House prices drop in the UK
A UK house crisis has been expeced for some time but opinion was strongly divided between analysts and estate agents as to the state of the market. So yesterday for the first time in 6 years Bloomberg reported a 0.1% drop in house prices. This is not a jaw-dropping figure, it could however signify an ongoing trend.
Many house owners are expected to sell in a hurry to avoid further losses which can deepen the crisis. Risk analyst Rita Taplatzidou talked to us about the underlying trends for house pricing in the UK:
"The August drop in London house prices has raised a lot of concern about whether or not this fall is an early warning signal that even the buoyant London economy is susceptible to market forces, as it is the first we have seen for quite some time.
The reason why property price movements in London are considered highly significant is because in recent times, downward trends in the markets have had no effect on prices in the capital. This makes sense, as the capital and international status of London means that prices are likely to be more resilient in the longer term, unless the current turmoil in the financial market undermines employment and wealth creating.
In order to get a general feeling of the London housing market, the recent fall of 0.1 per cent has to be seen in the context of a 2 per cent average monthly rise in London house prices over the past 12 months. The average asking price of a home in London increased by 23.4% in the year to August 2007, and currently stands at £394,268, which is nearly double (!) the national rate of increase which stands at 12.8% this month, as it has been reported by Rightmove.
Some analysts claim that this is a tale of the five interest rate rises in the last year finally feeding through to the market. Figures from Nationwide last month suggested that the UK market is finally slowing down, after a “mini-boom” which lasted a year and a half and which saw the revival of double-digit property inflation. Ernst & Young ITEM (Independent Economic Model) Club warns that houses are currently overvalued by around 16%. Interest rates are expected to move up to 6 per cent and then stabilize, which would end the booming property market according to their report.
Finally, a report released on Monday by Fitch Ratings, a credit rating agency, shows that house prices are high relative to rents in the UK. High prices relative to rents make housing less attractive to landlords. BUT, it is important to note that despite its housing overvaluation, UK has a buffer in overall risk rank, because of its high levels of household wealth. “Net wealth is the most comprehensive measure of household long-run solvency,” says the report.
The truth –as always- lies somewhere in the middle. Of course, record prices and high interest rates seem to have stretched the affordability for everyone, but regardless of the “crisis” indicators, such as the recent interest rate rises, mortgage lending remains robust.
On the other hand, as we move into autumn, the cumulative effects of these rate rises are expected to become more pronounced.
The seeds of this financial market crisis were planted with a seizure in the so-called sub-prime mortgage market in the USA. What makes this financial market crisis different to, say, 1998, is the extent to which that was a relatively localized event specific to the derivative and currency markets, when this time, the contagion has spread quickly across all global financial markets and contaminated different sectors.
I bet that you must feel pretty confused by now. Hopping from one argument to a contradictory one leaves us with nothing…and surely the finance world has suffered a lot and is pretty jumpy these days! House prices and stock markets are falling, lending conditions are being revised; all this uncertainty stems from literally not knowing what’s actually happening.
In situations like this, when the financial market crisis can morph into a very deep global economic crisis, we expect that the market will freeze, rather than experience a crash.
So, it is likely to be at least another two months before we start to see what the fall-out from the current turmoil actually is. Note, too, the sub-prime crisis is very likely going to continue for another year despite the cut in base rates by the Fed, which in turn means that the current environment of uncertainty is likely to continue and could take a very long time for confidence to be restored.
And as for the house prices… as we mentioned earlier the “prices are likely to be more resilient in the longer term, unless the current turmoil in the financial market undermines employment and wealth creating”. Thus, our advice is to keep an open eye on City bonuses, a key factor at the top end of the market. They may be well down at the end of this year and in early 2008, but it is too early for them to be having much impact."
Many house owners are expected to sell in a hurry to avoid further losses which can deepen the crisis. Risk analyst Rita Taplatzidou talked to us about the underlying trends for house pricing in the UK:
"The August drop in London house prices has raised a lot of concern about whether or not this fall is an early warning signal that even the buoyant London economy is susceptible to market forces, as it is the first we have seen for quite some time.
The reason why property price movements in London are considered highly significant is because in recent times, downward trends in the markets have had no effect on prices in the capital. This makes sense, as the capital and international status of London means that prices are likely to be more resilient in the longer term, unless the current turmoil in the financial market undermines employment and wealth creating.
In order to get a general feeling of the London housing market, the recent fall of 0.1 per cent has to be seen in the context of a 2 per cent average monthly rise in London house prices over the past 12 months. The average asking price of a home in London increased by 23.4% in the year to August 2007, and currently stands at £394,268, which is nearly double (!) the national rate of increase which stands at 12.8% this month, as it has been reported by Rightmove.
Some analysts claim that this is a tale of the five interest rate rises in the last year finally feeding through to the market. Figures from Nationwide last month suggested that the UK market is finally slowing down, after a “mini-boom” which lasted a year and a half and which saw the revival of double-digit property inflation. Ernst & Young ITEM (Independent Economic Model) Club warns that houses are currently overvalued by around 16%. Interest rates are expected to move up to 6 per cent and then stabilize, which would end the booming property market according to their report.
Finally, a report released on Monday by Fitch Ratings, a credit rating agency, shows that house prices are high relative to rents in the UK. High prices relative to rents make housing less attractive to landlords. BUT, it is important to note that despite its housing overvaluation, UK has a buffer in overall risk rank, because of its high levels of household wealth. “Net wealth is the most comprehensive measure of household long-run solvency,” says the report.
The truth –as always- lies somewhere in the middle. Of course, record prices and high interest rates seem to have stretched the affordability for everyone, but regardless of the “crisis” indicators, such as the recent interest rate rises, mortgage lending remains robust.
On the other hand, as we move into autumn, the cumulative effects of these rate rises are expected to become more pronounced.
The seeds of this financial market crisis were planted with a seizure in the so-called sub-prime mortgage market in the USA. What makes this financial market crisis different to, say, 1998, is the extent to which that was a relatively localized event specific to the derivative and currency markets, when this time, the contagion has spread quickly across all global financial markets and contaminated different sectors.
I bet that you must feel pretty confused by now. Hopping from one argument to a contradictory one leaves us with nothing…and surely the finance world has suffered a lot and is pretty jumpy these days! House prices and stock markets are falling, lending conditions are being revised; all this uncertainty stems from literally not knowing what’s actually happening.
In situations like this, when the financial market crisis can morph into a very deep global economic crisis, we expect that the market will freeze, rather than experience a crash.
So, it is likely to be at least another two months before we start to see what the fall-out from the current turmoil actually is. Note, too, the sub-prime crisis is very likely going to continue for another year despite the cut in base rates by the Fed, which in turn means that the current environment of uncertainty is likely to continue and could take a very long time for confidence to be restored.
And as for the house prices… as we mentioned earlier the “prices are likely to be more resilient in the longer term, unless the current turmoil in the financial market undermines employment and wealth creating”. Thus, our advice is to keep an open eye on City bonuses, a key factor at the top end of the market. They may be well down at the end of this year and in early 2008, but it is too early for them to be having much impact."
Comments
Post a Comment