As we have often mentioned, the price rises have been mainly due to the shortage of supply on the market, rather than rising demand. This shortage of housing means prices have been squeezed higher by a small number of buyers.

However, the shortage of supply is not the only reason behind the recovery.

• Low interest rates has prevented many mortgage defaults
• Banks are keen to avoid repossession because they want to avoid the bad debts on their books.
• There have been some signs of economic recovery, with improvements in consumer confidence (though official statistics still show we are in recession)
• A feeling that the worst of the house price falls may be over

The economic recovery is, like the housing market, very uncertain and lacking in conviction. Whilst many feel GDP statistics are wrong, and the economy is actually recovering, few expect a recovery to be anything other than weak.

In particular, firms, banks and consumers are all trying to rectify their balance sheets - pay off debt and increase savings. This will depress spending and the housing market into next year.

The UK economy has suffered the most because of its reliance on the financial markets and an asset (housing) boom. The government and monetary authorities must be pretty dissapointed at the sluggish response of the economy. They have done as much as they can with fiscal and conventional monetary policy. Even the scope of quantitative easing is one of the most radical amongst Western nations. (though some commentators say by just buying gilts and not corporate bonds, the impact of UK QE has been diminished.)

Whilst other countries are considering raising interest rates, that looks a long way off for the UK. Any tightening of the economy will need to come from tax rises to deal with the burgeoning debt. (see: prospects for UK Interest rates)

Furthermore, despite a 20% depreciation in sterling, the UK retains a persistent trade deficit suggesting an underlying imbalance in the economy. Since the credit crunch there are less capital flows to finance a current account deficit. Therefore there we may need to have to be a further depreciation to boost exports relative to imports.

Another factor in the equation is the scale of government debt and the purchase of government gilts. This has potential to worry markets and raise future inflationary pressures.

Given these factors the prospects for Pound Sterling looks pretty grim. Low interest rates and quantitative easing will weaken sterling and the government’s fiscal position will not help. The trade deficit just adds to the gloom behind sterling.

The saving grace for Sterling may be the relative weakness of our competitors. The Euro is starting to look prohibitively expensive, at least for south European economies like Spain and Ireland. Though the Eurozone is emerging from recession, it still looks pretty weak. The ECB takes a fundamentalist approach to keeping inflation low, but, even the ECB will be hard pressed to justify rate increases with the Euro economy so weak.

The good news for sterling is that the worst may (hopefully) be over. Forward looking surveys on confidence show improvements. The recent rise in manufacturing output and car sales give hope a real recovery could materialise next year.

It is hard to make predictions because the current situation is exceptional with no real precedent. Alot will depend on the nature of recovery. If the UK’s growth continues to be weaker than our competitors sterling will continue its downward slide. But, if the UK grows quicker than expected and confidence is restored in the UK people may switch back to Pounds. But, overall, I think the most likely scenario is that the Pound will remain weak. Alot of us could be spending our summer holidays in old Blighty rather than paying to goto Euroland.

There is lots of good information at UK Fraud Service CIFAS After this incident, an extra password has been put in place for anyone opening a new password. These are some tips to avoid Identity Fraud

There are so many ways your identity can be detrimentally damaged and this will give you some tips to protect yourself against others.

On Line Protection

• Think about the risks when working online. Only buy from reputable sites with Https and recognised padlock security.
• Do not be tricked by online crooks into giving them your information. Beware of fake emails with links to convincing but fraudulent websites. They want to spend your money, tap your bank account and use your credit cards.
• Do not succumb to phishing by giving out your name, bank details, passwords or information to anyone. Block unwanted spam and use a modern browser.
• Beware of responding to seemingly innocent emails if the response is driven by your needs
• If you publish anything on line you have no control over how it is stored, copied or archived. Think twice about publishing something you might later regret.
• Use strong passwords mixing several words, letters, numbers and punctuation. Use different passwords for different sites particularly for financial matters.
• Be careful about giving away too much information on on blogs and social networking sites. Identity thieves can piece together your identity from public information piece by piece like putting together a jigsaw.
• Crooks are very good at persuading you to do what they want. Beware the promise of huge rewards, lottery wins, lost inheritances, upfront payments etc.
• If you get a bad vibe or pressured into a quick decision, walk away.
• If you think you have been compromised consider contacting ecommerce sites like ebay and Amazon and ask them to freeze your accounts.
• Keep your guard up and use your common sense.
• Choose a safe way to pay like PayPal or credit card.
• Remember, if it looks too good to be true, it probably is.

