What's really happening to house prices

The slowdown in the UK housing market is a "grave cause for concern", according to Government Minister Harriet Harman.

But is the situation really that bad? Do the facts and figures underwrite this claim and, if so, what are the implications for house buyers and sellers?

Certainly the possibility of a full blown recession appears to creep closer. Every day now there's a large dollop of depressing financial and economic news. As expected, the Bank of England has not cut interest rates, the FTSE 100 wobbles on the edge of a bear market, total unemployment has climbed by 20,000 since February and the Council of Mortgage Lenders (CML) reports that new lending in May was down 44% on the previous year. In addition, consumer confidence appears to have crashed; a poll by the Nationwide shows that over 50% of households believe we will be in a worse state in six months' time.

According to the Halifax house prices have fallen some 8% over the past 10 months. This compares to the previous recession when it took 45 months for them to fall 13% from their peak in June 1989. The severe tightening in the availability of mortgage finance (loan approvals are down 28% in a month to a record low of 42,000, says the Bank of England) is the main reason for the fall in prices which is now feeding through into a house building slump.

The country's second biggest homebuilder Persimmon reported earlier this week that first-half completions were down 31%. It now plans to shed 1,100 jobs and lay off 900 casual staff, more than 20% of its workforce. Also, Taylor Wimpey and Barratt, the two other big house builders, have already dismissed more than 2000 workers.

Mortgage market still declining

Although the CML reports that lending volumes rose by 4% between April and May, rising loan rates has meant that on an annual basis volumes have almost halved. Remortgages have also reduced, falling by 23% in May compared to the same month in 2007.

The CML believes the fall-off in remortgaging may be due to increasing numbers of homeowners opting for their lender's standard variable rate (SVR) rather than paying a new arrangement fee. No surprise there, given the eye-watering increases in such fees in recent times.

Are you looking to remortgage? Maybe to extend your mortgage or just to get a more competitive interest rate?

For example, Halifax has raised its arrangement fee from £499 to £1,499 on its two-year fixed-rate deal. The average mortgage arrangement fee has increased tenfold in 15 years. The only consolation (if it can be so called) is that, generally, the higher the fee the lower the interest rate on the loan.

Thus for a large loan you could be better off, in terms of total monies expended, by paying a higher arrangement fee in return for a lower interest rate.

Tough for first-timers

House price surveys have become markedly more pessimistic since the beginning of the year and the mortgage famine continues unabated. The disappearance of 100% mortgages and stricter house deposit requirements have stymied many first time buyers who would otherwise be well placed should prices plunge further.

Getting your foot onto the first rung of the housing ladder? Moneyextra can help you compare all UK first time buyer mortgage deals to find you the best rate.

The Royal Institute of Chartered Surveyors has calculated that £27,738 is needed to pay for a deposit, stamp duty and solicitors' fees on the average first-time home price of £162,666.

Existing homeowners, for the most part, are not contemplating relocation unless for job or divorce reasons. The escalation in living costs in recent months, with the promise of more gloom to come, has deflated house-moving aspirations except for those desperate to downsize and reduce outgoings.

In fact it has been reported that more than 4 million households have resorted to personal loan or credit cards in order to meet mortgage or rental commitments in the past year. An Ernst & Young survey has found that households are 15% worse off than they were five years go, with the average mortgage repayment now £735 a month.

What the surveys say

The Nationwide reports that house prices in June were an average 6.3% lower than a year ago (representing the biggest drop since 1992); however the pace of decline has slowed a little, to 0.9% in that month as against 2.5% in May. With regard to location, the weakest performer is Northern Ireland where prices have fallen by 18.6% over 12 months. Overall, buy-to-let activity has held up well, accounting for 19% of all completions in 2008's first quarter (against the average of 14% over the last three years).

10 July 2008 © Moneyextra.com

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