UK House prices fall – again
Is anybody surprised by results from the UK’s biggest house lender, Halifax that house prices in the UK fell by 1.2% in June? Is there a crash around the corner?
After a number of conflicting reports over the last few months where the poor British house buyer has been subjected to mutually orthogonal forecasts and predictions from the witch doctors in the housing trade, one of the largest lenders – and incidentally, the most optimistic of those lenders – has had to report a drop on prices across the board of 1.2%.
Now, we’re still going to sit on the sidelines with this number as we have previously reported that the house price volatility index is still creating an uncertain market – however as reported before we should expect to see the ‘flip flopping’ of results from the lenders over the next four or five months as the market decides if it has peaked or not.
According to Martin Ellis, Halifax chief economist at Halifax – sound fundamentals, underpinned by a strengthening economy, high levels of employment and low interest rates, will continue to support housing demand over the second half of 2006. Of course he went on to say that prices has risen 2.6% over the last quarter and that last months figures did not indicate the beginning of the end for house price growth.
At the same time last week, the UK’s other big lender, the Nationwide, said that house prices had risen at 0.3% in June and that in general they felt that prices were subdued.
As we’ve pointed out before, most of the news in the housing market is being driven by those with a vested interest in the keeping up the appearance that the market is stable and growing. We worry that there is an underlying trend pushing downwards on the market and that the reality factors are being filtered out in statement made by these influencers.
According to the council of mortgage lenders in the UK fixed interest loans account for 60% of new loans. This figure is important because unlike the USA where a loan is taken out over 15-30 years at a fixed rate, the typical UK loan is set at a fixed rate for 1-3 years, with most taking on the 1-2 year option. This sounds great, but the problem is that the UK market has only been sustained by so called ‘affordability’ – that is interest rates are so low you can afford to make repayments and thus stretch the amount you borrow by greater than the previously accepted ratio’s. The downside is that you are then tied into the loan at market rates after the fixed part expires.
The upshot of all this is that many owners borrowed heavily when interest rates where at an all time low and the fixed rate reflected this (some companies offered loans a low as 2.75% for a fixed period). Now that the customers are starting to come off the fixed period, they are finding that the variable (ie Market) rate is only a few points higher, but in real terms this may mean paying between 150%-170% of the original fixed amount on a monthly basis – and so suddenly there are a number of customers with unaffordable repayments. Should the Bank of England follow the rest of the world and increase rates then the number of customers in arrears will increase and the number of defaults will sharply increase as well.
Once this happens it will be the usual snowball effect we see in markets that crash – though this will happen in slow motion because of the more illiquid nature of the market.
So what are the signs? Well volatility of prices is one sign, increasing lack of consumer confidence is another – but perhaps more important is that the press will finally stop listening to the PR luvvies in the Housing market and report the facts.
Sources
House prices fall in June Telegraph
House prices fall in June Reuters
Halifax: House prices fall 1.2% in2perspective