Off Line Protection

• Never carry documents or plastic cards unnecessarily. When not in use keep them in a safe place under lock and key if practical.
• In a shop or ATM make sure other people cannot see or hear your pin or personal information.
• If your credit cards, passport or driving licence have been lost or stolen contact the issuing organisation immediately.
• Keep your passwords and pins safe do not keep with your cards.
• Tell your bank, card issuers and all other organisations that you deal with immediately if you move house. Redirect your mail for at least a year. If you suspect your mail is being stolen. Check whether a mail redirection order has been made in your name without your knowledge.
• Be extra careful if you live in a property where other people could have access to your mail. You can arrange to collect valuable items such as new plastic cards or cheque books from a local branch.
• Destroy unwanted bills, receipts, credit-or debit-card slips, bank statements or even unwanted post in your name using a shredder.
• Check statements as soon as they arrive. If any unfamiliar transactions are listed, contact the company concerned immediately.
• Never give personal or account details to anyone who contacts you unexpectedly. Be suspicious even if they claim to be from your bank or the police.
• Dispose of unwanted computers with great care.

Remember just because you are paranoid it doesn’t mean they aren’t out to get you.

In the words of Hill Street Blues ‘Let’s be careful out there’

Hometrack stated that UK house prices rose for the third consecutive month, and Nationwide reported the first year on year increase since the credit crunch.

Hometrack report that property sellers are receiving 92.9% of the asking price up from a couple of months ago. However, like other agencies, they report the rise in prices is occuring despite a dearth of buyers. The main thing pushing prices higher is a shortage of supply.

Some factors that will influence the Property Market in the coming months

The price recovery will encourage more property owners to put their property on the market; many have been holding back during the house price falls. However, at the same time, many buyers were put off buying because of the rapid falls in prices. If people feel the worst of the house price falls are over, then more may be tempted back into the market.

Interest rates will rise sometime. At the moment, interest rates of 0.5% are making mortgage payments cheaper and preventing many having to sell. But, economic recovery could lead to higher interest rates. However, the recovery may be muted and interest rates could remain low for a considerable time. Also, unless people are on tracker mortgages, many banks haven’t passed the full rate cut onto homeowners so some will not see the full rate increase when it comes.

Unemployment likely to remain high during 2010 and 2011. The depth of the UK recession is depressing. It has now lasted 6 quarters - one of the longest on records. This will lead to a muted housing market.

• Problems facing UK Economy

The rise in prices occured because of the continued low interest rates and shortage of houses for sale.

However, the upturn in the market may encourage many homeowners to start putting their houses on the market. There is a considerable number of homeowners who have been holding off putting their house on the market waiting for market to turn. These homes are known as a shadow inventory. Now, prices have risen for a couple of months, we could see an increase in houses on the market which will moderate price rises and prices could fall if interest rates start to rise again.

Mortgage approvals continue to show signs of recovery with data expected to show further improvement.

Quoted 2 Year Fixed Rate Mortgage Rates

The fall in base interest rates to 0.5% has yet to be reflected in fixed rate mortgages. Despite continued base rates of 0.5%, commercial banks are already  raising their fixed rate mortgages.

Commercial banks have been claiming that the cost of borrowing is going up for them. However, looking at the three month libor (interbank rate) this is not the case. Libor rates have actually come down quite sharply.

3 Month Libor

Note 600 base points is the equivalent to 6.0%. Current Libor rates are just above 1%

Commercial banks may also argue, interest rates are likely to rise in the future. But, as we mentioned in latest interest rate predictions, the Bank of England feels interest rates will stay low for a considerable time.

Why are Fixed Rate Mortgage deals remaining High?

