The Real Problem with the Housing Market

First time buyers have almost always had a tough time, it is a big step to take in life (aside from being costly), the last thing they need is fancy mortgages that will only make matters worse....

Everyone running a business is looking for the "next big thing" or something new to boost sales and bring in new customers. The property industry and its peripheries are no different.

It emerged yesterday that the Halifax are now offering a fee-free, (with 2 year fixed rate) mortgage for first time buyers(FTB), at a 90% LTV.

Call me cynical, but given Monday's round of property doom-mongery by the press with the headline "Typical house price to lose a quarter of its value". (I hasten to add that this particular piece of news was, in part, according to the Halifax also) one has to wonder quite what the motives are here?

Perhaps it's just me? Here are my initial calculations, based on the info at hand:

  • House is for sale at 100,000
  • Mortgage at 90% is 90,000
  • FTB deposit is 10,000

So far so good it would seem!

  • House price on day of sale 100,000
  • House price at the end of the year according to the Telegraph 75,000

Yes, you read it correctly - negative equity achieved at 25%.

Now the press being as they are, this is not quite the full story - on closer reading, the article states that property will have dropped by a quarter if you take average prices from the peak of 2007 from roughly 200k to 150k.

Hmm, that’s like saying "I paid 10k for my house and it's now worth 250k" - "house prices risen by 2500%". Conveniently omitting the fact the house was bought in the 60's makes it somewhat misleading to say the least.

This being said, the latest figures at the moment (rather than some I think make for good headlines) are, Novembers average house price is 162,435. With a drop to 150,000 projected by the end of 2011 is roughly 8% in 12 months.

Even using these figures, this represents only 2% equity in the property, even the smallest of purchasing fees will soon whittle that away before you even start. Of course, if this particular mortgage is restricted to certain sub market areas in established redevelopment zones for example, then fair enough - sadly there is no mention of any restrictions.

My overall point is simple though - As much as stimulating the FTB market is a good thing, doing it at the expense of the purchaser is exactly how the UK economy got into the state it is in now, and is only being exacerbated by overly dramatic headlines in a bid to sell papers.

Maybe I am being a little too literal; could it be I have missed something? - Feel free to tell me in the comments if that is the case.

The private housing market is not in good shape at the moment - I don't think anyone will doubt that, but promoting debt encumberment in a bid to get the housing market moving?

First time buyers have almost always had a tough time, it is a big step to take in life (aside from being costly), the last thing they need is fancy mortgages that will only make matters worse. Selling debt to first time buyers is no way to get out of a recession - it never has been. Improving exports, increasing foreign investment is.

Take London as the example: Property prices across the entire sector are doing ok, commercial and residential especially, most of which is down to foreign money coming in ahead of the Olympics, and the subsequent local investment as a result.

There is little in the way of hard and fast stats in this industry as it is, so compiling predictions based upon systems designed to plot movements in other investment markets is not going to give you any kind of accurate results. If it did, the banks would have had some idea that the overzealous lending market of a couple of years ago was going to end in tears.

I suspect most will agree that the public take much of what politicians say with a pinch of salt, however, as Housing Minister Grant Shapps was reported to have said, " [Stability] might be achieved by changing the way in which people look at property ownership, suggesting that it should be seen as home ownership rather than to invest with intent to make profit."

I think most of us will agree - property ownership attitudes do need to change, as well as the methods by which we invest into property. For first time buyers, buying into a falling market with very high LTV is good for no-one, especially with interest rate rises more inevitable than ever.

If you are sat on cash and want to invest into the property market, there are far safer and more profitable property related investments you could invest into, many of which are far more liquid too: Real Estate Investment Trusts, Property Funds, as well as no end of other alternative property investments all spring to mind before considering the open housing market at the moment.

- Wednesday 12 January 2011

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