The House Price Crash Thread

[ahamaad]

A good rule of thumb for pricing an initial bid on a house purchase is to estimate what you'd be willing to pay to rent it.

Multiply that figure by 1.5 and then subtract any carrying costs of the property that you wouldn't have to bear if you were renting (insurance on the building, if in a jurisdiction (not the UK, AFAIK) that assesses taxes based on property value then property taxes, a reasonable allowance for maintenance). What's left is a reasonable mortgage payment. Plug that into an amortization calculator to get a loan amount (if taking out an adjustable rate mortgage, I'd suggest for conservatism to just compute based on a fixed rate a couple of points higher and use your higher rate based payment to repay the mortgage (so that while interest rates are lower than your high estimate, you're paying down the principal balance faster and thus reducing the impact of interest rate swings down the road; if interest rates fall then the benefit of this prepayment of principal really snowballs)), add in your downpayment and subtract the transaction fees and voila, you've got a reasonable starting offer.

:shock:

Is Carol Vorderman available to perform this calculation?

[Gringo]

Is Carol Vorderman available to perform this calculation?

Carol Vorderman - mortgage whore - "in too much debt, why not take on even more debt by securing a loan against your only major asset - trust me, I do maths on the telly, so you know it makes sense"

[Sid4ever]

A good rule of thumb for pricing an initial bid on a house purchase is to estimate what you'd be willing to pay to rent it.

Multiply that figure by 1.5 and then subtract any carrying costs of the property that you wouldn't have to bear if you were renting (insurance on the building, if in a jurisdiction (not the UK, AFAIK) that assesses taxes based on property value then property taxes, a reasonable allowance for maintenance). What's left is a reasonable mortgage payment. Plug that into an amortization calculator to get a loan amount (if taking out an adjustable rate mortgage, I'd suggest for conservatism to just compute based on a fixed rate a couple of points higher and use your higher rate based payment to repay the mortgage (so that while interest rates are lower than your high estimate, you're paying down the principal balance faster and thus reducing the impact of interest rate swings down the road; if interest rates fall then the benefit of this prepayment of principal really snowballs)), add in your downpayment and subtract the transaction fees and voila, you've got a reasonable starting offer.

Levi, I think I got that.

But just to make sure, if I am paying £700 for rent per month, should I be expecting to pay £1,200 for a mortgage on a similar property. Hope so cos Carol said I can secure the loan against my property and roller skate whilst it's that time of the month.

Wait, oh shit that was Dr Alban.

[Gringo]

Levi, I think I got that.

But just to make sure, if I am paying £700 for rent per month, should I be expecting to pay £1,200 for a mortgage on a similar property. Hope so cos Carol said I can secure the loan against my property and roller skate whilst it's that time of the month.

Wait, oh shit that was Dr Alban.

Well the way I read it is

If......

Rentable value = 700 / month

building insurance = 600 / year

Maintenance = 1800 / year

Property tax = n/a as it is born by tenants not landlords

then fair mortgage payment is

(700 * 1.5) -( (1800 + 400) / 12) = 850 per month

knock off 5% for transaction costs (buying, selling, HIPS, remortgaging fees etc etc) => c810 per month

[leviramsey]

Well the way I read it is

If......

Rentable value = 700 / month

building insurance = 600 / year

Maintenance = 1800 / year

Property tax = n/a as it is born by tenants not landlords

then fair mortgage payment is

(700 * 1.5) -( (1800 + 400) / 12) = 850 per month

knock off 5% for transaction costs (buying, selling, HIPS, remortgaging fees etc etc) => c810 per month

Gringo reads it correctly... the gist of this approach is to think like a BTL landlord, with the only extra wrinkle being that you're both the tenant and the landlord. The factor/ratio is akin to a P/E ratio for stocks... the price is the mortgage payment plus carrying costs and the earnings is the rent (paid from your right hand to your left, in this case).

Per amortization calculator, if we assume a 30 year mortgage at 8% interest, that payment allows you to borrow 110k (so if you're putting 25% down, then that's about 150k for the house).

It should be noted that the 1.5 is probably unrealistically low as a base factor, but that's basically the lowest possible value for that property unless hell or high water comes. 2.0 or thereabouts is generally considered an equilibrium value, and if you're talking about more than 2.3 or so, think long and hard about whether you should be buying this house or trying to rent it (and thus getting a landlord to make the speculative bet that he can sell it at enough of a profit to make it worth his while).

[Gringo]

Housing gloom 'worst in 30 years' or seeing as we've only got records going back 30 years, we could say it's the worst ever!!!!

Confidence in the UK housing market fell in March to its lowest point in 30 years, according to a closely watched survey of property surveyors.