• Less competition in the banking sector following merger between HBOS and Lloyds
• Banks desperate to recoup losses from bad debts and tracker mortgages with 0%
• Stagnant Housing market, making banks less willing to lend mortgages except with good profit margin

Will Fixed Rate Mortgages Become Cheaper?

Probably not. Despite base rates remaining low, the banks show little sign of making fixed rate mortgages cheaper.

T

Best fixed rate mortgage deals

Data Source: Bank of England

House Price Earnings Ratio

This shows the ratio of house price to average earnings for first time buyers. Although first time buyers is only a segment of the market, the trends are indicative of wider trends in the ratio of house prices to earnings.

As expected, the ratio of London house price to earnings is higher than the UK average. This is despite London having higher wages than the UK average. The relative shortage of space for new houses, means house prices in London have been pushed up to over 7 times average earnings at the peak in 2007.

The long term average for house price to earnings ratio is 3.5.

In the last boom of the late 80s, the ratio got close to 5.0. This meant that 2007 set a new record for house price to earnings ratio.

Despite fall in the house price to earnings ratio it still remains above the long term average.

Is it possible for House Price to Earnings Ratios to Increase in the Long Term?

Long Term House Price to Earnings Ratio (FTB)

House price to earnings ratios could increase in the long term if:

• There was a period of stable and low interest rates, reducing the cost of mortgage interest payments.
• If parents increasingly give deposits to children to enable them to buy more expensive houses.
• If there is a continued shortage of housing due to restrictions on building new houses and continued growth in number of households.
• If banks are willing to lend mortgages with bigger income multiples or if banks / government encourage more - part rent / part buy schemes.

The Credit crunch of 2007-09 caused banks to abandon their previous reckless mortgage lending. 100% mortgages and mortgages 5 times incomes were quickly removed as banks ran out of funds to lend. There may seem little prospect of banks returning to this kind of lending, but, that’s probably what people thought in 1995 after last crash.

Problems of House Price to Earnings Ratio.

Just because the long term house price ratio could increase, doesn’t mean it will. If it does increase, it creates various problems:

• More difficult for young people to get on property ladder.
• Higher % of Income going towards cost of mortgages
• Re-distribution of income from young to old.
• Buying a house may depend on having generous parents.
• Increased pressure to take out risky mortgages several times income.

House Price statistics

UK Base Rates

Interest rates have fallen to a a record low because the economy has experienced its deepest recession since the 1930s.

The Bank of England have kept interest rates at 0.5% since March 2009

Factors which will keep interest rates close to Zero in the future.

• Depth of recession and scale of fall in GDP
• Predicted rise in UK unemployment close to 3 million
• Budget Deficit rising to 12% of GDP means the government is under pressure to improve fiscal position. This will require higher taxes and lower spending. This fiscal stance could damage recovery and is deflationary. Therefore if taxes rise, it is more likely interest rates will stay low.
• Inflation predicted to fall below the governments target of 2% and stay close to 1%. With falling oil prices, deep recession and high levels of spare capacity, inflation is forecast to remain low in 2009. It is expected inflation will fall to below the government’s target of 1%. This raises the ugly potential of deflation - something the MPC will be very keen to avoid. The RPI measure  of inflation shows a high level of deflation -1.2% (RPI measure includes mortgage interest payments)
• Given this gloomy outlook for the UK economy, the Bank of England are forecasting low inflation and low interest rates in 2010.

Graph showing Interest Rate Predictions

Bank of England Interest Rate Forecasts

Source: Bank of England latest inflation report [link

This suggests many analysts believe official interest rates could stay at 0.5% during 2010.

Factors which will push up Interest Rates

• Scale of Quantitative easing (increasing money supply) increases potential for future inflation. As inflation rises, interest rates could rise sharply. However, the impact of quantitative easing has not been fully understood. Broad money growth still shows slow growth.
• UK housing market could be bottoming out leading to slow recovery in house prices.
• As economy recovers at end of the year, the historic rates could rise to prevent inflation.
• Signs of rising oil prices

The forecast for interest rates depends on how deep and lasting the recession proves. At the moment, economic conditions are conducive to low rates for several reasons.

