| House prices have dropped by 0.6 per cent in | | | | 'subprime' products. They have also increased the |
| March, bringing the annual rate of house price | | | | cost of many other mortgages. |
| growth down to 1.1 per cent, Nationwide has | | | | In particular, it is becoming increasingly difficult for |
| revealed. | | | | first time buyers to get on the property ladder. |
| The figures come amidst global financial instability | | | | This is mainly due to the rise in house price to |
| and news that housing market activity is | | | | earnings ratio. In the past this problem was got |
| decreasing. The average cost of a house in the | | | | around by banks being willing to offer 'generous' |
| UK is now £179,110, just £2,027 more than | | | | mortgages (e.g. interest only, self certification, |
| this time last year, and according to Nationwide, | | | | 100% mortgages). For example, in the past, the |
| prices will continue to fall.Nationwide’s | | | | Abbey National lent 5 times a borrowers salary. |
| Consumer Confidence survey has found that | | | | This increased generosity in lending helped to keep |
| since September, when house prices experienced | | | | the market buoyant without addressing the |
| a boom, consumers’ expectations of house | | | | underlying problem of overvalued house prices. |
| price growth have fallen sharply, with consumers, | | | | The Credit crunch has now made this difficult. |
| on average, expecting a 3 per cent fall in the | | | | For those who believe house prices can never fall, |
| next six months. Fionnuala Earley, | | | | it is worth remembering the case study of Japan. |
| Nationwide’s Chief Economist said: | | | | In the 1980s there was a similar boom in house |
| “This fall coincides with turmoil in the financial | | | | prices in Japan. But since the peak of 1991 house |
| markets and is likely to have been compounded | | | | prices in Japan have fallen for 14 consecutive |
| by the problems at Northern Rock, but it also | | | | years, leading to considerable economic problems |
| reflects the signs of slowing in the more visible | | | | such as lower consumer spending. House Prices |
| annual rate of house price growth and house | | | | have also started to fall in the U.S.A. US prices |
| purchase approvals data. House price growth | | | | have now fallen considerably since their peak in |
| expectations responded dramatically to all of | | | | 2007. Traditionally, the view of the housing |
| these factors.” The time for reselling a | | | | market is that it is not just an asset, but a place |
| property and maximizing on conveyance | | | | to live. Therefore, unlike the stock market, house |
| opportunities is now, before the lash of the credit | | | | prices won’t rise and fall due to speculation. |
| crunch may ruin any chance of home resale. | | | | However a lot of demand for UK housing is |
| At the moment, the lack of mortgage finance is | | | | coming from buy to let investors. Many buy to let |
| one of the most significant factor in falling | | | | investors are in the market for the long term; |
| demand for housing. The Council of Mortgage | | | | however, now that prices are falling, some of |
| Lenders suggest that mortgage approvals have | | | | these speculators are likely to leave the market |
| fallen to the lowest levels since 1991. Upto July | | | | causing a significant drop in demand. |
| 2007, mortgage lenders were very competitive | | | | In a research paper Alex Hamilton argues that |
| and eager to attract customers with mortgage | | | | much of the housing market is dominated by |
| products such as 100% mortgages and high | | | | herding behaviour. (Source 2) This means that a |
| income multiple mortgages. However, the credit | | | | lot of the rise in demand is caused by market |
| crisis has led to banks struggling to raise finance, | | | | sentiment rather than economic fundamentals. |
| therefore they have had to reduce their | | | | Now the market sentiment has changed people |
| mortgage lending. To ration mortgages, they have | | | | are less confident about buying. |
| removed many mortgage products, especially | | | | |