The Royal Institution of Chartered Surveyors' (Rics) said that 78.5% more surveyors reported a fall than a rise in house prices in March.

This was the gloomiest reading since Rics began the survey in 1978.

The government's own house price figures confirmed a fall in prices in February by 1.6%.

The results come after leading mortgage lenders have offered similarly downbeat views on property prices.

Rics said the next six months would be crucial for homeowners and would-be buyers in the UK.

Historical low

The Rics house price balance dropped for the eighth consecutive month. It exceeded the previously lowest reading in June 1990.

Jeremy Leaf, Rics spokesman, said the gloom was the result of the credit crunch and its effect in stopping mortgage providers lending to each other.

"Sentiment is at a very low ebb and will continue to remain depressed while the economy suffers from this unique liquidity blight," he said.

But never fear, with every post, Gringo provides a silver lining

But he added that a significant crash in prices remained unlikely and buyers with access to large deposits had the chance to get their hands on property they could not previously aspire to.

So as long as you're cash rich, there's nothing to worry about.

[leviramsey]

But he added that a significant crash in prices remained unlikely and buyers with access to large deposits had the chance to get their hands on property they could not previously aspire to.

So as long as you're cash rich, there's nothing to worry about.

Crashes are always good for those who sell when sentiment is at its peak optimism and buy when sentiment is at peak pessimism.

Just ask Roger Babson (a friend of my family back in the day, what with the Gloucester/Wellesley connection)...

[Gringo]

Here comes Mervyn to the rescue

Bank details £50bn lending boost

The Bank of England has announced details of a plan to help prevent the credit crisis causing more damage to the UK banking system and economy.

Banks will be able to swap potentially risky mortgage debts for £50bn of secure government bonds to enable them to operate during the credit squeeze.

The Bank's governor, Mervyn King, said the scheme aimed to improve liquidity in the banking system.

It should also increase confidence in financial markets, he added.

Under the scheme, banks will be allowed to swap their "high quality" mortgage debts for government securities.

This is a banking-market bail out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that

Robert Peston, BBC business editor

The swap will be for a period of one year and may be renewed for a total of three years.

It will only apply to mortgage debts on banks' books at the end of 2007 and the swaps cannot be used to finance new lending.

[snowychap]

Rigsby et al won't be keeping the whole thing afloat, it seems.

Banks pull the plug on buy-to-let

The era of the amateur landlord has all but ended, with banks effectively refusing to lend to new entrants to the buy-to-let market.

Thousands of existing landlords also face huge increases in the cost of remortgaging, experts said yesterday.

The warning came as HBOS, Britain’s biggest group of lenders, imposed the third increase in the cost of residential mortgages in as many weeks. Cheltenham & Gloucester, the fourth-biggest lender, also increased some of its rates for the second time in three weeks.

First-time landlords, including parents eager to buy a house for their student children, will now find it almost impossible to enter the housing market.

Lenders have stopped offering buy-to-let loans or severely tightened their lending criteria for prospective landlords and many of the existing one million buy-to-let mortgage holders approaching the end of their terms.

The development comes as senior figures in the housing industry predict up to two years of declining house prices. The problems in the buy-to-let market are compounded by fears that the target of many would-be landlords – apartment blocks in cities such as Birmingham, Manchester and Cardiff – are facing a rapid decline in their value.

Katie Tucker, of the broker John Charcol, said: “After another week of turmoil in mortgage markets, novice landlords now face huge difficulties securing a loan, and thousands of existing landlords coming to the end of fixed-rate deals will find it very hard and very expensive to switch mortgage providers if they have not built up at least 75 per cent equity in their buy-to-let property.”

This week Abbey withdrew virtually its entire range of buy-to-let mortgages, leaving only an expensive fixed-rate deal of 6.99 per cent for direct customers.

Chris Wood, of the National Association of Estate Agents, said: “It’s the amateur investors who are feeling the pinch. With lenders worried about falling house prices, prospective borrowers without a substantial deposit will find it very tough to get a buy-to-let loan.”

HBOS, owner of Halifax, Intelligent Finance, Bank of Scotland and Birmingham Midshires, heaped further misery on homeowners with large increases on mortgage interest rates and arrangement fees last night. It was the third time in as many weeks that the lender, which has more mortgage customers than any other bank, has announced an increase in rates.

Halifax is expected to raise fees by £1,000 and some rates by as much as 0.6 per cent, meaning an increase of £75 a month on a £150,000 interest-only loan. The bank increased the rates on some of its tracker deals by similar margins last week, and increased the rates on mortgage deals for those with small deposits by up to 0.35 per cent on April 7.

Intelligent Finance, the online lending arm of HBOS, increased the rates on its deals by up to 0.45 per cent yesterday and introduced a fee of £12,000 on a 7.49 per cent tracker deal for properties over £2 million.

