Are we talking ourselves into a recession?
23 May 2008
Is the economy on its knees with a recession around the corner or are we simply talking ourselves into an economic mire?
Peter Lane, founding director of Peter Lane and Partners in Cambridgeshire, writes:
For years we have enjoyed great conditions in the property market but now the conditions have altered - it’s stormy and changeable out there.
Part of the reason for the lack of confidence in the market is due to the news we are fed every day - mortgages are difficult to secure if you need one and unaffordable if you already have one. Of course, this is true in some cases. However, most people are unaware that despite the recent problems caused by the ‘credit crunch’, fewer than eight per cent of borrowers have been affected.
Those most affected are buyers with no deposit, those borrowing more than the value of their property and those with a poor credit history. Although the criteria for obtaining a loan are much tighter than six months ago, having a poor credit rating does not exclude you from obtaining a mortgage.
First-time buyers are also being helped on to the property ladder by a variety of schemes, including the Government’s ‘My Choice Homebuy’ initiative. This scheme contributes up to 50 per cent towards the price of a home purchased on the open market. It is available to first-time buyers earning under £60,000. The type of home you can buy and its price will depend on your household needs, average local property prices and the amount you can afford to contribute.
Another way of purchasing a property with little or no deposit is through a vendor (seller) gift. This is a scheme accepted by selected lenders where buyers are getting good value for money from their purchases. If a property is on the market for £200,000 and the vendor is happy to accept £190,000, the £10,000 difference provides a five percent gifted deposit, provided the lender’s surveyor agrees that the property is worth £200,000.
Both of these schemes are ideal in the current market but you should always seek independent advice.
More encouraging news is that the Bank of England recently dropped its base rate again, cutting monthly mortgage repayments for borrowers on a tracker rate. The Government has also stepped in by injecting £50million worth of bonds into the money market with a promise of a further £50million. This will start to free up the credit markets, allowing lenders to offer competitive mortgages again. The Bank of Scotland recently announced a Rights Issue which was quickly followed by the HBOS group, which includes the Halifax. This enables them to sell shares to their shareholders at a discounted rate, boosting their liquidity and enabling them to release more funds for mortgage lending.
The group that will benefit from this is buyers. Until now, conditions for buyers have not been good for years – apart from those looking for high loan-to-value mortgages. As prices enter a phase of re-adjustment, people can now afford to buy property that even a couple of years ago would have been out of their reach. There is plenty on the market to choose from - most people can’t remember the last time things were so good for prudent buyers!
Another encouraging development is that investors have just started to purchase one, two, and three bedroom homes. They are buying well below market value and with rental values increasing between 10 and 15 per cent over the past six months; this offers an excellent business opportunity. It begs the question - if investors are buying, why are first-time buyers being over-cautions?
However, the big questions still remain and cannot be answered. Will the country slip into recession? How will the property market continue to react? Can we look at the recent past to help us understand how the market will behave in the future? Should we believe all that we read in the national press? This one is easy to answer - most definitely not!
What we do know is that some agents are closing their doors because they did not prepare for what we have known was coming six months ago. Our agency took the painful decision to cut costs, believing the market would be much slower over the next six to nine months – it has proven to be a very wise decision.
Some scaremongers are warning that the current market conditions will lead to the same property market crash as in the 1990s but the economic conditions today could not be more different. In the 1990s, interest rates, unemployment and repossessions were at an all time high. Today we have lower interest rates, which are still falling, the lowest unemployment for decades and relatively low numbers of repossessions.
I believe that Cambridgeshire has been much less affected than the rest of the country because of our location. We are close to two major cities; Cambridge and Peterborough, both providing ample employment opportunities. With numerous corporate companies in such close proximity, we benefit from a constant flow of employees moving in and out of the area. Easy access to both the A14 and the A1, together with the main-line railway station at Huntingdon into London means a steady ‘in and out’ flow of people. Add the usual need for local people to move, first-time buyers and investment buyers and it becomes clear why this area is not following the national trend.
We know the market is cyclical. We know, in the short term, what goes up will come down. However, we also know that in the long term there is a relentless upward trend, despite the odd hiccup. There are good buyers out there and property priced in line with buyers’ reasonable expectations will sell. The thing to remember is that it is all relative; if your property is worth less, so is the one you are going to buy.
Does that make for a bad market? Not at all!
Source
http://www.movewithus.co.uk/mwu-news/00,news,52411,468,00.htm (launches a new window)
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