Archive for January, 2011

Egypt – the economic ripples and how they may affect UK economy

January 31st, 2011

It is almost classic chaos theory, riots in the street in one country such as Egypt can affect the price of houses in UK.  Seems strange but it really is possible, here is why.

Instability in Egypt affects the Middle East region and in turn this could affect oil prices.  Already the ripples are being seen in the currency markets as currency traders and investors mark down the higher risk currencies.  If investors see a threat to future oil prices then prices will most likely increase.

Any increase in oil prices will impact economies and in particular the UK economy which is already experiencing an inflation upturn.  If UK inflation increases too far then the pressure on the Bank of England to raise base rates will grow.  And with increased interest rates it will make the cost of house purchase higher, thus impacting on UK property prices.

So far we have just used the oil example, but other commodities are at risk of price increases, one major example is wheat prices.  Any increases in commodities will again feed into higher inflation.

The bottom line is the stability in Egypt and the Middle East is key for the UK economy, and most especially whilst the UK is experiencing its own domestic issues due to the extraordinarily high level of national debt.

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Posted in UK Economy

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Is “Mortgage Stickiness” holding up property sales?

January 24th, 2011

The term “Mortgage Stickiness” describes the situation where a property owner has a mortgage product that they want to keep, typically because the mortgage is a fantastic deal that they cannot expect to improve upon, or it may be their financial situation has weakened and thus its unlikely they will be able to get another mortgage.

The current market has left up to 50% of residential mortgage holders with products that track bank base rates at 1% or 2% over base rate, in some case less than 1%.  In effect these mortgage holders have a huge disincentive to move property because if they did the new mortgage would have a much higher long term interest rate (some products offer initial low rates but the longer term rates are typically 3% or 4% over bank base rate). 

The effect is that someone with an average mortgage of around £140,000 (BBA statistics) could see interest charges increasing from £233 pcm (2%  rate) to £466 pcm(4% rate).  For many people this is a huge disincentive to move.

The other factor is those whose financial situation has changed, or maybe the more recent strict mortgage rules man they can no longer get a mortgage (some self employed may fall into this category).

No one knows for certain but it is clear that a very large percentage of property owners are effectively in a trap, they have a “sticky mortgage”, it would simply be too expensive to move to a new mortgage, effectively leaving them with no option of moving property.

This then takes us to our last point.  With a large proportion of the property market (up to 50%) trapped in this way we have a situation where there is insufficient property coming onto the market.  Perhaps this is a good thing short term as it helps to stabilise property prices?  However if the BofE starts to increase bank base rates too fast we could see a major shift, many will no longer be held back by their existing mortgage which will become more comparable to new mortgages on offer.  This could create a step change in market supply and create some interesting dynamics for property prices.

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Posted in UK House Prices

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Banks may be split up?

January 22nd, 2011

There are reports that the UK independent commission reviewing the banking system is now considering not only the splitting up of banks but also the separation of retail and investment banking – the latter of which we think is a great idea!

As a consumer when you put money in a deposit account you get a modest rate of interest in return for your low risk deposit, and when you put money into an investment scheme you potentially get  a high rate of interest and with it much more risk.  But here is the oddity, the banks can take your low interest deposit money and then invest that money at higher risk, they make increased profit on the margin, and if it goes wrong you potentially lose your deposit or the tax payer ends up paying compensation.  Surely this is wrong and the banking system has to be changed, low risk deposit accounts should be just that, low risk.

Of course this example is an over simplification, but it highlights the risks the ordinary deposit account holders take, along with the tax payer as guarantor, for any adverse risky investment decisions taken by the “investment arm” of a bank.

Lets hope the bank commission comes up with a solution that protects the consumer and tax payer, but at the same time does not cause the banks to relocate overseas … whatever action is taken needs to have an international dimension to ensure there is a level playing field.

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Posted in UK Economy

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Are house prices set to surge?

January 18th, 2011

According to a news article published in the Express today there are expectations of a house price surge in spring 2011.

But it all depends what is meant by “surge”.  The article does not give any predictions, its focus is more on the balance of opinion amongst surveyors that prices will increase this spring. 

One of the factors given for the spring increase is a shortage of quality housing available for sale.  Thus it only takes a small increase in demand, when combined with shortage of supply, for prices to increase.

The fact is however that houses prices tend to follow a seasonal pattern in that spring is traditionally a period where prices rise (relatively).  But in a declining market as we have seen recently a rise in prices this spring will correct the falls over the winter, the real question is will prices increase over the full year of 2011? 

A longer term sustainable increase in property prices may still be some time away as there are many factors at play here.  If you would like to read more about factors that influence property prices read our 2009 article on house price predictions.

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Posted in UK House Prices

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Bank base rate projection for 2011 and 2012

January 13th, 2011

We have reviewed comments from many of the UK’s leading businesses and economists to try and determine the consolidated view for bank base rates in 2011 and 2012.

The historically low bank base rates of been of great benefit to borrowers and in particular those with loans and mortgages that track bank base rate (BBR).  The low BBR means that many consumers have more to spend due to lower cost of borrowing, this is a key consideration as the Government fiscal squeeze starts to have greater impact in 2011.

Most of the experts are pointing toward an increase in the latter part of 2011, probably in Q4, 2011.  The size of this increase seems to be around 0.25% to 0.5% based on the views of the majority of reports and comments we have read.

A key consideration is that any increase does not cause the economy to go back into recession.  Another factor is that wage inflation needs to be held back, should it start to rise significantly then BBR may have to increase further to counter inflationary effects.

Moving into 2012 many of the experts see some further increases (few mention figures) and give the indication that by the end of 2012 BBR will still be well below the historical norm.  This would suggest BBR perhaps at no more than 2% by end of 2012?  As we say, few are willing to mention specific figures as there are too many variables, the 2% figure is therefore difficult to forecast with any confidence.

Interestingly we found many experts of the opinion that lower BBR will be a factor for a considerable period, possibly another 3 or maybe 4 years.  Forecasting this far out is increasingly difficult but this must be good news for those with mortgages.

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Posted in UK Economy

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Falling property prices and increasing rents?

January 7th, 2011

It may seem an unusual combination but there have been increasing reports of property prices falling and at the same time increases in rents. Why is this the case and can it continue?

Firstly it is worth looking at rental yields.  Over the last 5 to 10 years rental yields have fallen to a level where for much of the South East UK a yield of 5% was typical (although yields where higher in some areas such as North East UK).

In part the low 5% yield was down to property prices being driven upward whilst at the same time the rental market was effectively capped by affordability, thus as house prices increased rental yields fell.

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Now we have a situation where the recessionary impact on rents has eased allowing rents to increase in some areas.  At the same time property prices have fallen.  The upshot is that rental yields of 6% are now becoming more common in the South East.  But what about the longer term?

In the medium term there will be some negative impact on rents due to housing benefit changes but there are longer term upward pressures on rents, in particular two;

  1. Mortgage financing is becoming more difficult, and with international agreements for banks to increase liquid assets (Basel III) this shows no sign of abating. This could mean an increasing proportion of the UK population turning to tenancies rather than home ownership.
  2. There is a growing UK population which is not being matched by an increase in new homes being built.  This will create an increased demand for housing and thus tenancies.

The upshot is in the medium term there does seem to be a trend of falling house prices and increasing rents.  But in the longer term property prices will start to rise but we will probably see improved rental yields compared with the last decade.

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Posted in Buy-to-Let, UK House Prices

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