current state of the housing market

Bob Hope once remarked: "A bank is a place that will lend you money if you can prove that you do not need it." Many would be borrowers share this sentiment today.

Turmoil in the housing market has pushed up the cost of borrowing and forced many lending institutions to withdraw a variety of mortgage products. Some lenders have even withdrawn from the market altogether. The International Monetary Fund has described the global credit crisis as "the largest financial shock since The Great Depression" and has suggested that UK house prices are overvalued by some 30%. The spectre of negative equity is again stalking the land.

Experian, the credit reference agency, suggests that more than 75,000 households will be vulnerable. There are also concerns about the buy-to-let sector. The recent Royal Institute of Chartered Surveyors House Market Survey reported that "sentiment is at a very low ebb and will continue to remain depressed while the economy suffers from this unique liquidity blight".

However, the current situation is markedly different from the 1990's when the UK was in recession and interest rates were sky high. Back in 1990, over a third of first time buyers had 100% mortgages, which created an immediate pool of home owners at risk from negative equity; the equivalent figure last year was just 5%. The Prime Minister and his Chancellor are in discussion with the banks in an effort to alleviate the credit problem and a £50 billion bank rescue plan has been formulated. The Royal Bank of Scotland is seeking to raise capital by announcing a £12 billion rights issue and Mervyn King, the Governor of the Bank of England, has intimated that other banks may follow. Interest rates have been cut three times since December 2007 but such cuts have not been passed on to borrowers.

The problem is this: over the last few years, house prices have soared not so much as a result of the demand for, and supply of, houses themselves but more as a result of the demand for, and supply of, credit. Loose credit means rising house prices; tight credit means falling house prices. Economists point to the fact that it is time we stopped using our properties to fund our lifestyles and as a way of making pension provision for retirement. Gone are the days when one could borrow 100% or even 105% of the value of one's property and expect to build up some equity in subsequent years. There is no doubt we are in for a correction but many commentators feel that this is no bad thing. Recent house price falls should be set against a 170% rise over the past decade. A return to more sensible pricing and more sensible lending was inevitable. It might be painful in the short term but desirable in the long term.

Not all sectors of the property market are affected by the downturn in prices; farmland is increasing in value and prices at the top end of the residential market are holding up well. In favoured spots such as Winchester, for example, house prices have traditionally held up better than in many other parts of the country and good properties are still attracting buyers. The housing market like the stock market depends on confidence. For this to return, the credit crunch will need to ease and the lenders to make more money available to credit worthy borrowers. The bull market had to end at some juncture and there are lessons to be learned for the future. Bob Hope was only partly right but there is no doubt that more sensible lending is the key to re-establishing a stable housing market.

If you would like more information about any of the issues outlined above, please contact Jim Kennedy from our Residential Property team at jim.kennedy@bllaw.co.uk

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