How To Purchase House

It is a subject which splits opinion on a daily, weekly and monthly basis – the housing market. The sector is pored over in minute detail, with many lenders, bodies and other organisations publishing figures at the end of each month, detailing average house prices, annual changes, monthly changes, regional breakdowns, discrepancies between asking and selling prices, and so on.Data released recently by the Royal Institution of Chartered Surveyors (RICS) says that house prices are showing their most pronounced rise for more than two years. This, in part, has been caused by a lack of supply, but should not take away from the fact that the proportion of surveyors reporting price increases is at its highest point since May 2007 – well before the outset of the credit crisis.It is difficult to ascertain just how accurate or reliable these surveys – and there are a great many – actually are. Most are released by groups or organisations that have a vested interest in the value of property going up. One of the more reliable reports comes from the Land Registry, which bases its figures on the prices houses are actually sold for, not what they are deemed to be worth by the owners or agents. After all, a house is only worth what somebody is willing to pay for it.That being said, there does seem to be evidence that an appetite for entering the housing market is returning. Reporting its figures for September, the National Association of Estate Agents said that the average number of house hunters registered at its agents had jumped from 238 to 294 in the month. Furthermore, a survey has found that it is cheaper to buy a home in the UK than it is to rent in all regions apart from London, although this assumes that first time buyers have sizeable deposits in place.What is certain is that at the end of September, there were more mortgage products to choose from than there have been for almost a year, with a shade over 1,400 on the market. There are still just a handful of products that offer buyers a loan worth the total value of the property, or even 95 per cent, but the 90 per cent loan-to-value market is now comprised of more than 100 products, which has not been the case for most of 2009.A number of new trackers have also been launched by providers and, with some predicting that the base rate of interest will remain low for some years to come, the more daring of potential homeowners have a number of competitive deals to choose from. There is still some way to go before the housing market can be considered in good health, but a number of providers have decreased their rates lately as well as launching new products that look competitive. Those who had given up designs on owning their own homes could do worse than giving the mortgage best buys a cursory glance once more.

This is the third in my series on the prospects for the Housing Market in England and Wales in 2009.

Now is the time to reflect and predict what will happen over the next few months.

The Good News:

Reassuringly, the doomsday scenarios of further falls in house prices of between 10% and 30%, which some commentators were predicting at the beginning of the year, have evaporated.

What we have seen over the past few months is steadily increasing house prices, measured by both the Halifax and the Nationwide Building Society monthly indices.

But the picture is far from universal; London and the South East have captured most of the gains. But, there have been bigger rises elsewhere for country property and sharper declines for city centre flats.

This data, accords with my view, that what was happening in spring was a slowing in the speed of price reductions.

My summer assertion that those who were still waiting for a floor to be reached in the Housing Market had almost certainly missed the best bargains seems an obvious conclusion some 4 moths later.

There has also been a mini surge in properties on to the market in August and September, with numbers perhaps inevitably falling back in October ahead on the run in towards the Christmas and New Year festivities.

Some beleaguered first time buyers have been saved by the so called Bank of Mum and Dad, where others first time buyers have been forced to sit it out, with high percentage deposits still demanded by mortgage lenders.

Mortgage lending has increased but is still way off what could be described as normal market conditions.

The Not So Good News:

The market conditions which conspired to produce such benign conditions need some explanation.

The availability or rather lack of availability of mortgages has had a significant impact. Self Certified loans have assumed the mantle of bad boys, and have all but disappeared. Buy to let mortgages are out of favour as well with most lenders.

The necessity for a HIP before a property can be marketed has also had an impact, but not as great as some Estate Agents would have you believe.

Both have resulted in a serious shortage in the amount of properties coming to market for sale. Hence, this shortage, at first stopped prices falling and then secondly, led to small increases.

The inevitable tailing off of new stock of properties onto the market in late autumn will continue this upturn in prices, however modest in total.

There is evidence that the mortgage companies have staved off wholesale repossessions, but with unemployment still not yet peaking, there will be room for more property onto the market to potentially weaken prices.

The so called accidental landlords, forced to rent to avoid loses on their investments may be encouraged enough with hardening prices to put their properties on the market.

Twist Stick or Bust then?

We are still technically in recession, alone among the major European economies. These figures may well be revised upwards, and we are I suspect at present witnessing weak growth.

With such economic uncertainty, it is highly unlikely that interest rates will rise and may be depressed well into 2010 and possibly beyond.

This may lead some to put their properties on the market in the New Year, or buy ahead of any further price rises.

For many more, the prospect of mortgage refusal or an unfavourable mortgage rate will deter them enough to wait and see a little while longer.

Equitrax, the credit checking agency has estimated that almost half (45%) of home buyers had their first mortgage application refused.

If you add to the mixture, a general election in May, the likelihood is that fewer properties will be available for sale. As all Estate Agents will tell you general elections severely dampen housing market activity.

