Barely a day goes by without one paper or another commenting on the potential rise and fall of the UK property market, and with this comes the speculation surrounding the buoyancy of the UK mortgage market. It is not difficult to see the direct link between the property market and the mortgage market.
Barely a day goes by without one newspaper or another commenting on the potential for further falls in the UK property market and with this comes speculation surrounding the real buoyancy of the UK mortgage market. It is not difficult to see the direct link between the property market and the mortgage market. When mortgages were plentiful, more people moved home and the volume of mortgage applications was correspondingly high – simple!
However, the credit crunch has clearly changed all that. Shortage of funds has forced lending institutions to become much more cautious about how much they are able to lend and to whom.
The UK Property Market
Having established the link between the current mortgage market and the property market, it makes sense to consider what has been happening recently in the property market. The effects of the credit crunch have dominated the whole financial sector, especially the mortgage market.
Most commentators agree that the credit crunch started in August 2007, when the French bank, BNP Paribas, suspended two funds with large exposure to the US sub-prime mortgage market because it was unable to value the assets that they contained. The fallout from this decision caused a rapid rise in the cost of credit and a loss of confidence throughout the financial markets.
Subsequently, a number of financial institutions around the world with exposure to the sub-prime mortgage market found themselves in major financial difficulties. Banks in the UK that were hit included Northern Rock and Bradford & Bingley.
At the beginning of 2008, the Nationwide Building Society was predicting that house prices would remain static during the year, but by April 2008, it had changed its predictions and was suggesting that prices would fall significantly. In April 2008, mortgage providers removed 100 percent mortgages from their portfolios and made their lending rules much stricter for borrowers. Lending criteria attached to mortgages for ‘buy to let’ properties were tightened particularly hard.
The housing market stagnated rapidly, forcing many estate agents to lay off staff and to close branches. Only 32,000 new mortgage loans were approved in August 2008, about one third of the number approved during the same month in the previous year.
The threat of recession has forced the Bank of England and other central banks to reduce their base rates. Following these rate reductions, the UK government is putting pressure on mortgage providers to increase lending in order to avoid meltdown in the housing market. The Council of Mortgage Lenders (CML) is predicting that property prices will not start to rise again until 2010, at the earliest.
Much will depend on the length and depth of the forthcoming recession and how it affects unemployment levels. In some parts of the UK, particularly south east England, there is still a housing shortage, so some experts are predicting that these areas will be the first places where the property market will recover as the country emerges from recession.
The UK Mortgage Market
With the property market still falling, most potential buyers are adopting a ‘wait and see’ attitude, unless they have to move house for work related or other pressing reasons. Mortgage rates are stabilising and may even be dropping, so existing borrowers should be in a reasonably comfortable position just as long as their jobs are not under threat.
Anyone who has taken out a 90 percent or higher rate mortgage since 2005 could potentially find themselves in a negative equity situation. This could possibly be an issue for some borrowers with a fixed rate or tracker mortgage deal coming up for renewal, but most other borrowers are unlikely to be affected.
Other Financial Issues
To deal with the credit crunch, Individuals appear to be making serious efforts to prioritise their debts. Not surprisingly, maintaining their monthly mortgage repayments is their first priority. Borrowers appear to have become increasingly savvy about the cost of borrowing in other areas. Recently, they have been tightening their belts and reducing the net amount of money that they are borrowing through the use of credit cards.
Potentially, this impacts on the mortgage market in several ways. Firstly, it is possible that more borrowers will try to use mortgage deals to consolidate other debts such as credit cards, in order to make the level of monthly payments more tolerable. Secondly, as individuals get their unsecured debt under control, they are able to make more future plans and are able to commit to making larger monthly repayments. Thirdly, as individuals pay off their credit card debt, they gather a better credit rating, enabling them to make the most of the best possible mortgage deals which, in turn, encourages greater borrowing in this way. In the current financial climate, being able to obtain a good credit rating has become more important than ever.
Despite the current issues triggered by the credit crunch, the long term future of the mortgage market looks assured.
Although consumer confidence has been hit and some individuals who stretched themselves too far when taking out their mortgages may find themselves in negative equity if they are forced to sell their properties at short notice, the majority of homeowners, especially those who have owned property for a number of years, still find themselves in a comfortable and sustainable position.
The current lower property prices are also likely to attract first time buyers, which will eventually help to stimulate the whole of the property market.