Panic about house prices!

by Christina Jordan on 06 March 2010  |  16 comments
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Mortgage lending slumped in January and there are signs the trend of rising house prices is over. Is there reason to panic?

January was a pretty dud month in terms of mortgage lending. That’s the conclusion reached now all the relevant bodies have released their lending figures for the period.

The latest was the Bank of England, which said that the number of loans approved for house purchase in January (48,198) was significantly lower than the 58,223 in December, and less than the previous six month average of 55,924.

Remortgaging didn’t fare much better at 23,611 deals approved in January, again lower than the December and six-month average figures.

In fact, the total number of mortgages approved was the lowest since last May.

The British Bankers’ Association also saw a sharp drop (24%) in mortgages approved for house purchase between December and January. Plus it said that total lending fell by 26% to its lowest level in eight years. And the Council of Mortgage Lenders (CML) recorded a large drop in gross mortgage lending -- 32% -- over the same period, the lowest level in 10 years.

Yep, January wasn’t great.

Chill out

However it’s not time to start panicking, or muttering the phrase ‘double dip’, just yet.

January’s lower lending figures were clearly caused by a combination of terrible weather forcing most of us to stay indoors, and the ending of the Stamp Duty holiday on New Year’s Eve. This had caused a spike in mortgage lending in November and December -- first-time buyer numbers hit a two-year high -- which was always going to be followed with a bump back down to earth.

A setback in the recovery is my verdict and nothing more. I am not suggesting February lending figures will necessarily bounce straight back but I think that the smoother indicators (annual and quarterly measures) will continue to show improvements.

A much more illuminating take on the mortgage market this week looks at long and short term trends in homeownership levels and predicts that more of us could choose to, or be forced to, rent in the future.

• Follow the hints and tips in this goal: Cut the cost of your monthly mortgage payments

Affordability squeeze

This new research comes from the CML which points out that the huge affordability issues already in place before the credit crunch have been exacerbated by it. Prices may have dropped 20% from peak to trough since 2007 but tighter lending criteria means it is definitely harder to borrow now.

This could lead to more people having to rent, says the trade body, a trend supported by changing consumer preferences. In other words, it’s also no longer seen as peculiar if you don’t want to buy a property in your twenties.

For wannabe first-time buyers any ‘consumer preference’ is pretty much taken out of their hands, as it’s much harder to get onto the housing ladder now than it was before the crunch.

A typical first-time buyer needs to find around £34,000 as a deposit, which is more than their average total gross household income. Just three years ago the deposit required to enter the market was £12,700 and this accounted for 37% of household income -- a massive shift.

Unsurprisingly there is now a greatly increased reliance on financial support from parents. In 2006, a significant 38% of young first-time buyers in 2006 received help, and this had risen from just 10% a decade earlier. Now though it is estimated that 80% of first-time buyers under 30 years old receive financial help from their parents to buy their first home.

There has also been a huge fall in the proportion of young households with mortgages -- it’s estimated that for those in the ‘formerly typical’ first-time buyer age bracket of 25-34, the likelihood of buying at the moment is around half its level of a decade ago.

The CML suggests that the move away from homeownership that started before the crunch will continue, not least because of a constraint in housing supply as well as the obvious affordability challenges.

• Adopt the goal: Build up your savings

We need FTBs

But first-time buyers drive the housing market. Without them second-time buyers can’t sell and purchase chains fall apart.Lenders have a key role in helping the market, and by increasing the supply of mortgages to first-time buyers they will enable more to take that first step onto the ladder.

Of course, this still needs to be done in the context of responsible lending, so there is unlikely to be a sweeping change in lending criteria.

But we have already seen lenders become more flexible in lending to those with a small deposit in the last few months, and competing in the first-time buyer market for the first time since the start of the credit crunch.

Lenders are introducing more mortgages to the market in 2010, that’s undeniable. Deals available topped 2,000 in February for the first time in over 12 months, according to financial information provider Moneyfacts, and 400 of those have been introduced since the New Year.

Plus more and more deals are being launched specifically for first-time buyers. There has been a 38% increase in the number of mortgages available to buyers with a deposit of just 10% since the beginning of the year, and a 28% rise in deals for those with 15% upfront.

For example, First Direct has just launched a best buy term tracker at 3.99% (Base +3.49%) for those with a 15% deposit, which comes with a modest £499 fee.

OK, finding 15% of a property’s value is still a lot for some first-time buyers, but last year you needed 25%, and sometimes 40%, to get anywhere near a competitive mortgage. Things are getting better.

If you can only scrape together 10% upfront, there are deals available. You will pay a bit more, but competition is slowly coming back to this sector of the market too.

Here are 10 of the best mortgages for first-time buyers with 10% upfront:

Five fab variables

Five fantastic fixes

More: The biggest house-price myth | The best landlord mortgages

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.