UK Property Market : from Relocation to Repossession

Mark Siara - Mon 14 Apr, 2008

The main benefit of a housing market correction: axing those TV property makeover shows

A slew of data in recent days has been jumped upon by journalists and politicians trying to determine the future direction and magnitude of house prices. However, all the recent news and speculation has done little to clarify the situation for the British public. Should we buy? Should we sell? Should we move and if we do, will we be able to afford the new mortgage. Will it be relocation or repossession? Let’s examine the facts.

First of all we had the Halifax house price survey which quoted a 2.5% drop for the month of March. This appears a bad portent, especially as this was the worst fall in monthly prices since September 1992. And, as pointed out here at the Daily Reckoning last week, the March drop saw annual house price inflation turn negative for the first time in many years.

As with most stories it is often prudent to look behind the headlines. The figures quoted here are averages, smeared across the various regions and a wide selection of flats, bungalows, maisonettes and houses (2, 3, 4 or 10 bedrooms, the survey didn’t say). This is important. For example, let’s say that flats may have dropped by 5% last month. That implies that other properties fell by a lesser amount (to meet the 2.5% average), or may have even risen. Similarly, if high priced properties in London are seeing a slump, this will have a disproportionate affect on the average price quoted in the Halifax (or Nationwide or Council of Mortgage Lenders or fill in with name of interested party) survey.

Look at the blogs or the message boards and a more detailed picture emerges. Obviously you do get your fair share of nutters and people with a vested interest who don’t know the meaning of the word provenance. But if you can filter out the detritus there are things to be learned. What can currently be gleaned is this: the changes in house prices are lumpy. That is to say they are not constant – there is variation across regions and property types. So an average figure won’t cut the mustard and on that basis the Halifax survey is not much help; we need more details even though it appears the average national trend is likely to be flat or down in the near term at least.

But then, HSBC bank comes up with a new mortgage offer. They will match any existing fixed rate for a further period of two years. Good news indeed for the worried masses with a soon-to-expire low rate deal. The devil is in the detail of course and the Beelzebub in question holds a three-pronged fork. Firstly, the offer is only available for the next few weeks. Two, you are going to need a minimum 20% deposit. And finally, there will be a (sometimes hefty) arrangement fee. So good PR but is it a good deal? Again you have to do your own research.

One point worthy of note here: If HSBC can lend to other banks at around 6%, why are they bothering lending to potentially defaulting homeowners at a rate that could be as low as 4.5%? Do they know something we don’t about the liquidity or solvency of our other financial institutions? Or do they believe the base rate will continue to fall below the current 5%, taking the interbank rate with it. Lending to homeowners and imposing large fees may then be the most profitable course. It may simply be however that they are cashing in on the perceived panic in order to grow their mortgage business.

What becomes clear after all of this is that the average homeowner and long-term buy-to-let landlords would be foolish to make a buy or sell decision based on a news story or the latest survey. And in any case, for most people a house is not like another investment – it is a home and with that goes a whole bucketful of considerations which are not merely financial. Trying to time the market, by for example selling up and renting in the hope of large house price falls, is a dangerous game although it may be very profitable.

But what about the wider picture? Would a house price correction be bad for the UK economy? In the short term probably, as people spend less when they fell less rich. The Treasury too will feel the pinch from the reduction in house purchase stamp duty. Longer term it may have a more positive effect. If people aren’t throwing as large a percentage of their income into the mortgage, they will have more disposable income left to spend on other things. The main benefit I can see however is not financial at all. As the population discovers that housing is not a one-way bet, interest in amateur buy-to-let and renovate-to-sell schemes will wane. And that should mean the appetite for the myriad housing shows currently on television will disappear. So, for the likes of Phil and Kirstie or Sarah Beany, it really will be time to move on.