Newsletter January 2008
Variable rates gain favour as borrowers expect a rate fall
There was a move away from fixed-rate mortgages in October, with levels of new fixed-rate loans falling to 68% from 72% in September. Fixed-rate loans have been popular throughout 2007 with levels consistently at or above 70%. But the trend towards variable rate loans may increase in coming months as the expectation of further interest rate cuts lessens the need for borrowers to lock in and guard against rate rises.
Mortgage affordability continued to deteriorate in October as interest payments consumed the highest levels of income in over 15 years. First-time buyers contributed 20.6% of their income towards mortgage interest, up from 20.4% in September and the highest level since 1991, and movers contributed 17.6%, up from 17.5% in September and the highest level since 1992. The Bank of England’s rate reduction of 0.25% will provide some relief to borrowers in coming months.
Lending volumes remained strong in October totalling £33.5 billion, a 9% rise from £30.6 billion in September and £30.6 billion a year ago. The majority of these loans are likely to have been approved before the full impact of the credit crunch and the problems associated with Northern Rock took hold. Lending is expected to be more subdued in coming months as mortgage approval numbers are showing.
Home movers typically borrowed 3.02 times their income, unchanged from September, whilst first-time buyers typically borrowed 3.36 times their income, down from 3.38 in September.
Commenting on the figures, CML director general Michael Coogan said:
“October is the last month we expect lending volumes to be higher than a year ago as lenders and borrowers will behave more cautiously in an uncertain and slowing market environment. Lenders have already responded to the credit squeeze by tightening lending criteria and increasing some loan costs. And looking ahead, any uncertainty in the housing market may mean that borrowers are less willing to stretch themselves financially. However, overall, in the coming months we expect the lending figures to be driven more by supply factors rather than lower consumer demand.
“For those customers coming to the end of their fixed rate mortgage in 2008, the potential impact of higher monthly payments will be diminished by the fall in bank rate this month and other rate reductions to come early in the New Year.“
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RICS UK Housing Market Survey November 2007
Surveyors reported that house price growth remained negative for the fourth month in succession - but supply still remains tight, says RICS’ UK housing market survey.
The RICS house price balance almost halved in November. 40.6 percent more Chartered Surveyors reported a fall than a rise in house prices, down from 23.4 in October - The most negative since May 2005 when 49 percent more Chartered Surveyors reported a fall than a rise.
However, the new instructions net balance still remains negative. 6 percent more Chartered Surveyors reported a fall than a rise in new instructions to sell property up from 17 percent in October. Supply has started to loosen somewhat but a strong labour market means that those at the margins still remain confident of maintaining stable household finances.
New buyer enquiries improved for the first time in 12 months but the net balance still remains well below the long run average. 31 percent more Chartered Surveyors reported a fall than a rise up from 41 percent in October. Some would–be-buyers have started to test the resolve of sellers who might be feeling the pinch of successive interest rises but many have been prevented from moving forward by tightening mortgage lending criteria. In fact, the balance of newly agreed sales declined at the fastest pace since April 1999 (when the question was first asked). 36 percent more Chartered Surveyors reported a fall than a rise in newly agreed sales.
Sustained weakness in demand, combined with loosening supply conditions is resulting in greater stocks of property on surveyor’s books. The stock of unsold property on surveyor’s books jumped by 8.7%, following last month’s rise of 9.7%. As a result, the ratio of completed sales (over the last three months) compared to the stock of unsold property on the market fell to 33.1%. Market conditions are now the loosest they have been since October 2005.
Surveyor confidence in house prices reached the lowest level since records began in 1998. Market conditions are still having a depressing effect on sentiment but the recent interest rate cut, may see optimism increase in the coming months.
Surveyors reported price falls across all regions in England and Wales. This was particularly visible in the East and West Midlands. In Northern Ireland, surveyors reported broadly based price declines. Scotland was the only region in the survey where surveyors reported a positive trend in house prices.
RICS spokesman, Jeremy Leaf, said:
“It is clear that the housing market continues to feel the strain of depressed market conditions. The recent credit crunch continues to hit confidence in the market, with Chartered Surveyors feeling the most pessimistic about price expectations since 1998.
“However, while underlying economic fundamentals remain sound and the labour market remains strong, large falls in prices remain unlikely. Employment would have to fall sharply before enough supply entered the market to create a significant dip. ”
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RICS Residential Lettings Survey Q3 2007
Demand for flats falls away but rents remain firm
The growth in tenant demand for rental property moderated as demand for flats fell away due to an oversupply in the market, says the RICS Lettings Survey.Rental growth continued its upward curve as the impetus for would-be-buyers to step onto the property ladder remained subdued by:
- accessibility issues
- rising uncertainty
- a slowing housing market.
20% more Chartered Surveyors reported a rise than a fall in tenant lettings, down from 28.5% in the last quarter. Significantly, demand for family homes remains stronger than for flats due to an oversupply of newbuild.
25.2% more Chartered Surveyors reported a rise than a fall in demand for houses compared to 16.9% Chartered Surveyors who reported a rise in demand for flats, down from 36.9% last quarter. New landlord instructions (an indicator of buy-to-let activity) dropped below the long run average of 16%. 11% more Chartered Surveyors reported a rise in landlord instructions compared to 19% in the previous quarter.
An uncertain backdrop may have dissuaded new investors in the buy-to-let market. The ongoing credit crunch is likely to have had some impact by encouraging banks and building societies to be more selective in their lending criteria.The survey suggests more landlords are dropping out of the market as the effect of interest rate hikes seeps through.
Looking forward, the pace of rental growth is projected to slacken while still being strongly positive.
Moreover, surveyors are generally more upbeat about the prospects for houses as opposed to flats, where in broad brush terms, there is perceived to be at the very least an adequate level of supply.
RICS spokesperson Jeremy Leaf commented:
"A combination of the tightening lending criteria and successive interest rate rises has started to hit the buy-to-let market but with the drop in capital gains tax due in April next year, many landlords will resist selling until the spring.
"With rents still on the increase many would-be-buyers will find accessing the housing market even more difficult as they struggle to raise the capital for that first important purchase.
"However, many landlords will still take solace from uncertainty in the economy and enjoy the gains from rising rents."
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