Bank of England matches Federal Reserve for cash injection
The Bank of England is set to offer UK lenders an extra £10bn in funds as it tries to limit the impact of the global credit crunch and high borrowing costs. It is one of five central banks that have pledged to inject $100bn (£49bn) of emergency cash into money markets.
On Monday, the US Federal Reserve made $20bn available through auction, though it did not say how many banks took advantage of the extra money.
Analysts said the extra cash was needed because the inter-bank lending rate had remained stubbornly high despite recent interest rate cuts in the UK and US. In London, the Libor, which stands for the London Inter-bank Offered Rate, dipped earlier this week to 6.431%, compared with 6.627% on Wednesday last week when the central banks unveiled their rescue plan.
As well as the Bank of England and the Fed, the European Central Bank and the national banks of Canada and Switzerland are also involved in the plan.
Another strong year for investors
According to Paragon, buy-to-let investors enjoyed another strong year in 2007 as total returns generated by the average residential property reached 21% - the highest level for 28 months.
With a combination of buoyant house prices, strong rental income and stable yields, the typical landlord generated more than £34,500 over the past year, according to Paragon’s latest buy-to-let index.
Growth in rental incomes have been healthy, reflecting demand for rented homes, with rents rising by 6% over the past quarter and 17% in the past 12 months to reach a new record level of £11,300. The average value of buy-to-let property has also been strong, rising by 15.3% over the year, but yields have remained at 6% or above throughout 2007 as landlords have been able to increase rents in line with property values.
Regions that have enjoyed the best total returns in 2007 are London, the East Midlands and the South West, with the East Midlands achieving the fastest annual growth in rents over the year. Yorkshire and the North West achieved the best yields during the year, with both regions at 6.8%.
John Heron, Paragon’s director of mortgages, said: “Returns generated by landlords are very good and compare favourably with alternative investment classes. An investment linked to the FTSE All Share made a year ago would have yielded just over 7.4% from both capital appreciation and dividend yield, while the highest yielding internet savings accounts earn around 6%. In comparison, the return of 21% on buy-to-let looks particularly attractive.”
WAG wants to suspend right-to-buy scheme
The Welsh Assembly Government (WAG) wants to suspend Wales’ right-to-buy scheme in order to stem the loss of affordable housing in the country.
In Wales, the right-to-buy scheme gives tenants of council homes and some housing association tenants the right to buy their home at a discount to the open market value. The current maximum discount in Wales is £16,000.
The WAG is seeking powers from Westminster to stop this scheme as in some counties, such as Powys and Ceredigion, almost 60% of council housing stock has been sold under right-to-buy.
It said that since the right-to-buy scheme was introduced in 1980, tenants in Wales have purchased more than 140,000 homes, which halves the country’s social housing stock.
The proposed changes would also allow social landlords the right of first refusal to buy back any of their properties that were resold within ten years of their original purchase under right-to-buy.
Final proposals for CGT will be in the New Year
After promising businesses that final proposals to Capital Gains Tax (CGT) will be announced before the end of the year, the Government has now done a U-turn announcing that it will not be published until the New Year.
On 27 November, Chancellor Alistair Darling told the Confederation of Business Industry (CBI) that the final proposals would be revealed within three weeks to allow businesses time to adjust before next April.
Economic secretary of the Secretary Kitty Ussher told Parliament recently that plans would be announced before Christmas and business groups had been told to expect the proposals within days.
Re-focus is on social housing
Councils and landlords should ensure social housing services focus on people, not just the homes they live in, said housing minister Yvette Cooper in a speech to the Housing Corporation and Chartered Institute of Housing.
Cooper announced a package of measures and extra investment aimed at making social housing fairer, more effective and more personal. The plans will re-focus social housing around the needs of tenants such as young families needing to move to larger homes. The Government’s plans include the launch of a major new crackdown on cramped housing.
A new national ‘Overcrowding Action Plan’ sets out proposals for increasing the number of larger homes nationally with £15m funds over the next three years to help councils do more in the areas most under pressure. The funding will be targeted at 38 of the most overcrowded areas in London, Birmingham, Bradford, Leicester, Liverpool and Manchester.
Cooper said: “Around 70% of households are now homeowners, and 90% say they want to be. As a Government we want to widen access to home ownership and help more people build up assets. But home ownership can’t be sustainable for everyone. And for some it is a real struggle to find an affordable stable home in the private sector.”
Intermediary lenders are optimistic about 2008
Intermediary lenders remain optimistic about 2008, despite the current uncertainty in the market, reflecting the positive fundamentals of high employment and strong housing demand that underpins the market, according to the Intermediary Mortgages Lenders Association (IMLA).
Respondents to IMLA’s recent survey think remortgaging activity will remain buoyant, with over two thirds of members thinking volumes will increase slightly or remain the same. The survey showed lenders responding to changing market conditions with over 80% tightening criteria relating to loan-to-value ratios, and almost 60% tightening those relating to income and financial assessment.
Peter Williams, IMLA’s executive director, said: “Lenders have a realistic but optimistic perspective on the market, which will be supported by good levels of remortgaging activity and reaffirmation of prudent lending practices. They are noticeably more upbeat about their own firm’s volumes than they are about the market as a whole, pointing to the considerable opportunities that remain within such a large market. With credit quality moving up the agenda and key to the reopening of the structured finance markets, lenders are tightening their lending criteria with regard to both loan-to-value ratios and financial assessment.”