Price rises for most properties will inevitably follow. Perversely, however, if sentiment disappears it is perfectly possible, (with fewer properties for sale but also fewer buyers), prices may start to drop.

What will also have a bearing on how the housing market performs are the inevitable increases in taxation after the general election in May 2010.

Furthermore, with Stamp Duty being a major disincentive to move, people may decide unless forced by one of the 3D’s, debt, divorce or death, to stay put.

Most analysts are now pushing their forecasts for a sustained albeit slow recovery in the Housing Market into 2011 and 2012.

Should you Sell?

Hometrack the housing market research, company shows the average time to sell a house now to be just over 8 weeks, down from 12 weeks at the beginning of the year. It is predominantly a Sellers’ market, so securing a sale should be easier than any time this year. As always price and location are still the crucial factors.

Should you Buy?

The winners so far this year have undoubtedly been cash purchasers or low loan to value buyers picking up the best mortgages.

You will still certainly benefit, if you can get mortgage finance, by buying now against future price rises next year. However, you may prefer to choose from a wider range of available properties coming to market next year.

A watching brief would be advisable. If you do not need a mortgage or have mortgage funds but no property to sell, then if your dream property comes up, you should go for it!

As a wealthy buyer who purchased a property in Belgravia, at the height of the boom in 2007 commented, “when you are buying quality you can never pay too much-you can only pay too soon!”

The Sub Prime problem arrived in an economy growing at over 3%. It is disturbing to speculate what will happen to the substantially weakened banks if there is a long recession and the vast bulk of medium rated mortgage risk and possibly even the huge Junk bond market come under, not just the current valuation problems but also, pressure from actual defaults.Whilst many home owners are clearly concerned about falling house prices there are a few interesting options out there both for investors and home owners who want to hedge against falls in the housing market.Spread betting firms like IG Index now offer markets on the Average UK House Price. Of course with any such speculation there are risks. However, trading the Housing Market is an interesting option.Sentiment is now falling and whilst mortgage approvals have been suffering this is not the end (or even beginning) of the story. Viewings and enquiries at Estate Agents have been recording ever lower numbers. The mortgage offer is generally one of the last factors in a house purchase, first comes the hunt. The real test will come if the employment outlook begins to seriously weaken. It must be something of a worry to policy makers that the current anguish is being felt when we have virtually full employment. What on earth will happen if (when) large numbers of high earning jobs start to be lost? Whilst people outside of the City of London like to smile at every misfortune felt by the absurdly overpaid bankers the fact is that in doing so they are laughing at themselves. Weakness in the City would mean an ever widening circle of misery. Looking at the housing market from a slightly different angle, Simon Denham of Financial Spreads recently commented on the current high cost of mortgages, “The ridiculous requirement for banks to mark to market every single asset they hold is playing havoc. Most investments are in very liquid easily priced holdings eg stocks, government bonds, cash etc. However many are in completely illiquid and still perfectly secure assets eg mortgage bonds, property etc. How do you value a product which has good solid worth but for which, temporarily, there is no buyer? Many are being forced to revalue at ruinous levels simply because the auditors, fearful of their own backs, are insisting that this is prudent. None of them would ever dream of selling at these valuation levels but this is academic.“It is this ‘mark to market’ requirement that is likely to hold back recovery. As soon as a mortgage is awarded the lender may have to mark the loan immediately at a substantial loss. You can understand the lender’s reluctance.”It is easy to let the current slowdown in housing to assume crisis proportions in many investors’ minds. However, in reality, a year ago it would have been difficult to find anyone who thought that prices were anything other than over heated. A period of cooling or at least stagnation is probably well overdue. Unfortunately, given that we live in a country where for many people the value of their house defines their wealth, it is easy for any slowdown to affect the national psyche. If we enter a five year slump as per 1989 to 1994 then the economy will find it very difficult to ignore.

Note that spread betting on UK House Prices like other forms of spread betting carries a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.

According to the Land Registry, house prices in January were down by 15.1% since the same time last year.  Every region in England and Wales has seen property prices fall by at least 12% in the last year.  Buyers are waiting until they see that the market has bottomed out, and with the waiting, house prices are expected to continue falling for the next few months.  There are however signs that the freefall may be easing and soon may have reached the bottom. 

For example, with prices in prime spots in London being down up to 20% compared to the March 2008 peak coupled with the weak pound, buyers from overseas are seeking to pick up a bargain.  The window of a strong euro against the pound and the security of bricks and mortar in prime location adds further appeal.  Although Londoners themselves may object to property being snapped up it will be one small prop to help stabilise house prices.  Importantly, according to TimesOnline, cash sales, which are not recorded in the statistics produced by Nationwide or by Halifax, now account for a whopping 40 per cent of transactions as buyers turn to property as a more lucrative alternative to low-paying deposit accounts.

