There are ominous signs that the long period of ultra low mortgage rates has reversed its trend and rates are on the rise.
The Halifax’s House Price Index indicates that prices fell by 0.5% during February, reversing the reported January rise and continuing the slow downward trend of 2011. That means that average house prices are down approximately 1.9% on the same time last year. The biggest decline has actually taken place over the last three months, down by 1.1 per cent.
These declines are good news for first time buyers as housing becomes increasingly affordable – the price to earnings ratio is now around 4.31, based on the average full-time male’s earnings, down from 4.32 in January and from somewhere around 5 to 6 times at the height of the property boom.
According to the Halifax statistics, the average UK house price is now £160,118 or a staggering 20% below the property boom August 2007 peak of just under £200,000, and that’s not allowing for inflation over this period which peaked at over 5%.
Despite the falls, the housing market remains in the doldrums with sales at an all time low, people reluctant to move because many are in negative equity and mortgages still hard to get, with high set-up fees and high deposits required.
But it’s the move by some of the lenders which in the last few days will concern many borrowers. Halifax will be raising its standard variable rate (SVR) to 3.99% from 3.5% on the 1st of May 2012. Santander and RBS/NatWest look like they will follow suit.
This is not a big rise – it’s likely to put around £45 per month on a £150,000 repayment mortgage, but according to thisismoney.co.uk around 850,000 households are affected. The significance here, though, is the change in direction of mortgage rates.
The Bank of England rate has not changed – it’s still 0.5% – and this is likely to remain so for some time. In fact, the Bank’s moves if anything are in the other direction: inflation appears to be falling and there are likely to be further moves to ease monetary policy through more Quantitative Easing (QE).
However, the cost of money to the banks on the wholesale money markets has become more expensive recently. According to Moneyweek.co.uk this is because savers are turning to investments (the stock markets) rather than leaving their money in bank accounts at ultra low interest rates with inflation eating away its value.
That’s a loss to the banks and it’s more risky for savers, but if savers get used to the concept of investing as opposed to bank savings, in future the banks will need to offer more incentive to attract deposits.
It’s not just higher funding costs though: the banks now are desperate to improve their margins, so they are paring costs, and incrementally increasing income wherever they can where they think the customer will bear it. They are already refusing to issue interest only mortgages.
With a rising trend in mortgage rates, which will further reduce prices, more people will find themselves in negative equity. This will definitely put pressure on the 15% of those in mortgage arrears at this time, so for some this could tip the balance into re-possession. It is therefore likely that re-possession rates will be on the rise again in 2012.
©LandlordZONE 8 March 2012