difficult economic conditions will drive the sub-prime mortgage market forward over the next five years.”
Brown retreats over tax on property developers
The UK government signalled a possible change in direction on its proposals to introduce a tax on property developers when Prime Minister Gordon Brown said a Bill doing so would only be introduced in provisional form.
The Planning Gain Supplement (PGS) is a proposed levy on land that gains in value once planning approval is given. In his announcement of the government's draft legislative programme, months ahead of the Queen's Speech, Brown said the PGS would not proceed ‘if prior to the pre-Budget report a better way is identified of ensuring local communities receive significantly more of the benefit planning gain to invest in necessary infrastructure including transport’.
Royal Institution of Chartered Surveyors spokesman Damian Cleghorn said he is pleased the government has recognised PGS is not the most appropriate mechanism for increasing the supply of housing, based as it is, on a 'fundamental misunderstanding' of how land comes forward for development.
However, Cleghorn added that further clarification is needed as to whether or not the statement represents Gordon Brown throwing down his gauntlet to industry to come up with a more practical solution.
The House Builders’ Federation, which represents Taylor-Wimpey and Barretts as well as 300 other homebuilders, welcomed the apparent U-turn. The organisation’s director of economic affairs, John Stewart, said: “We're pleased the prime minister is not charging ahead with something we don't think would have the benefits expected of it. There are better alternatives to a property gain tax and we were concerned this wasn’t a workable proposal.”
Doubts over super casino in Manchester
Conservative leader David Cameron has called for a Government statement on super casinos after Prime Minister Gordon Brown seemed to back away from the concept, marking a dramatic U-turn in the Government’s attitude towards gambling.
Brown outraged supporters of the massive gambling venues this week when he announced a review of whether they are the best way to revive run-down areas.
Manchester was the surprise winning bidder to host the casino and had been expecting £200m in investment and 2,700 jobs for the city’s highly-deprived east-end. But the scheme is now reported to be ‘pretty much dead in the water’.
Cameron said: “We congratulated Manchester (when it was awarded the first super casino), because we thought the review had been conducted properly, but then we found out that they hadn't looked at really important issues like will this encourage problem gambling and should it be a destination casino i.e. somewhere people actually have to go to in order to gamble rather than just being in the centre of a big city.”
Brown’s comments have angered Labour MPs such as Graham Stringer (Manchester Blackley), who said it was ‘quite frankly insulting’ to think the city council had not examined the other possibilities for regenerating the area.
