House prices and interest rate cuts where are we now

Two of the most often asked questions from clients are -

• What do we think of house prices? and

• Why, when interest rates have come down, am I still not getting the full reduction in my monthly mortgage payments?

To answer both fully would take more room than we have here, but here is a précis.

House prices have fallen back to the levels last seen in October 2006 after 10 consecutive monthly falls in value.

Indices are calculated on the basis of the value of completed house purchases and the FT House Price Index stands 10.4% below that of December 2007. This is less than the Nationwide or Halifax surveys often quoted, but is a figure independently calculated, and one which represents an average of the whole Country.

House prices will continue to fall whilst redundancy and unemployment feature high up on personal agendas. The Council of Mortgage Lenders forecast the number of borrowers more than three months in arrears in paying their mortgage is likely to double to 500,000 in 2009, and repossessions will rise to 75,000.

We consider both figures to be conservative, and believe the real figures will be higher. In the good old world of Supply & Demand this basically means there is more Supply than Demand and so prices will continue to fall. This is despite the fact that as a nation we need to build 155,000 new homes a year to house the burgeoning population.

A good marker on when any recovery might arrive is the rental market. It was the ease of obtaining mortgages that fuelled the house price spiral and a lot of that bubble was blown up by the ‘get rich quick’ speculation that becoming a landlord offered.

This drove rental yields on properties to all time lows as house prices increased to the point where average rental yields were below deposit rates at Banks. This meant that landlords were receiving no risk premium for the volatility of the capital price of the asset they were buying into or the threat of voids through non-payment of rents. So house prices had to fall.

So will the cut in interest rates help? The Press and Media are full of historic 300 year lows in interest rates but Lenders are not passing this on in full. In normal times interest rate cuts are good for mortgage holders and first-time buyers; but not for savers. However, these are not normal times.

Banks and Building Societies have to provide reasonable rates for savers and mortgage holders (a difficult job), and would not be able to perform this balancing act if they offered savers 0% interest on their savings, whilst lending to mortgage customers at 2%.

Therefore, in order to attract funds - to then lend on for mortgages - the Banks and Building Societies have chosen not to follow the Bank of England’s lead as they continue to shore up their battered business. Also many Tracker Mortgages contain terms which do not allow the rate charged to go below a certain rate, known as a ‘collar’.

Do not expect zero mortgage or savings rates, even if the Bank of England cut rates further, the lending process will not allow this to happen.