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Fresh hope for homeowners in 2009?
By Johanna Gornitzki
For years now, the housing market has been racing ahead. Double-digit annual price rises had become the norm and homeowners watched as the equity in their homes soared. But the bubble burst in autumn 2007 as the effects of the US sub-prime crisis spread to the UK and the credit crunch squeezed lending.
Since then, mortgage finance has dried up and, along with it, our confidence in property. Throughout 2008, house prices fell by 14.6% with the price of the typical house worth almost £30,000 less than a year ago.
The number of available mortgage deals has also shrunk as lenders tightened their lending criteria, with total lending dropping 42% between September 2007 and September 2008, according to the Council of Mortgage Lenders. The trade body now expects new lending for this year to be just 37% of last year's levels.
The number of sales has also dropped to the lowest level since 1974, according to Nationwide, while HM Revenue & Customs figures reveal that property sales in the UK have fallen by 53% in the past year.
A vicious circle
"As people find it harder to get finance, fewer people can move, so the number of housing transactions decreases and house prices fall. It's a vicious circle."
So what will happen as we enter 2009? Can we expect more of the same or will confidence return? Of course, no one knows for sure what will happen over the coming year, but most experts remain gloomy.
Melanie Bien, director of independent mortgage broker Savills Private Finance, believes the housing market will continue to be "extremely weak", and Miles Shipside, commercial director of Rightmove, says the outlook remains uncertain because the full extent of toxic debt is yet to be revealed.
Most property commentators agree that the house price fall is likely to average 25% peak-to-trough, but some pessimists think we might even see a fall of 50% in some areas before prices start to level out. Much will depend on the availability of mortgages, says Bien, and recovery will happen at different times across the country, led by London and the South East.
"If mortgage finance becomes readily available again, we could see London prices recover by 2012," she adds.
Getting a good mortgage deal will continue to be difficult. The days when you could get a 100% or 125% mortgage are long gone, and the traditional 95% mortgages have all but disappeared, with most borrowers required to put down a minimum deposit of at least 10%.
While there's still a lot of choice in the market, it's becoming increasingly difficult for anyone without a decent chunk of equity - about 40% as opposed to 25% previously - to find a good deal. Shipside says: "We're in a new era of financial prudence. Higher deposits and responsible lending are the new reality."
Many hope the Government's decision to inject £50 billion into eight of the UK's biggest banks will create more positive conditions for the mortgage market. "This should bring down three-month Libor [the money market rate at which lenders lend to each other], which should make them more willing to lend," Bien says. "But we're unlikely to see criteria ease significantly in the next 12 months. The best rates and most choice will still be available to those with at least a 25% deposit or that level of equity in their homes, which is bad news for first-time buyers."
But while the bank bailout will increase the number of mortgages, it's unlikely we'll see a return to pre-crunch levels or income multiples. "The cheap rates we got used to pre-credit crunch may have gone for good as lenders are now chasing margins rather than market share. There's no need for them to try and undercut each other as they did in the past," says Bien.
Other experts are not ruling out the return of 100% mortgages, but most think it will be some years before LTVs (the ratio of the loan to the value of the property) climb back to these levels.
Trickle-down effect
Many experts believe the mortgage market will begin to expand in spring, but it could take a while before consumer confidence returns. Buyers might also hold off signing on the dotted line in the hope that prices will fall further or the mortgage market improve, and rising unemployment could also delay a recovery.
So what does this all mean for you? If you have a decent amount of equity in your home and are not looking to move in the near future, you can afford to sit back and relax. While it might be worrying to see the price of your property dropping, remember that you won't be affected by the value of your house until you come to sell it, and prices are likely to rise again as soon as the market recovers.
You could experience some difficulties, however, if you bought in the past year or so and put down little or no deposit.
But this is only an issue if you need to remortgage or sell. With the mortgage market currently so constricted, if you haven't got much equity in your home you'll find it hard to get a good deal and might end up on your lender's more expensive standard variable rate. And if you have to sell, you might find yourself in negative equity, which means you will get less for your property than the value of your outstanding mortgage.
Swings and roundabouts
If you're a first-time buyer, the current market conditions could provide some good news. "First-time buyers will see prices fall to within their reach," says Shipside.
The problem, however, will be finding the finance. "Even if a first-time buyer can get a deposit of 10%, they'll have to pay a higher rate than they would have done if they had had a 25% deposit. Unless their parents can help them out, they'll probably be forced to rent for longer," warns Bien.
But if you're hoping to buy a home, don't despair. Focus on saving for a deposit so, when prices do bottom out, you'll be in a good position to snap up the biggest bargains.
What to do if...
Research the area and what type of property you're after. Certain areas and properties have gone down in price more than others.
Line up your mortgage before making an offer.
Ensure your job is safe - you don't want to be stuck with a hefty mortgage and no income.
Consider the pros and cons of delaying buying property. If you're a first-time buyer, you don't have to pay any stamp duty on any property worth less than £175,000 until October 2009.
You are a seller:
Be realistic. While the value of your property might have fallen over the past 12 months, unless you bought in the past year or so, you should still have made a decent profit.
Take advice from your estate agent to find out what similar properties are selling for.
Check that potential buyers are serious: if they have committed some cash, they are less likely to pull out.
Make sure your property is immaculate: a fresh lick of paint and a general tidy-up could make all the difference in attracting all-important buyers.
Think about how you can make your property more appealing: offer to pay stamp duty, throw in a season ticket for commuters or offer it fully furnished.
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