House Prices House Prices: 2008 Predictions

Date Published:

28/05/2008

In the four months since our last report about house price predictions in 2008, the property market has been turned on its head. So what are the latest predictions?

By Gordon Miller

The Northern Rock crisis turned into a fiasco and, along with the credit crunch nationwide, it has pushed house prices on a downward trajectory for the first prolonged period in more than a decade. With the help of expert property analysts, we look at what's in store for the remainder of 2008.

Depending on your point of view in the first quarter of 2008, either the wheels fell off the UK property market trolley or we had a well overdue price correction. In a recently published report, the International Monetary Fund claims that house prices in Britain are almost 30 per cent higher than can be explained by fundamental factors such as disposable income, interest rates and the size of the working-age population.

Implicit in the report is the issue of house price affordability, especially for first time buyers. The theory goes that if there are no first time buyers, there's no upward pressure on the housing market and a 'bottleneck' is created. The annual Roof Affordability Index highlights the problem in the UK of being able to afford to get on the housing ladder.

How House Prices Have Risen

The Index reveals house prices for first time buyers throughout the UK have risen 200 per cent in a decade, and the average first time property price has rocketed from £52,674 to £159,494, with house price to income ratios doubling from 1.72 to 3.4. The figure is even higher in London, with first time buyers facing a huge 250 per cent rise to almost £260,000.

The Index, which was initiated in 1994, also shows that while the average weekly income of working households has risen 53 per cent over the last 10 years from £590 to £900, the average monthly mortgage payment has increased dramatically over the same period from £304.80 to £827.87 - a rise of 172 per cent.

It means it is now 78 per cent harder, as a national average, for first time buyers to secure a home than 10 years ago, with house hunters in every English region being impacted by rising housing costs.

Shelter chief executive, Adam Sampson, says, 'These new figures show in full the true and worsening situation first time buyers find themselves in. Every year the gulf between what first time buyers can afford and the cost of housing is widening. Despite falling house prices, many lenders are increasing their mortgage rates, making an already desperate situation worse. It means there is a generation of young people and young families being locked out of the housing market without a hope of ever sharing in the asset wealth of the generation before.'

A major issue in preventing the housing market from getting moving is the increasing reluctance among mortgage lenders to lend money to the public or other banks in the wake of the credit crunch. Mortgages of 100 per cent loan to value have all but disappeared, and banks aren't even passing on the full base rate cuts made by the Bank of England.

Recognising the 'bottleneck' that has been created, the Bank of England is to take over mortgage loans that are sat on lenders' balance sheets, in order to increase liquidity in the money markets. The UK's major high street lenders are said to be petitioning for a widening in the collateral accepted to include lesser quality mortgages and to make more longer-term funding available. PM Gordon Brown and chancellor Alistair Darling are said to be broadly supportive, wishing to give homeowners confidence that their mortgage is secure, and first time buyers hope that measures are afoot that will help them to afford to be able to buy their own place. Analysts say the government cannot afford to delay; to do so could tip a slowdown into a recession.

Ownhome Initiative

The government recognises the problem and, as a result, housing group Places for People and The Co-operative Bank has launched Ownhome, a government-backed scheme available throughout England that is aimed at widening home ownership and increasing housing affordability amongst key workers, social housing tenants and first time buyers with an annual household income of less than £60,000.

Ownhome consists of two parts - a loan and a mortgage. Places for People will lend buyers between 20 and 40 per cent of the value of their new home, and The Co-operative Bank will offer a choice of any of their award-winning mortgages - fixed, tracker or discount - on the remaining 60 to 80 per cent.

Key benefits of the new scheme include: no payments on the equity loan from Places for People for the first five years; no additional premiums or increased rates built into the Co-operative Bank mortgage; no deposit needed, although the flexibility is available to pay one if the customer can afford to do so; buyers will own 100 per cent of their home, so there is no rent or landlord to pay.