All About Loans Weblog

These days the news is filled with warnings that the stock market is going through a crisis and share values are well below what they were six months ago.

So what does that mean to all the people with large home loans? Well experts are warning that homeowners need not worry, as the recent volatility in the stock market is unlikely to have any real long-term affect on property prices.

The reason we need not worry is that despite the turbulence in the stock market the economic situation in the country is still very strong with unemployment low and inflation pretty much under control. Also historically there is evidence that stock market crashes do not have a negative affect on house prices. Looking back at the 1987 stock market crash for instance saw house prices remain strong and continued to remain so for the following years.

It is possible that the stock market crisis could even lead to a further rise in the property market as investors turn away from putting their money in the stock market and instead invest in buy-to-let housing. This up-turn for the finance industry could then see a fall in loan costs for borrowers.

As well as this the stock market crisis would have to last a lot longer before it really started to be felt across the rest of the economy. However mortgage prices could go up for some lenders because they rely on credit from the stock market.

So although homeowners are experiencing a down turn in house value, they don’t need to start worrying just yet about the value of their property being linked to the stock market.

There are a number of potential triggers that could be helping the housing to crash.

First of all the credit crunch has been making debt much more expensive in the past few months. As well as being more expensive, borrowing is also a lot harder to come by, with few of the cheap loans that were available last summer.

Secondly the buy-to-let sector is also heavily exposed after having grown out of almost nothing a decade ago to accounting for almost 8% of all mortgages today.

Thirdly, Britain like the US, has its own sub-prime or ‘bad debt’ housing sector, with such a loosening in credit standards in the past few years that as many as 5% of mortgage borrowers are using 50% of their pre-tax income to service their debt.

The UK has many mortgages with ‘teaser’ rates - mortgages that let borrowers get low repayments for the first couple of years and then move onto the more expensive standard variable rate (SVR). There has also been a massive rise in the more amount of interest-only home loans taken out which rested on the assumption that the capital value of property would always rise.

Unemployment levels are starting rise, along with the cost of living. Fuel and food costs have both rocketed, leaving many households pushed to the limit. With more repossessions taking place, the housing market is seeing a drop in asking prices, as banks try to recoup their losses.

Britain is now facing a very real possibility that the property market could go through a painful correction at best or at worst a full blown price crash that could potentially wipe as much as £50,000 off the value of the average British property in the coming years.

There are a number of reasons for justifying the realistic probability of a house price crash. First of all there is the fact that the average home in the UK now cost roughly £200,000 – that’s nine times the average income of the UK which is currently at £22,000 per year. In the mid 1990s the average price was only 4.5 times the average annual income, and this was at a time when the country was recovering from low unemployment, and cheap loans were not on offer to everyone.

Now that the cost of living is rising so sharply, fewer people can afford to consider moving up the property chain. With fuel and food prices going up and home loan rates so high, more families are looking to cut back, rather than expand.

One argument against the crash theory is that Britain is a small island with a large number of people seeking homes because of immigration and smaller family units. The argument basically goes that there is very strong demand for housing while supply continues to remain very weak, thus pushing up prices.

However this paints a false picture, according to the Home Builders Federation. The HBF say that the stock of new properties built since mid-2004 have been more than adequate to meet demand. Also if houses were in such short supply than we should also have been witnessing a large rise in the cost of renting a property however this has not happened until recently.

In the past 10 years house prices have gone up by 10% a year while the cost of renting has increased by only 3% or roughly the same pace as the rise in the cost of living. This is all about to change, however, as thousands of buy-to-let investors pull out of the housing market, leaving a smaller pool of rental properties.

Despite the coming increases in rents, investors with buy-to-let mortgages are facing the same high interest rates as the rest of the housing market and are unable to wait for rents to rise for fear of defaults and repossessions.

The recent housing boom and high rents are lead 850,000 people to take out buy-to-let mortgages, totalling £95 billion of outstanding debt, according to the Council of Mortgage Lenders (CML).

The number of investors choosing to build a property empire is showing no signs of slowing despite the last interest rate increase, or the prospective house price increases over the next year.

Borrowers were approved for 330,000 buy-to-let home loans in 2006 - an increase of 48% in the last year.

The last five interest rate increases bumped the cost of a £100,000 loan to an extra in interest £1200 a year.

Lee Grandin, managing director of Landlord Mortgages, said:

“The most recent base rate rise to 5.75% is a blow to many buy-to-let investors. With landlords still reeling from the rate rise in May, this second increase in two months will pile on further pressure.”

Stuart Law, managing director of Assetz, a property investment firm, said:

“It is tenants who will pay the price of five interest rate rises over the last 12 months, as landlords increase rents in an attempt to recover their costs. With higher mortgage costs, fewer people will be able to afford their own homes, but they must live somewhere, which is driving demand for rental property and enabling landlords to increase rents.”

Many people are turning to property investment as the new ‘mutual funds’. It is the new way to become wealthy. While it isn’t a get rich quick program, it does offer a reasonably low risk method of wealth building that anyone can step into.