Mortgage availability is beginning to see change.  In January, mortgage approvals held steady at 31,000.  Although this is half of what it was last year, they have averaged 31,000 for the last six months.  Mortgage lenders typically want a deposit of 20% of the purchase price which is a hefty sum to secure.  Saving for a deposit takes time and in this time house prices fall.  However, Northern Rock will soon begin to offer some 90% mortgages.  The Bank of England is expected to lower base rates again and is also likely to increase the amount of money in the British economy, both of which will improve the supply of funds for mortgages.

The current low interest rates, although will not lead to a sudden housing market revival, do make loans more affordable which will be another positive support for both new and existing borrowers.  According to Halifax, mortgage payments have fallen from 31% of gross earnings for a new borrower in the first half of 2008 to an estimated 21% in January 2009.  The house price to average earnings ratio has decreased to an estimated 4.48 in December 2008 from a peak of 5.84 in July 2007; a fall of 23%. The long-term average is 4.0.  Potential buyers are noticing the opportunity: according to the Royal Institution for Chartered Surveyors enquiries from new buyers rose in January 2009 for the third successive month.  

Of course, there continues to be pressure on incomes with rising unemployment and the negative impact of the turbulent financial markets on the availability of mortgage finance, but the update is that there are signs that the freefall on house prices and drought of mortgage availability is easing.  As such, it could be wise to buy before house prices reach bottom as with low prices, low interest rates and increased mortgage availability an eventual recovering economy could bring house prices to rebound sharply.

According to the press the US housing market is in freefall and the UK housing market is following it. A market that only moves in one direction clearly offers investors opportunities. But how to trade house prices? One of the easiest ways to gain exposure is through spread betting where some companies now let you speculate on the average UK house price and even the average London house price.

Economies thrive on confidence and one of the pillars of confidence in the UK is the value of property. If the whole market grinds to a halt through lack of liquidity then there would be only one direction for it to go. Down. In a market bereft of buyers the prices must fall. With fewer and fewer people able to ‘gear up’ to pay the current prices then I fear this will be the scenario towards which we are heading. A major problem is that once a trend gets set it is very difficult to halt its momentum (witness the property situation in the US). Buyers shrink from putting themselves in hock when they fear that next week / month / year the house they have, so painfully paid for, will have dropped in value. And so stagnation follows. If the housing market locks up then many retailers who thrive on sales to ‘new owners’ will also fail and so on down a long line that ends with recession. At the moment, growth is just enough to keep the tills turning over but without some aid from our central bank I fear that this will not be the case for long.

If I was looking to buy a house now I would just knock 25% off the asking price on the basis that this is where forecasters expect the market to be in a years time. Presumably I would be paying a Mortgage (probably around 7.5%) during that time, have paid 2 to 5% stamp duty on the deal plus numerous other house purchase related fees. If the market did indeed drop as expected a purchaser at current levels could easily be looking at an overall negative cash/asset position of some 30-35% by next year once you include all of the costs. That does not sound too good.

Although for those people who are certain that the markets are in freefall, or for those who feel the UK is different to the US and less affected by sub prime fallout, the spread betting companies have come up with an interesting type of speculation.

You can now spread bet on the future UK average house prices.

How does it work?

Looking at IG Index they make their spreads based on “the Halifax House Price Survey produced by HBOS, the premier and most widely publicised indicator of the UK housing market. So, whether you want to profit from predicted market shifts or hedge against the value of property you already own, you can back your judgement against nationally recognised figures”.

Prices are given in points per £1,000. You simply ‘buy’ if you think the average price is set to rise or ’sell’ if you think it will fall.

The current spread of the Average London House Price (December) market is 258.1 to 264.1 points.

The current spread of the Average UK House Price (December) market is 163.1 to 166.7 points.

(Both December markets expire on 31 December).

So focussing on London, that spread is basically saying you can bet on London house prices being higher than £264,100 or lower than £258,100 on 31 December.

You bet in £x per point. Where a point is £1,000 of the house price. So if you are trading £15 per point and the average house price moves £5,000 (5 points) your profit / loss would change by £15 per point x 5 points = £75.

Taking the above London spread let’s say you think the prices will continue to fall. You could therefore Sell £20 per point at 258.1 points.

If the market does fall to let’s say 249.5 points (ie £249,500) then you would win / lose: (258.1 points – 249.5 points) x £20 per point = £172 profit.

Note that profits in spread betting are tax free*.

But if the UK market has a correction or simply stops falling or if London is more resilient to the current mortgage malaise then the average London house price could be £265,200 on 31 December.

Therefore if the market closes at, let’s say, 265.2 points then you would win / lose: (258.1 points – 265.2 points) x £20 per point = -£142 loss.

Of course, as the example above shows, as with all spread betting, care is needed.

Financial spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.

* Note that Tax Law may be different if you pay tax in a jurisdiction outside the UK, it can also change.