The credit crunch is already pushing up costs for new borrowers and for anyone coming off a fixed rate product. By Christmas, it’s possible that we will see the equivalent of a full percentage point increase in mortgage costs when compared with 1st August.
Around 8% of consumer spending in the UK in recent years has come from the release of equity from property. This will dry up as homeowners discover the higher cost associated with re-mortgaging and the impact will be felt most directly by DIY firms, builders and decorators, the motor trade as well as holiday companies. All business who have benefitted recently from the wave of cash that re-mortgaging has generated
Northern Rock accounted for nearly 20% of new mortgages in the first half of this year. It is unlikely that anyone except the remuneration committee are going to be persuaded that they are going to have anything like that kind of share now and other lenders are likely to pull their 100% products too. This will make it harder for new buyers to afford the record prices being asked for homes which in turn will lead to a downturn in values across the market. The property website Rightmove have already indicated that asking prices are 2.6% down on last month and I have noted supply in general to be down 15% year on year.
No doubt cynics will try to blame all this on HIPs but in all seriousness, the additional costs will make houses more unaffordable for the very people on whom values depend – new borrowers buying homes currently for sale. As a result, it looks like house prices will start 2008 on a downward trend with younger estate agents discovering the excitement of valuing in a falling market.
What is important to remember is that house prices for everyone are set by the few transactions being done at any one time. The people who are most likely to suffer in any downturn are those who bought in the past 12 months. Even if values were to fall by 20% it would take them back to roughly what they were between 12 and 18 months ago so the pain for most people would be the perceived loss and not actual pain. The pain would be reserved for those who had dived into the market recently with high gearing (who look like they will loose most of their equity) and those who who forked out for a ‘Buy-2-Let’ property when they were just a plan a year ago and can’t now find a tenant to pay the rent.
The queues that formed outside branches of Northern Rock illustrate that the public don’t need to understand the fundamentals – panic and a flight from a business backed by the Bank of England – who sign as guarantee our bank notes remember, could just as likely happen to the property market as it has in the banking sector. It is just likely to be more drawn out, more painful and felt by more than just the customers of one lender.