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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Friday, 16 May 2014

The UK Housing Market - where is it going?

Owning your home is something of a British obsession. It is not just somewhere to live (though that's important), it's also the biggest investment most people make in their lifetimes. And if you already own one you're fortunate - the prices seem to be going nowhere but up.

Last month, figures from the Royal Institute of Chartered Surveyors suggest that on average we can expect a 6% rise in prices for the next five years. In the last year alone we've seen a 17% rise in London prices, arguably driven by an influx of wealthy foreigners who see London as a good investment, and the ability of London as a centre of economic growth to attract ever more people. But the price rise in London tends to distort the overall pattern, and if we remove London from the equation we get a national price rise in the last year of 5.8%.

The Office for National Statistics has produced a chart showing price changes expressed as percentages. You can see below that we had a substantial drop into negative figures with the financial crash in 2008, and by contrast now we're seeing a steep upward movement.

Figure 1: Annual house price rates of change, UK all dwellings from January 2004 to February 2014

(12 month percentage change)

The ONS puts the average UK house price at £250,000, while Nationwide have it lower at around £175,000. The Land Registry has it lower again at £165,000. This variability is down to the way the organisations calculate the figures, Nationwide using its own mortgage lending data, while the ONS uses data from a number of lenders, and makes certain adjustments. The Land Registry uses property ownership registration data. It all leads to an £85,000 difference between lowest and highest figures, which tends to confuse the issue.

London of course leads the pack, with the average house price now around £458,000. And if things move as predicted that will be £567,000 by 2020. 

So what's driving this resurgence? Low interest rates are a factor, as is the Help to Buy Mortgage guarantee scheme.  Then there's the funding for lending scheme, which was launched by the government in conjunction with the Bank of England in 2012. Its purpose was to provide cheap money to banks and building societies, thereby encouraging them to increase mortgage lending. This seems to have worked too well, as it was withdrawn in November 2013, supposedly to cool the market down. Another significant factor is the lack of new housing being built. This is a problem stretching back many years, and it seems the political will to address it has been woefully lacking. So we've had a long period where demand exceeds supply.

This seemingly relentless increase in prices creates issues of affordability, especially if you're a first time buyer. If we use a simple example to demonstrate the problem: - let's assume you want to buy an averagely priced London house at £468,000. You actually have a deposit of £40,000, and your net income per month is £2,500. At a mortgage term of 25 years and an interest rate of 4.75% you're only looking at a monthly repayment of £2,440! Which is 97% of your monthly income. Walk in the park then. This example may be extreme, but for younger people living in London (many of whom won't have a £40,000 deposit), it effectively excludes them from home ownership.

Intiatives (as mentioned above) have been launched to address the problem. The most significant one from the buyer's point of view is the Help to Buy scheme. This comes in two flavours. The first is an equity loan. This allows a prospective buyer with a 5% deposit to take a government loan for up to 20% of the price of the house. That loan is fee free for five years, then you will be charged an annual fee of 1.75%. With this arrangement in place you can then apply for a mortgage up to 75% of the property's value. Flavour two is the mortgage guarantee option. Again, you need 5% deposit, but this time the government guarantees the mortgage with the lender, so if you default they'll get their money back. Both these options are open to first time buyers and those moving home, on a property with a value up to £600,000.

There's no doubt that this scheme has made it possible for people to get on the housing ladder. But along with the funding for lending scheme it has been criticised in some quarters for stoking up the housing market.

The crazy multiples of income that were on offer before the last recession in 2007/8 (up to 6 times salary in some cases) are no longer the norm, though some lenders still offer them. And although income multiples are still a factor, as a result of the recent Mortgage Market Review lenders are moving towards pure 'affordability' as a criterion. This means that during your mortgage application your finances will come under close scrutiny, a kind of 'stress test' for consumers. This is an effort to curb the tendency of borrowers to overextend themselves when they had the opportunity pre-2007. Interest rates are currently at a historic low, but when they go up, as they inevitably will, your lender wants to be confident about your ability to keep repaying the loan. For many people this kind of scrutiny will make it yet harder to get a mortgage.

So the alternative for those young people priced out of the market is either to rent or stay at home with Mum and Dad. The stay at home generation aren't doing it by choice, they have the issue of first getting a decent paying job, which is proving problematic for many well qualified young people, the jobs just aren't there. And assuming they are working, the average rent for a one bedroom flat in London is £1200 a month. Admittedly that figure is only around half that outside the capital, but it's still a significant slice of a salary. And rents are only predicted to rise going forward.

There's a school of thought that says the UK housing market is a bubble that will one day burst, and compared with other countries Britain's housing stock comes out as 30% overvalued. But apart from the 2008 dip, there seems no sign of the bubble bursting anytime soon. Even if in the near future salaries rise, and more housing stock becomes available, it will still be a challenge to get your foot on that ladder. 

Darren Winters


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