The ups and downs of the property market
The slowing market of the last part of 2007 has continued into 2008. Rather than offering any signs of improvement, the property sector, for a variety of reasons, looks as though it could be in for a challenging year ahead. Predicting any market however, is not a precise science and the affordable sector generally proves to be stronger than most.
Effects of the credit crunch
Unfortunately, the effects of the credit crunch are still with us and don’t look as though they are going to subside in the short term, if anything it’s likely to get worse before it gets better. Under normal circumstances this wouldn’t necessarily have a big impact on the affordable housing market. This is because it is mainly supported by building societies that are not reliant on the money markets to raise mortgage funds, including a small group of larger banks - Abbey, Halifax, Woolwich who so far have proved to be “relatively” resilient to many of the problems. The result of this is that mortgage pricing is still competitive by historical standards. (Bank base rates in Feb 08 were 5.25%, in Feb 98 were 6.25% and in Feb 88 were 9%).
Lending money
The main problem currently facing the property sector, however, is quite simply the shortage of mortgage funds available to lend to new customers. This is likely to have a knock on effect to the affordable sector even though the demand and the need to buy properties still remains and is still likely to be strong. The shortage of funds has been caused because a large number of banks and specialist mortgage lenders raise the money they lend to home purchasers in the form of mortgages directly from the money markets. They don’t actually lend their own money in the same way as most building societies that raise the bulk of their mortgage funds through the savings of their customers.
Due to the problems seen with Northern Rock the interest rates that banks will lend to each other has risen too high and so a big gap has been produced between this type of lender and those that lend out their own money. Additionally, due to a number of complex factors several specialist mortgage companies can no longer raise the funds required and have subsequently either temporarily closed for new business or given up the ghost altogether and pulled out of the market.
The impact
The knock on effect of all this is that the lenders left in the market offering competitive terms are being swamped with business and literally can’t cope with the demand. The danger, therefore is that the lenders who have traditionally supported affordable housing initiatives such as shared ownership, HomeBuy and the new MyChoiceHomebuy and Ownhome (launched with effect from 1st April 2008) could be forced to reduce their commitment to the sector or change the terms on which they operate. So far this hasn’t happened, apart from a couple of isolated instances, and hopefully the lenders will see out the current market conditions and continue to offer attractive terms and interest rates. Some of the controls put on shared ownership buyers for example, 3.5 times your income are now being applied to other buyers too - so it’s more of a level playing field. If values keep going down it will help those struggling to borrow enough, to buy. In the current climate it’s more or less the only way to get on the ladder without a deposit, as 100 per cent mortgages on outright purchases has now all but disappeared. In the meantime, advice to all first-time buyers is simply; if you are offered a good mortgage deal, accept it quickly as the chances are the same deal could be more expensive in months to come.
Next steps to take
One thing that has always set the affordable home ownership sector aside from open market sales is that it is noticeably robust in times of financial uncertainty. After all, unlike property investors, the needs of first-time buyers don’t go away. Regardless of market conditions affordable housing is always going to be preferable to private rent, sleeping on a friends floor or outstaying your welcome at home with the parents. The number of new build developments offering properties for purchase under a variety of affordable housing schemes is on the increase. If you find a property in the right location check it out and see whether it’s available for you to buy. After all, home ownership is all about finding the right property in the right area at the right price and providing you with a long term home that is all yours. Whatever worries you have about the market in the short term will be long gone when you look back in five or ten year’s time. The benefits of owning your own home always outweigh the negatives because of the short term fluctuations of the financial markets and the reasons to buy are as strong as they always have been.
Source: HomeFocus Magazine