BACK in January when I finally managed to sell my flat to a more-money-than-sense foreign buyer I registered my details with all the local estate agents.
The original point of doing this was to find a house to rent, but there was no persuading Paddington’s property experts that was all I wanted.
They all demanded details of the kind of house I’d like to own. Eventually, partly so I didn’t have to spend any more time explaining why in overheated markets renting is vastly superior, I told them I’d like a four-bedroom house with a garden near Hyde Park for between £850,000 and £1.2m.
And that was the end of that. For the next eight months I didn’t hear a word from any of them. Until last week. Then I had four calls in a row.
None of the houses fits the bill: they had three bedrooms; they cost more like £1.5m; the outside space on offer was the road outside the front door.
But the point is this: for the first time in ages London estate agents are having to look for buyers. And this isn’t just the case in the capital; all over the country, people who have convinced themselves that house prices only ever rise are finding that it isn’t necessarily so.
The latest numbers from the Land Registry show that prices are barely rising in the country as a whole and that they have fallen in Yorkshire, Humberside, the West Midlands and Wales. Other surveys have recently shown prices falling in these areas, and in the southwest. Last week a report from Rightmove showed asking prices falling in London, albeit by only 0.1%.
At the same time the Royal Institution of Chartered Surveyors has reported that new buyer inquiries have fallen every month for the past eight months and that the amount of stock on estate agents’ books has risen every month since March.
There are clear signs of stress in the market: repossessions are up; mortgage arrears are rising; the sell-to-rent companies (who bail out those in trouble by buying their house at a discount and then letting them rent it back) have made a return.
I have even been asked if it is possible for a seller to help interested buyers out with a loan. This used to be called “owner finance” but I haven’t heard the phrase for 15 years.
I’ve been writing for some time about the risks inherent in the UK house-price bubble. Prices have been rising faster here than almost anywhere else and are now at their worst affordability levels for 15 years.
In terms of income multiples and the proportion of disposable income required to service the average mortgage, prices are higher than they were even at their peak in the US. For a long time property has been a bubble in search of a pin.
It might have found one. Rising interest rates have already hit affordability here hard – the base rate has risen five times in the past year. However, mortgage rates aren’t just about Bank rate. Many lenders borrow the money that they then lend to us in the wholesale market. The crisis in the financial markets has meant the price of borrowing has risen about 0.5% this year.
The lenders have to get that money back somehow and that suggests that, even if interest rates themselves don’t rise, the average mortgage is going to be significantly more expensive than it is now. Already most sub-prime lenders (those who offer risky loans) have raised their rates by anything from half a percentage point to 2 points. Some have stopped lending altogether.
This tightening-up of rates is going to affect demand for property across the country. It might also force supply up more than many expect.
We are constantly told that UK lending standards are higher than in the US, that our mortgage companies are less reckless lenders. But is this true?
We have our own version of America’s “liar loans”. Think of self-certification. Some brokers say that in the past year about a third of mortgages have gone to people who have “self-certified” their incomes. That means the banks have taken their word that they can afford to pay their bills. Perhaps they can’t.
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The same is true of lots of buy-to-let mortgages. Huge numbers of these have been given out to people who can only pay them if their rental income covers their mortgage payments. They have no safety nets. With mortgage rates rising and rents staying the same, isn’t that sub-prime?
What of the “well-off”? Some are on high incomes but have taken out mortgages vastly disproportionate to those incomes in the hope of receiving big bonuses and paying off lump sums. What if they don’t get those bonuses? Doesn’t that make them sub-prime?
And what of the 2m UK mortgage holders now on absurdly low “teaser rates” who are soon going to have to remortgage to more expensive deals?
‘Homeowners’ who can’t afford their homes
The point is, a lot of “home-owners” can’t really afford their homes. As mortgage rates rise they may well have to sell. Supply is already rising and demand – even in central London now that next year’s bonuses are seriously under threat – is falling away. That’s a recipe for falling prices.
Many of you have written to me in the past agreeing that property is overpriced but saying that prices can’t fall without there being some trigger to kick things off. I think the credit crunch might be it.
Only a few months ago house prices in the US were expected to rise for ever. Now they are falling – in some places very fast. I’ve placed my own bets on the same happening here (I don’t own a house).
Given that I’ve been wrong on property for over two years I won’t recommend that you follow me in this strategy. However, if you are about to buy, and particularly if you are about to buy a buy-to-let investment, you might want to run the numbers one more time before you sign on the dotted line.
First published in The Sunday Times 2/9/07
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