• Weak housing market
• ongoing credit crunch and reluctance to lend
• Negative economic growth of -4%
• rising unemployment - over 2 million and approaching 3 million
• Credit crisis reducing availability of credit
• MPC inflation report forecasting inflation of 0.7% and possibility of deflation in 2010

Factors Influencing interest rates in 2009-2010

• Real interest rates are actually negative. Real interest rates are (Nominal interest rates - inflation) = 0.5% - 2% = -1.5%.
• Sub Prime Mortgage Crisis - The effects of the mortgage sub prime crisis are still being felt in the UK, in particular there is a shortage of mortgage credit. The main effect of the sub prime mortgage problems are to make mortgage lenders less willing to give risky loans. It has also affected consumer confidence. The effect of these two factors are to reduce house price growth and consumer spending. This reduces inflationary pressures and makes it easier to enable interest rate cuts.

Fixed Interest Rate Predictions

Despite base rates staying at 0.5%, fixed rate mortgage deals have not reflected the low interest rates. The Bank of England’s figures suggest the average 2 year fixed rate deal climbed to 4.46 per cent during July. Yet, with forecasts for interest rates to remain close to 0%, this suggest the banks are increasing their profit margins. They shouldn’t really rise more, but, weak competition is pushing fixed rate mortgages slowly up.

Predictions for US Interest Rates

As for the US, interest rates have already been cut to 0% - 0.25%, but, this may be insufficient to stave off the problems arising from the US Housing Market. However, with rates at 0.25% there is little more that they can do. Although the economy shows signs of tentative recovery, base rates are likely to remain low for a while.

See also:

• Difficulties with predicting interest rates
• Interest rates explained

This graph shows the rapid decline in interest rates and inflation in the past couple of years.

Some now feel the worst of the recession is over, and if the fragile recovery turns into a stronger economic growth, the interest rate cycle could be reversed with rates returning to levels of 5%. This would have a big implication for homeowners who are getting used to base rates of 0.5%.

Given the unprecedented nature of economic crisis, it is more difficult to predict how the economy will recovery. We have witnessed an unprecedented array of economic policies from the largest fiscal deficit since WW2, to Q.E. and zero interest rates. These policies will not continue for ever and the need to quell the rising deficit could hinder future recovery. Also, there are unknown factors such as how the extent of swine flu may impact on economic growth should the pandemic spread.

The most likely scenario is for interest rates to rise gradually during 2010. Despite, quantitative easing, I don’t see a rapid return of inflation. There is too much spare capacity in the economy. Current money supply figures indicate bank lending is far from returning to normal.

Also, next year in 2010 and definitely in 2011, there is a likelyhood the government will have to tighten its fiscal budget. Therefore, with tax cuts expiring and possibly higher tax rates, it will enable the MPC to keep interest rates low to avoid a double dip recession.

Base Rates

Long Term Trends In UK House Prices

The two  big house prices crashes seem mere blips in the long upward trend. It should be noted these prices are nominal not real (Inflation has not been taken into account). However, UK House prices have still risen much faster than inflation.
In 1952, average UK house prices were £1,811. If they had risen in line with inflation average house prices would be now £42,000…

Again the main feature here is the two crashes and spectacular growth in between. See article: Why are house prices so volatile

This suggests house prices have fallen back to trend growth levels. However, the trend in house prices is not a guarantee of what will happen in the future - just a reflection of what has happened in the past. See Japan or US for examples, of country where long term house price trend changes.

Even adjusted for inflation and even accounting for the two big house prices busts, house prices are still more expensive!

See article: Why are House prices in UK so expensive?

The volatility of house price growth

Affordability of Housing

It is interesting to note how low house price to earnings ratios fell in the mid 1990s at the end of the last crash. Also, how much house price to earnings rose by the peak of the 2007 bubble.

Just in case you need more evidence House prices are still expensive for first time buyers.

It is mortgage lending that drives demand for buying houses. But, the credit crunch is still hitting banks making them reluctant to lend.

Base Rates can’t fall any further. But, how long will they stay at 0% with house prices showing signs of recovery?

Housing Market stats at ONS

Copyright:

Note Graphs can be reproduced freely on other websites, with link back to www.housingmarket.org.uk/ - a sister site of mortgageguideuk.co.uk/