Are We Going to See a Housing?

Despite the gloomy financial forecast, 2009 didn’t turn out too badly for the UK residential

property. The Nationwide house price index rose by 5.90% year-on-year. But the same risks

facing the market 12 months ago still remain, if not worse. The outlook for 2010 is not going to

be smooth sailing.

The pick-up wasn’t caused by a surge in demand, but a shortage of supply, as widespread

selling didn’t happen. Much if that was due to the Bank o England cutting its base rate to 0.5%

the lowest ever. With payments on about two thirds of all mortgages linked to the base rate

that meant much lower loan costs for many and relief for over-extended borrowers.

Consequently, repossessions and forced sales have been much lower than expected, while low

rates enticed some waiting buyers to take the plunge. Even if the Bank of England doesn’t decide to hike base rates in the near future, UK mortgage rates are set to rise in the next 12 months. 

Fears are growing about the scale of Britain’s public debt – already at its highest ever at peacetime level. 

A record £225 billion of UK government bonds will need to be sold by the Treasury just

to balance the books. Investors will only buy these securities if the returns they receive are high enough to compensate them for the extra risks they are taking.

Already ten year gilt yields have climbed to 4% up from their 3% March 2009 lows. This rise

will eventually filter through to higher mortgage rates as borrowers compete for cash with the government.

This will reverse the benefits borrowers have enjoyed from lower mortgage repayments.

Over-extended borrowers will face renewed financial pressure and that’s likely to

lead to more repossession and forced selling in 2010.

The number of first-time buyers has dropped to its lowest point in a decade, say the Halifax.

Many have problems raising deposits, while lenders are picky about making loans.

 Without the first-time buyers, a sustainable recovery can’t happen. In short, the messy resolution of

the UK’s property problems has only been deferred.

Tan Tran is Managing Director of Fontis Capital Ltd., a specialist
property finance consultancy and an owner of several other
businesses. You can follow Tan on:
Twitter: PropertyGuruUK
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