Effect on the UK Property Market

As a result of the inability of many borrowers to repay mortgages, massive increases in repossessions have been recorded with more than 45,000 repossessions expected by the end of this year, this equates to 6% of house sales. It has been suggested by many economists that the number of repossessions in 2009 will exceed 100,000, which is more than the record of 75,000 in 1991 during the last recession of the UK economy. According to the Council of Mortgage Lenders about 168,000 borrowers are said to be at least three months in arrears on their home loans. It could be argued that repossessions of homes only serves to further decrease the value of houses, as most of these properties will then be auctioned off at prices much lower than the ‘market value’, which in turn could help to drive down the market values.
A number of factors have contributed to the inability to repay mortgages, which has driven down prices. Inflation has increased to 5.2%, the highest rate for 16 years, meaning that the goods and services within this country have become more expensive. According to research the British have seen their disposable income levels fall by nearly 30% in the past two years, with the average household now having just 25% of their salary left after paying all essential outgoings including their mortgage and utility bills. Vocalink warns that people's incomes are being squeezed by a combination of rising living costs and falling take home pay.
The result of the unwillingness of financial institutions to lend money can be seen in the mortgage market, with mortgage approvals having slumped by 74% in the year to 1st December 2008, with just 32,000 mortgages approved in November. This contrasts with 115,000 in July 2007 and 88,000 in October 2007, it seems apparent that the ‘credit crunch’ had already begun to take effect. This appears to show that banks are increasingly less willing to lend money and that institutions are not willing to change their lending policies just yet. The value of mortgages loaned nationwide in the UK during October stood at just £458m, which equates to just 6% of the same month in 2007.
Property prices in the UK have fallen each month since autumn 2007, due to the decline in the availability of credit for those without a large deposit and high earnings. This has eradicated the first time buyer market, the majority of who are forced into the private rentals market. Surveys by Halifax and Nationwide suggest that house prices have fallen between 15-20% this year alone. Many industry experts are predicting further falls in house, including Jonathan Davis a chartered Financial Planner at Armstrong Davis who said "Next year prices will fall by 15-20% because unemployment is kicking in, house repossessions will rise rapidly and houses will go through auctions at silly prices - the banks aren’t lending." The IPD annual property index returns for 2007 for all property showed a capital growth of -7.7% and negative total return of -3.4%. Halifax announced on 2nd January 2009 that they believe property prices fell by 16.2% over the course of 2008 according to the their own dedicated Halifax house price index, after they previously speculated on a final a annual figure of around 15%.
The drastic falls in demand for housing have naturally seen negative effects on the development industries. Bovis, as an example, reported that profits were down to £11.7m in the first half of 2008 from £58.4m in the first half of 2007. This fall in profits was due to housing revenue being down by 40% as a result of the fall in demand for property. However completions of social and partnership homes grew by 38% in this period. This is a familiar pattern across the residential sector with Kier redesign ting land for social housing as a result of a 60% slump in its order book; it announced that it had made the decision as social housing is standing up better than private homes and that the homes would be a mix of rental and shared ownership. Another organisation, Bellway, announced in November that it was the first developer to be given funding towards affordable housing and then retain ownership of the development. Normally grant funding is given directly to housing associations.

www.ukinv.com