What effect has the credit crunch on the property market?
Recent fluctuations in international financial markets caused by the US sub prime crisis have already witnessed a UK lender go bust. On top of this there have been very public queues from Northern Rock customers wanting to withdraw their savings.
What are the likely effects of this credit crunch on house prices? Fisher German property partner, Andrew Ranson, investigates.
So far, demand in the UK housing market has been resilient in the face of five interest rate rises. However, house prices are at a record high of 5.8 times earnings, well above the 20 year average of 4 times earnings. Mr Ranson points out, “in particular, two million UK fixed rate borrowers will face their own crunch, when their cheap fixed rate mortgages expire towards the end of this year. When they do, they are likely to experience a more stringent lending market, as well as an increase in their monthly costs.”
The city bonuses which have fuelled the top end of the market over the last year are unlikely to help much next year and until interest rates start to fall again, lower growth and affordability are also likely to reduce interest from investors.
All these factors are likely to continue the slump in new buyer enquiries. So are we heading for another market crash?
Mr Ranson observes that although the market is more susceptible to a downturn than it has been for some time, there are a number of significant differences between the current situation and the crash we saw back in the early 90’s:
- Mortgage payments as a percentage of earnings have increased recently but at 24%, they are still considerably lower than their 35%peak in 1989/90.
- Although the Royal Institute of Chartered Surveyors (RICS) are predicting a 50% increase in the number of repossessions to 45,000 per annum, this too is a long way short of the 1991 level of 75,000.
- The current economy is much stronger. Both unemployment and inflation are much lower and more stable. In the early 90’s inflation was running at around 10% and unemployment rose rapidly from 1 million to 3 million.
Looking to the future, Mr Ranson thinks that the market is quite finely balanced. “If interest rates hit seven per cent we could have serious problems, but it is most likely that the market will just slow down, in much the same way as it did in 2005. Properties will probably take a little longer to sell, but given the strength of the economy, it is unlikely that many will be forced to sell. This will prevent sale prices from falling too much and if not forced to sell, many vendors are likely to just sit tight causing the volume of house sales to reduce. If the bank of England start to reduce interest rates later next year as expected or perhaps even earlier,” Mr Ranson thinks, “Some of these factors will start to reverse.” Please contact Mr Ranson for further information on 01295 271555
- Ashby de la Zouch
- 01530 412821
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- 01295 271 555
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- 01858 410 200
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- 01949 851815
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- 02380 883150
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- 01785 220 044
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- 01905 453275