Asked about the factors needed for a return to normality in the industry, over a third of lenders stressed the importance of re-opening the securitisation markets, and over a quarter the availability of more liquidity in the market. By the end of 2008, lenders expect Bank base rate to be at least 0.5% lower than they thought at the time of the last survey in the summer.
Highest total returns since August 2005
According to Paragon’s December 2007 Buy-to-Let Index, total returns (rental income plus capital gains) of an average property purchased 12 months ago has reached 21.3% in November which is also its highest level since August 2005.
Highest total returns were achieved in London (39%), East Midlands (30.7%) and the South West (21.3%).
Rents have also risen by 16.9% over the last year and 6.3% over the last quarter, to stand at £11,300 in November. London (31.1%) and Yorkshire (23.9%) continue to generate the highest rental income but the East Midlands experienced the fastest annual growth in rents at 35.9%.
Average investment property values have risen by 15.3% over the last 12 months to stand at £187,164. The region with the highest annual property value rise is London (33.5%).
Yields also remain stable at around 6% for the 20 th consecutive month. Regions achieving the highest yields are the North West and Yorkshire (both at 6.8%).
Lastly, terraced houses continue to generate the highest yields for investors at 6.6%, and the highest annual value appreciation of 20.4%. Semi-detached properties generate the second highest yields at 6.1%, followed by detached (5.9%) and then flats at 5.4%.
First-time buyers may be able to get ahead in 2008
The Royal Institute of Chartered Surveyors (RICS) expects house prices to be broadly unchanged in 2008.
RICS does not believe that any drop in house prices will be extended in duration. The Bank of England has already countered any threat to the economy from the credit squeeze by cutting interest rates and RICS expects base rates to be lowered to 5% in the first half of 2008.
RICS believes repossessions will rise from 30,000 to 45,000, which amounts to 123 repossessions per day, as mortgage resets begin to bite. This is still well below the high water mark of the early 1990’s when repossessions rose to close to 80,000. If labour market conditions remain generally firm, an influx of supply from homeowners forced to sell by increases in their mortgage repayments seems unlikely.
RICS also thinks there is strong pent-up demand from first-time buyers who have been waiting for an opportunity to access the housing market. Should prices soften, RICS expects that many first time buyers will attempt to capitalise where they have been previously squeezed. In a climate with strong employment conditions, this should provide a boost to a flagging market.
Buy-to-let investment could slow into 2008 as the range of mortgage products diminishes in light of the credit crunch. But RICS’ research shows that there is little evidence of widespread sales of investment properties taking place.
Simon Rubinsohn, RICS’ chief economist, said: “2008 will prove a difficult year for the housing market, but with falls likely in the base rate, the housing market should be provided with a stable platform. The effect of the credit crunch will dissipate slowly meaning that those seeking to obtain finance in the first half of 2008 may struggle.
“However, the employment picture should remain firm throughout the year, helping to prevent significant numbers of repossessions and the subsequent influx of supply into the market. This should ensure that house price growth remains broadly flat over the course of the year.”
Optimism in the buy-to-let market
According to research by Alliance and Leicester, 71% of buy-to-let investors see their overall prospects for 2008 as good or very good. Over three quarters of landlords claim they are making a profit out of their properties, with 22% of these able to save some of this outcome and boost their savings.
Landlords with properties in Central London believe rental yields can be as much as four time higher (44%) than buy-to-let properties in the South East of England (10%).
In other regions landlords believe that Scotland will generate a 5% increase in rental yields next year, and a 4% increase in the North. They also believe that Wales is the least likely to produce high rental yields, predicting just a 1% increase.
Jeremy Claridge, head of specialist mortgages at Alliance and Leicester, said: “It is encouraging that buy-to-let landlords indicate they are feeling buoyant about the outlook for 2008. Regardless of a tough financial year, it is clear the buy-to-let property market is still healthy for longstanding landlords, especially for those in the South East of the country.
“Our research shows that landlords believe London will produce the highest rental yields in 2008 and remain very popular as investment areas, but it is the North of England and Scotland that are expected to expand most rapidly over the next year in terms of projected net growth.”
Connells believes the wider economy is strong enough to support housing market
Connells Survey and Valuation believes the housing market will recover in 2008 after its recent downturn.
Ross Bowen, managing director of Connells Survey & Valuation, said: “The UK housing market has hardened this year, more significantly over the second half. As a result we have seen a fall in the number of surveys undertaken in the market, both for purchase and remortgage purposes.
“Until December's cut in interest rates, consumers have had to endure five successive hikes in rates which have already stretched the budgets of some and there is anxiety over the impact of this for home owners rolling off their discounted mortgage schemes next year. Lower confidence has contributed to reduced transaction levels, and this has had a knock-on effect with the market starting to adjust some property values. While we expect house prices to come under continued pressure next year, the wider economy remains strong enough to resist any significant drop on a national level.
“During 2008 we are likely to see more regional variation in prices. There are also signs that demand for new build flats is beginning to suffer in some parts of the country. However, the UK’s chronic housing shortage and growing population will ensure that demand recovers. Consumer and market confidence will remain low until the further cuts in interest rates expected next year are delivered, and there is more liquidity in the financial markets. These factors will have an increased impact on the housing market next year.”
