Nationwide House Price Index records only small monthly fall
Posted on 27 November 2008 by
Today’s announcement from Nationwide of their House Price Index for November showed a real fall of only 0.3% on the month, although the doctored (or seasonally adjusted to use the technical term) fall headlined by Nationwide was marginally higher at 0.4%.
The annual change fell to 13.9% from 14.6% last month and I expect last month’s figure will prove to be the peak year-on-year fall. This is because October 2007 was the last month prices were still falling and so until then this year’s fall in prices replaced an increase in the same month last year, thus magnifying the year-on-year figure. From November 2007 prices were dropping and today’s fall in prices replaces a larger fall (1%) last month, resulting in a drop in the annualised figure.
In the press release from Fionnuala Earley, Nationwide’s Chief Economist, one paragraph with some particularly interesting statistics is:
“Turnover rates in the housing market have fallen to historic lows, even below the levels in the 1990s when the economic conditions were worse than they are today. At the trough of the market in Q4 1990, interest rates were at 14% and there were almost double the number of unemployment claimants, yet a greater proportion of owner occupiers were taking out mortgages to move house. The significant difference today is the financial market shock which has led to the severe tightening of credit. In Q4 1990, 60% of first time buyers were taking out loans with LTVs above 90%, today the equivalent proportion is 14%. While this may reflect less desire on the part of borrowers to borrow at high LTV, especially given its higher cost, it also implies that part of the reduction in turnover today is likely to be due to the availability of finance at higher LTV.”
I would put a different focus on Fionnuala’s conclusion in the last sentence. Although both factors she mentions are certainly relevant I think the lack of finance today is a far bigger reason for the lack of first time buyers (FTBs) in the market than a concern about borrowing on a high LTV. The reason high LTV mortgages are so difficult to get is that lenders are not prepared (for understandable reasons) to satisfy even the limited demand there is from FTBs. That proves the lack of finance is the major reason for the lack of FTBs. If the absence of FTBs from the market was due to a lack of desire to borrow at a high LTV lenders could afford to offer mortgages on high LTVs because there wouldn’t be many takers!
Having said that FTBs have been largely absent from the market recently, but this is because they naturally don’t want to jump into the market when there is so much talk (much of it unduly scaremongering in my view) that prices have significantly further to fall. However, I expect the combination of much lower property prices, some distressed sellers and significantly lower interest rates, plus the expectation of even lower rates in the next few months, to tempt some of the more astute FTBs into the market in the first half of next year, while it is still a buyers’ market, as affordability has greatly improved in the last 15 months.
The fact that 60% of FTBs in 1990 borrowed over 90% to buy their property, at a time when prices were clearly still falling, is a strong indication that having to borrow 95% or 100% of the purchase price to buy a property is not in general a deterrent to FTBs, as long as the mortgage is affordable. Fionnuala’s point about the higher cost of high LTV mortgages is well made, but whilst the spread between the cost of a 60% LTV mortgage and a 90% mortgage is probably now at an all time record, the actual rate payable is still far lower than in the era of 14% interest rates in 1990.
From a purely financial point of view it will be far better to buy a property near the bottom of the market with a relatively expensive mortgage than to wait for clear evidence a recovery has started and pay more for the property, even if at that stage a cheaper mortgage is available. The challenge of course is to identify when the market is close to bottoming out. I am sticking to my forecast that the market will have stabilised by mid 2009 and that there will be a very modest recovery in the second half. Unfortunately some FTBs who identify the right time to buy will miss the bottom because of the lack of high LTV mortgages.
One challenge for lenders next year will be to allocate some funds to high LTV mortgages to avoid strangling the recovery at birth when it does come.
Categories: Property market, Bank of England, Mortgages, House and home, Interest rates
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