Possible housing crash in 2008

by Kay Murchie

According to many property experts, the bubble could be about to burst on Britain’s booming property market. A crash could wipe at least £450billion off the value of the country’s housing stock. The results would be a flurry of bankruptcies and repossessions.

According to research by the Bank of America, there is a one-in-five chance that the UK housing market will experience a severe crash in the next 12 months. The Bank states that property prices are currently overvalued by at least 20%.

Bovis Homes and Barratt Developments, the housebuilders, have recently indicated that the 5 consecutive interest rate increases have resulted in slowing growth in the property market.

In addition, record levels of mortgage and unsecured debt and buy-to-let enthusiasts are making the market even more unpredictable. Many hold the Gordon Brown responsible for forcing homeowners with higher taxes and his unwillingness to increase stamp duty thresholds in line with house price inflation.

Financial institutions and analysts believe that current economic circumstances are indicating a crash.

First-time buyers facing hardest ever battle

Despite house prices falling, mortgages are becoming harder to secure which means first-time buyers are facing a tough time currently.

There are now only 4,100 different mortgage deals on the market, compared with 15,599 last July. Furthermore, just a couple of months ago, loans of up to 125% of the value of a home were on offer but these have all been withdrawn.

This is according to research from the annual Roof affordability index published by the housing charity Shelter who said an impossible situation is being made even worse by Britain’s mortgage meltdown.

The decade-long housing boom shows that the price of an average first-time property increased from £52,674 in 1997 to £159,494 in 2007.

Furthermore, mortgage repayments used up nearly 21% of the average working household’s income in 2007, compared with 12% in 1997, according to Shelter.

Adam Sampson of Shelter said despite falling house prices, many lenders are increasing their mortgage rates, making an already desperate situation worse.

It means there is a generation of young people and young families being locked out of the housing market without a hope of ever sharing in the asset wealth of the generation before.

David Stubbs of the Royal Institution of Chartered Surveyors said the biggest issue for first-time buyers was finding a deposit.

Saving for a deposit is likely to remain the main barrier to entry to the market as lenders shy away from those buyers who only have a small amount of money to put down, added Mr Stubbs.

Abbey Mortgages has established that 1.1 million first-time buyers are delaying purchasing a home for at least the next 12 months. This is primarily due to the withdrawal of cheap mortgages and the decline in property prices.

Morgan Stanley predict 10% house price falls this year

Analysts at US investment bank Morgan Stanley, predict that property prices will fall by 10% this year and 5% in 2009 and, as a result, will push more than 1 million homeowners into negative equity (where their home is worth less than their mortgage).

Morgan Stanley said our base case is for a 15% fall in nominal prices over two years, our bear case looks for a 25% fall over two years.

Last month’s Great Housing Market Debate saw 150 industry representatives say they believe that property prices will decline in the next 12 months.

Furthermore, Neil Woodford of investment house Invesco Perpetual, recently said property prices across the UK will fall 8% to 10% this year.

In the early 1990s, house prices declined by 10.6% over a prolonged period, leaving owners sitting on houses they were unable to sell without the risk of losing large sums of money.

Morgan Stanley’s predictions are similar to that of Vince Cable, deputy leader of the UK Liberal Democrats. He said by next April, 3 million British families could be plunged into negative equity.

Mr Cable’s warning is based on the assessment that there are around three million people whose mortgage currently accounts for 90% or more of the value of their home.

If prices fall by 10% over the next 12 months, they will find themselves in the black hole of negative equity, concluded Mr Cable.

<!– –>

First-time buyers delaying a property purchase

Abbey Mortgages has established that 1.1 million first-time buyers are delaying purchasing a home for at least the next 12 months. This is primarily due to the withdrawal of cheap mortgages and the decline in property prices.

However, this group of people are advised to invest their deposit wisely. Those delaying purchasing a home would benefit greatly from moving their deposits into high-interest saving account, according to Abbey. This could help make deposits grow faster than house prices, and leave first-time buyers in a stronger position next year.

Abbey said investing the average deposit of £28,000 would generate around £1,820 in interest over a 12 month period.

This amounts to funds totalling £31 billion and wise investment over the next year could make potential buyers an extra £2 million in interest.

In spite of the concerns over the future of the property market, around 624,000 first-time buyers are still planning to invest in their first home in the next 12 months.