House price ups and downs don’t tell the whole story...
House price indices are seized on as evidence of grim times ahead. Newspaper articles talking about average home owners losing £2,000 each in the first few weeks of 2008 sound extremely worrying.
Once they are added to claims about a rising tide of repossessions and customers falling behind with mortgage payments, it is entirely possible to paint a picture of a housing market on the brink of meltdown.
Is it, however, the whole picture? For brokers the news about falling house prices adds additional pressure to a market already suffering from the credit crunch.
In a market that has seen a significant amount of products withdrawn and is also coping with falling house prices, the pressure builds to find the correct advice. Do house price reports tell the whole story for consumers and brokers? Or should the industry be focusing on the build up of equity over the last 10 years?
Painting a negative picture
House price indices paint a picture of a market in turmoil. Almost every week there appears to be a new house price market report showing that prices are dropping coupled with predictions that 2008 is set to see yet more falls.
Whether it is figures from lenders, estate agents or government bodies, everyone appears to be in agreement that the only way currently is down for the UK housing market.
Recent figures from the Council of Mortgage Lenders’ (CML) reveal that mortgage lending is being affected. December 2007 showed a 25 per cent drop from November 2007 and was the lowest figure since May 2005.
The seasonal part of the drop is estimated at around 7 per cent so something is definitely happening in the mortgage market.
Bad news or a welcome re-adjustment?
Falling house prices are, of course, not bad news for everyone. Sellers may be tearing their hair out and worrying about the price they will receive, but for buyers the ‘bad’ news is definitely good news.
First-time buyers or those without substantial deposits will welcome house price falls.
Homes which were previously unaffordable for those buyers may now be back within their price range. House price inflation benefits sellers, but for buyers a bit of deflation is entirely welcome.
Whole areas of major towns and cities which were ‘no-go zones’ based on prices are now back within the price range of many buyers.
A successful housing market needs buyers as well as sellers, so the fact that prices are falling could be viewed as merely a welcome re-adjustment for the housing market.
The relationship between average property prices and average salaries had become strained so if prices moderate that could be seen as a good thing for the market.
It is, however, a message that is difficult to sell to house sellers. UK economic confidence is closely bound to rising house prices and anything that pricks the housing market bubble is viewed as unwelcome.
Putting the focus on home equity
Focusing purely on month-by-month house price indices gives a barometer of the current state of the housing market. It does not, however tell the whole story.
Consumers should focus on the equity in their homes as much – if not more than – the price and how it moves from month to month.
Whatever happens to the property market, people need to remember that we have had a prolonged period of rising prices and those on the property ladder have reaped substantial financial rewards.
Research by GE Money Home Lending (GEMHL) has established that British home owners have an impressive £1.96 trillion of equity in their homes.
To give the figure its full glory, it works out at £1,960,000,000,000. That is a lot of zeroes, but it adds up to an average of around £127,455 for each property.
GE analysed industry data, including research on home ownership from leading analysts GfK NOP as well as the CML, the Communities and Local Government department, and the Office of National Statistics to produce a picture of how home ownership impacts on people’s wealth.
The findings are striking – 26 per cent of people own their homes outright and have accumulated property wealth of £1.377 trillion. Those with mortgages have around £582 billion of equity in their homes.
These are impressive figures – and ones consumers should bear in mind when they read the latest news about house price falls. House price indices may vary month-by-month but relatively small percentage drops will barely dent the £1.96 trillion of housing equity.
Most of this property wealth will have been accumulated by the use of mortgages and by borrowing money. There are few consumers who have the cash to buy a home outright.
Looking at the figures: how the numbers split
The South East of England comprises 19.2 per cent of the property wealth in Britain followed by 14.1 per cent in London, making those areas the two wealthiest regions when it comes to property equity. The North East has 2.97 per cent and Wales has 4.5 per cent – the two lowest percentages in the country.
The analysis further reveals that the North West and Wales have the highest percentages of people who own their homes outright at 30 per cent, while the North East and North West have the highest percentages of people with a mortgage at 39 per cent. London with 29 per cent has the lowest proportion of people with a mortgage.
The analysis gives in our view a clearer and more detailed picture of the UK’s housing market. Too often market commentators and analysts focus on the ups and downs of house prices. There is too much focus on the short-term without looking at the long-term benefits of taking out a mortgage.
A more positive and realistic picture
Taking the longer view gives a more positive – and more realistic – picture of what has been achieved by the mortgage industry for consumers and what householders have achieved for themselves by taking out mortgages.
Rising property prices have enabled a great number of people to make money on their homes and allowed them to afford to move up the housing ladder. However, none of this would have been possible without mortgage lending.
The mortgage industry has contributed significantly to the rise in property equity through the flexibility offered by lenders and the commitment by mortgage intermediaries and financial advisers to serve their clients’ needs.
The year ahead may be challenging for the property market in general, with more house price falls to come.
However, the mortgage market is solidly underpinned by strong economic fundamentals and consumers who are already on the housing ladder should remember they have had substantial financial rewards.
Those who are enabled to get on to the housing ladder by house price falls will also benefit
