The ‘mortgage famine’ is a myth. There are enough mortgages out there. It’s just that people don’t want to buy. That means things aren’t as bad as they look for the housing market.
Of course, house prices are down and will go on falling for many more months. That’s inevitable as a result of the credit crunch and it’s a perfectly natural follow-up to six years of boom and rising prices. Nothing goes up in a straight line.
But for the fall to turn into a collapse would require that potential buyers simply couldn’t get the loans they need to buy. And a survey from HSBC shows, as any conversation with estate agents will also tell you, that would-be buyers can get the money.
In fact, HSBC found that 98% of would-be buyers got a mortgage. So the fact that supposedly there are only 3,700 different mortgage products on the market as opposed to 13,000 last August is irrelevant. The truth is that most of those supposedly different offers were simply minor variations on the same product. There never were 13,000 different mortgages available to UK buyers. The ‘mortgage famine’ is a myth.
So long as would-be buyers can get loans, the property market is unlikely to melt down. How far it will fall will depend on how severe a recession we get. That depends crucially on how bad the US recession is, and here the data is mildly encouraging. There are signs that the US housing market is bottoming. And very low interest rates look like helping return the US economy to growth by the middle of next year.
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Small flats are still too dear
The lack of first-time buyers is a problem for the UK market, but not for all of it. FTBs buy mainly small city-centre flats, the one type of property that is in surplus at the moment because too many developers built too many in the hope of selling them at far too high prices.
Despite falling by as much as 30% over the past year, many of these flats are still overpriced in relation to your standard 3-bed semi and when I ask what return you’d get from buying one of these flats and letting it out, the answer still often comes out at about 6%. That’s too low: the rental return on BTL needs to be 7-8% for it to make sense, so city-centre flat prices should fall further before they’re a slam-dunk buy. That means FTBs are mostly right to sit on their hands and keep renting, though some are starting to negotiate cut-price bargains with desperate developers.
Incidentally, to really compare one of these flats with a 3-bed semi you must take service charges into account. A freehold house has no service charge. So if you pay £100 per month service charge with a flat – a charge that will rise over the years - you need to add about £20,000 to the price of the flat to make it comparable with that of a freehold property.
Loan terms are reasonable
I remember the 1990s recession when interest rates doubled to 12%. I and many of my friends stared bankruptcy in the face because of the huge rise in our mortgage repayments. Today, even with RPI inflation at 5%, you can get a 2-year or 5-year fixed-rate mortgage at 5.98%. That’s not expensive, provided you can find such a loan without a huge arrangement fee. Nationwide scores well on this count with £599 flat fees.
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But with interest rates likely to fall in 2009, the question is whether you’d now be better off with a tracker mortgage. Nationwide’s 3-year tracker (fee £599) at Base Rate plus 0.74% costs 5.74% now but might cost 1% less by the end of next year.
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If you pay higher rate tax, then consider an offset mortgage, which enables you to earn an effective interest rate of 10% on your savings.
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In each of these mortgage sectors, competition is probably stronger now than a few months ago. All lenders have higher deposit requirements, and all are tougher on affordability than they were last year, but they still want to lend money. So would-be buyers or remortgagors can still expect to secure a good deal if they shop around.
