The editorial in The Business is the best read in British journalism every week. It’s a hard-hitting, fact-based examination of a current issue that I find indispensable reading.
These warnings from this week’s Business leader point to real troubles in the UK housing market:
Interest payments are rising fast for hundreds of thousands of families: "According to figures from the Council of Mortgage Lenders, interest payment as a percentage of income has shot up from 14.9% in February 2006 to 18.6% in September 2007. Almost all the increase in wages during that time has been gobbled up by higher mortgages; combined with higher taxes, petrol prices and inflation, it is hardly surprising consumers are beginning to feel as if their purchasing power and disposable income is declining. This will only get worse: 110,000 households a month come to the end of their fixed-rate mortgage deals over the next year; with two-year fixed mortgage rates 1.5 percentage points higher than in October 2005, this means interest payments will shoot up by a third."
The buy-to-let market is a "train wreck waiting to happen": "The second set of statistics to give Mr Brown nightmares is that gross rental yields on buy-to-let properties are about 5.3%, before costs are deducted, when mortgage rates are at about 6%. So this market is set to crash."
House prices are set to drop (but not crash): "HSBC this week warned that house prices are about 30% over-valued. JPMorgan, whose housing model is based on data going back to 1973, estimates house prices are overvalued by 24% – surpassing the 23% at the peak of the late 1980s bubble. The International Monetary Fund last month calculated that homes in Britain were overpriced by up to 40%. Goldman Sachs calculates that if rents do not go up, house prices would have to fall by 20% for yields to return to their historical level. Morgan Stanley is predicting a drop in prices next year.
It’s getting harder and harder for first-time buyers: "In analysis updated for The Business, David Owen, Dresdner’s chief European economist, says the price of the average home is 7.23 times average household disposable income. That is higher than previous peaks of 1973 and 1988."
The Business does not predict that there will be a massive crash. There is likely to be no massive macroeconomic trigger like the ERM debacle. Growth is forecast to moderate, but not stop. There is also a "structural shortage of homes [that] will continue to underpin prices."
On Friday Tory housing spokesman Grant Shapps MP launched a review into homebuying. Mr Shapps has estimated that £339 million is lost in abortive
transaction costs each year. Of 1.8 million transactions each year –
taking, on average 8 to 10 weeks – nearly half-a-million (28%) fall
The review which will be conducted with industry expert and former Tory PPC Owen Inskip, and TV presenter Kirsty Allsopp, will seek to find ways of making home buying less bureaucratic and less expensive. The review may recommend an end to ‘gazumping’. The Tories are already pledged to abolish Home Information Packs although they will retain the energy performance certificate.