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Property Market Round-Up

Property prices have had a good run for their money - they have been rising steadily since 1997 and have outstripped all other potential investments.

This rise has lasted longer than any experts expected it would – most forecasting from the beginning of this year that the market would flatten. The UK’s biggest mortgage lender, the Halifax has just had to upgrade its forecast for the average house price rise for 2007, increasing it from 4% to 6%. Its reasoning is that a combination of greater economic momentum and a worse shortage of property than expected have produced a stronger performance for the first half of the year, and they expect that to weaken during the remainder of the year.

However, there is also some evidence that the housing market is slowing down. The British Bankers’ Association has revealed that the increase in mortgage lending is now below the regular trend. There is now a feeling among economists that the market is losing momentum as affordability issues across the market – and particularly for first-time buyers – as a result of higher interest rates begin to take their toll.

Despite the outward appearance of a healthy market, albeit now slowing down, there are now some other problems beginning to surface. The banks may be facing a mortgage time bomb. With the five interest rate rises in the last twelve months, the banks are expected to start reporting a significant rise in the number of people having problems with their mortgage repayments.

In the first quarter of 2007, £56m of mortgage bad debt was written off. This may rise to £500m for the whole of 2007, and continue to rise into 2008. Even this figure for mortgage arrears is made to look small by the £892 of losses on personal loans which were reported for quarter one 2007.

The big problems for mortgage owners is expected to be in the next twelve months or so when something like two million homeowners come to the end of their cheap fixed rate deals and have to look for new arrangements which they will find horribly more expensive. There is a feeling that banks are supporting excessive consumer debt and this may give rise to banking problems in the near future. Some experts fear the problem is greater than even the banks would care to admit.

The buy-to-let mortgage market is also having its share of problems. Buyers of new-build flats have seen the value of their investments sink into the foundations, despite having financial incentives from the developers. Rental income is also struggling to cover mortgage payments, many of which, of course, are now higher than previously expected.

Comments from within the buy to let market remain bullish, but the evidence gives lie to this, as auction rooms are full of properties that have been repossessed less than two years after some landlords made their first steps into the buy-to-let market. Where investors were attracted by deals with stamp duty and legal fees paid for them, together with discounts and rental guarantees, they are now being met with the reality of a tough business. Developers continue to offer similar deals.

Tom Smith
2nd August 2007

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