Housing price correction seems due

When Gordon Brown was Chancellor he was responsible for the production of several reports from various economists which were supposed to shake-up the market for home loans and modernise Britain’s planning laws.

Sadly, the documents were in the main left untouched and the country has fallen further behind each year with the amount of affordable housing on offer. Now shortage of properties has almost reached crisis point and the lack of availability has served to push up the price of housing even further, and families, already under financial constraint, are feeling the squeeze. Now Prime Minister, Mr Brown, has to face the desperate situation of the housing marketplace.

He has come up with some new ideas: a new market in fixed rate, long-term mortgages; and easing local authority financial constraints – but these could take several years to bring about real change.

As the powers think, base rates continue to rise, taking mortgage interest rates with them, and consumers are feeling the pressure – many being tempted to borrow beyond their real means.

The UK often follows the US, and it may do so again into a housing disaster. There are many contributing factors. The Bank of England concentrates on controlling inflation, but, in so doing, it has allowed a bubble to develop in credit, mortgages and property prices. On top of that immigration from Eastern Europe has given more labour to the UK and helped with economic growth, but the extra numbers of people have brought more pressure onto the stock of UK housing and onto social services. Another factor is that private sector house builders have not moved quickly enough to cater for the needs of people looking for new homes. There has also been to much time and money spent on high density apartment blocks, but most people aspire to traditional family homes and not enough have been built. Finally, the Bank has warned about people taking our mortgages beyond their means and the threat that poses to financial stability. This continues to happen despite the interest rate rises of late.

Up to mid 2004 house prices has gone up by 20% and the Bank’s Monetary Policy Committee (MPC) took rates up from 4% to 4.75%, which did the jobs and the boom eased off. Then in August 2005, interest rates dropped to 4.5% and the property market took off again. Now, even five quarter point rises later, the property market is continuing upward.

The Council of Mortgage Lenders this week issued figures that showed that first-time buyers have never had a harder time to buy their first property. They have to borrow on average 3.37 times their income – a record high – and mortgage interest represents 19.1% of income – the highest for 20 years.

Those already with mortgages are faced with ever increasing repayments – either straight away if on any sort of a variable rate, or soon if they are on fixed rates that are coming to the end of the deal period. This latter group have yet to be hit by the mortgage interest rate increases and will feel the shock hard when it hits.

Mr Brown would like to get a more US-style housing market with more and longer fixed rate mortgages – up to 25 years. The problem is that the US experience has shown that not many people actual stick to those deals and as soon as the interest rate drops, they try to switch to a better deal.

Another problem in the UK is the large difference between regions; for example London prices have been rocketing while others have stagnated or even fallen. There are thousands of bonus millionaires created in London most years and they push the price of property up. Meanwhile, most people find it more and more difficult to find anywhere in the capital that they can afford to buy.

One reason the UK housing market has been kept buoyant has been the high demand, but relatively low supply. Around 223,000 new houses are needed every year to match demand, but the recent average has been only 160,000. The planning process has been held to blame and Mr Brown would like to see changes in that area to simplify matters. There is, however, some feeling that developers with land and planning permission would rather sit on the land and watch its value grow rather than build too soon.

It has been estimated that Britain’s household numbers have increased by 900,000 since 2004, but only 600,000 new houses have been built. Such a shortage would easily lead to the sort or price rises we have seen. When interest rates were low, rising house prices seemed like a good thing, but with both rising affordability becomes an issue for everyone. Lenders have not held back on lending to the sub-prime market, but this can lead to people borrowing more than they can afford.

With so many people struggling to finance their basic need of a home, a correction in prices can only be around the next corner.