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UK Property Market Recovery Could be Marred By Interest Rate Hikes

by Laura Halloway

If the UK economy improves later in 2011 it could lead the Bank of England to rising interest rates suddenly.  Experts are warning that this could cause potential problems for the property market.  It’s not come as much surprise that the bank’s Monetary Policy Committee has made the decision to leave interest rates at their record low rate of 0.5%.

However, this could mean trouble for those looking for larger mortgages or starting out on the property ladder.   ‘There are still serious concerns about consumer spending and the full effects of the fiscal tightening measures that were implemented in April are not yet fully known. However, if the economy turns a corner the MPC could be forced to make a series of sudden rate rises which could unbalance the housing market,’ said Jennet Siebrits, head of residential research at consultants CB Richard Ellis.

Nick Hopkinson, Directory of property company PPR Estates, however, doesn’t seem to think interest rates will rise this year.   ‘The Bank of England is clearly not going to be able to increase interest rates this year, even though inflation is running away from it. UK PLC is still very weak and any increase in borrowing costs would almost certainly tip the scales back into recession,’ he said.

‘The Government’s austerity cuts continue to bite, unemployment continues to move upwards and household incomes and cash flows will continue to come under increasing pressure for the remainder of 2011,’ he added.

Whatever does happen in 2011, the effect on the property market isn’t going to be promising.   ‘The house sale market has virtually ground to a halt this spring with transaction volumes falling back to the lowest levels seen since the credit crunch outside London recently. I therefore expect house prices to fall by 5% this year, even if base lending rates remain artificially low,’ said Hopkinson.

‘If interest rates are forced up due to the MPC needing to retain credibility on its inflation management brief, then things will get a lot worse for many struggling sellers,’ he added.

According to Neil Chegwidden, director of residential research at Jones Lang LaSalle, the decision will do little to lift the mood in the national housing market but will help it to tread water.

‘The UK housing market has weakened since last autumn but has probably proved a little more resilient than many had expected during the first few months of 2011. London is bucking the national trend in prices but all regions of the UK are suffering from an even further decline in transactions,’ he said.

‘The key mood enhancing trends that the housing industry will be watching for are a pick-up in transactions, a rise in mortgage lending and a boost in first time buyers. News that visitor numbers at new homes sales sites have increased during the first few months of 2011 is one positive sign, but whether these other indicators can follow suit is more questionable,’ he added.

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Thinktank Calls for Tough Mortgage Lending Criteria

by Sean Matthews

It’s hard to get a mortgage these days.  You only need to drop into a few consumer forums such as Money Saving Expert to see how much first time buyers and homeowners are struggling to secure a mortgage offer.  Since the credit crunch, mortgage lenders have reviewed their products, tightened their security checks, and made it impossible for a lot of people to step onto the property ladder.

However, a UK ‘thinktank’ has recommended that the banks keep their tough lending criteria in place to prevent another house price bubble building in the near future.

It’s been suggested by the Institute for Public Policy Research (IPPR) that mortgages should be capped at 90% and that customers should also be prevented from borrowing sums that are more than 3.5 times their annual income.

The Institute said there had been 4 separate occurrences of these ‘housing bubbles’ in the last 40 years and that each had caused damage to the economy on a wide scale.

The most recent house price boom, when property values trebled between 1996 and 2006, has been blamed and more specifically the loose lending criteria being used during that time.  In fact, prior to the credit crunch, the UK had the highest LTV (loan to value) ratio out of all OECD countries, except for the Netherlands.

The UK has the highest level of mortgage lending compared with the USA and the rest of Western Europe.  The group said that even though the UK had a deficiency in housing, the availability of cheap credit could cause the property market to become more volatile.

The IPPR has approached the Government and City regulator, the Financial Services Authority, asking them not to bow down to lobbying by the banking industry.  Instead, they want to see caps put on mortgage lending.  It also asked for mortgage deposits to be increased for buy-to-let properties to ensure that rental income was sufficient to pay mortgage repayments.

Nick Pearce, IPPR director, said: “Britain has suffered four housing bubbles in the last 40 years, each of which contributed to major economic and social problems. We must learn the lessons from this economic history.

“A central plank of economic policy should be to target moderate increases in house prices, rather than allowing runaway house price inflation which is always damaging in the long run.

“The Housing Minister, Grant Shapps, has tentatively floated the idea of aiming for house price stability but he and (Chancellor) George Osborne should go further and make it an explicit policy objective.”

What do you think?  Time to toughen up even more and risk locking some first-time buyers out of the housing game for years to come, or time to loosen up a little?  Our previous article suggests things may be looking up and that the IPPR’s fears may be ignored.

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6 Million Brits Shun The Property Game

by Sean Matthews

Whilst the availability of credit might be improving on the high street, people are still nervous about committing to a mortgage.   Research is suggesting that over 6 million Brits have given up on finding a mortgage and have decided to rent or stay at their current property until the market improves.

Unfortunately, it’s a catch 22 situation.  The market needs confidence from buyers in order to recover and buyers need confidence in the market.  Mortgage rates are steadily falling and the number of mortgage products being offered are on the increase.  However, these products are focused at the high end of the market and are therefore only accessible to those homebuyers with significant equity available.

According to a report released by moneysupermarket, those looking for a house now expect to buy their first home at around 38 years old and only 5% of those planning on buying a house in the future actually have a deposit saved.

However, the number of products aimed at first time buyers has risen by almost 200 which still offers some hope for those wanting to purchase their first property.  The average loan to value (LTV) for first time buyer products is around 77% which means that first time buyers still need that all important deposit.  Whilst house prices may have dropped, the cost of living has continued to rise, and less people have the spare funds to commit to saving for a deposit.

For those with a deposit of 10% the market is still limited when it comes to mortgage products and any products have rates that are significantly higher than the most competitive mortgage rates.  This makes the monthly payments for first time buyers much higher than those with larger deposits.

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