Mortgage brokers also suggested that more rate rises could be on the way, despite the Bank of England’s £50 billion bailout for British banks.

Ms Tucker said: “If HBOS are suddenly pricing themselves out of the market under all brands, it implies that they don’t want to part with their current available cash, or that they have been swamped with business this week. This price hike will displace a huge amount of business, swamping other lenders, so there’s a good chance the rest will follow suit next week.”

The mortgage market is shrinking rapidly as lenders withdraw products and tighten lending criteria. But experts say that landlords are among the people worst hit by the market woes.

Last April there were 2,990 buy-to-let mortgage products available, with an average rate of 5.23 per cent. Today there are 597 products, with an average rate of 6.75 per cent. Some specialist lenders, including Mortgage Trust and Paragon, have stopped offering buy-to-let deals altogether.

Last year lenders would loan up to 90 per cent of a buy-to-let property’s value (LTV), but most landlords now need to raise a deposit of 25 per cent to obtain a mortgage. Landlords have also been hit by lenders’ demands for increased rental cover — the amount of rent that covers the mortgage. Last autumn landlords only needed 100 per cent rental cover but lenders are now insisting on 120 or even 130 per cent.

Average rental yields — the return on capital — have also been falling steadily over the past six years. In the second quarter of 2002, the average rental return was 6.8 per cent, but this fell to 5.8 per cent in 2003 and reached a low of 5 per cent in 2005. In the first quarter of 2008, the average annual rental yield was only 4.66 per cent, according to the Association of Residential Letting Agents.

[Gringo]

A smaller part, but important part of the market is the distressed sellers arena. The idea being that someone who is is desperate to sell due to mortgage arrears or other motives (moving abroad, selling a diceased family members property etc) would sell at 15-20% below market value because they were desperate or had waited too long for the market or because the property needed attention (often old people die leaving a house that hasn't been redecorated for 20+ years). So the buyer purchases for 80% of the market using a bridging loan, remortgages with a buy-to-let mortgage at 85% the next day, and ends up with 2% (after fees) to do the smarten the place up a bit or to pocket.

The largest two vendors in this market have been mortgage express and birmingham midshires. Mortgage express announced on Thursday that they won't allow any remortgages on properties that the owner has owned for less than six months. Bhm Mids are due to announce a similar policy change.

This in effect takes out a support mechanism for reposessions. Now that this game is over, the banks will be forced to repossess instead of passing the risk onto a BTL landlord. In other downturns, banks have struggle to get 65-70% of market values when dumping them through auctions, so this is going to add further downward pressure on house prices.

To those who are young enough and capable of doing up houses, now is the time to start scouting round auctions for the repo's, but it with a residential mortgage, do it up over 6 months, re-mtg as a BTL, rent it out and buy another. Over a 3 year period, you've got your pension plan in place. There are still opportunities available in the property market for those looking to make money, but they are for workers not speculators.

[snowychap]

UK house prices see annual fall says Nationwide

House prices in the UK have recorded their first annual fall for 12 years, according to the Nationwide.

Prices fell by 1.1% in April, the sixth monthly decline in a row, and were down 1% from the levels seen in April 2007, the building society said.

Nationwide said the price falls reflected a weakening market which had been hit by "poor affordability and tighter financial market conditions".

An average home now costs £178,555 which is £1,759 lower than April 2007.

'Cautious consumers'

"April was another difficult month for the housing market," said Fionnuala Earley, Nationwide's chief economist.

She said that there had been a "steep decline" in house buying in the last six months owing to falling demand from first-time buyers, higher mortgage rates and tighter lending criteria.

The rise in unsold property on the market improved the bargaining power of buyers which pushed down prices.

She said that this was likely to have a knock-on effect on the wider economy, with consumers becoming more cautious.

But rising oil and food prices meant that the Bank of England would "prefer to cut rates at a more gradual rate than homeowners might prefer", she predicted.

'Not the 90s'

The figures come the day after the Bank's own data showed that new mortgage approvals had fallen to their lowest level since records began in 1990.

This was partly owing to the difficulty for first-time buyers in finding a mortgage deal without a significant deposit.

But the fall in prices, down 1.8% over three months compared with the previous quarter, will be welcomed by some new buyers who have seen prices rocket up by 45% in the past five years.

Ms Earley added that the housing market was very different to the situation in the late 1980s and early 1990s.

"The underlying conditions for most mortgage borrowers are more positive than some would suggest," she said.

Bank plan

The Halifax said that prices fell by 2.5% in March compared with the previous month, and the rival mortgage lender is set to release its figures for April in the next few days.

Nationwide's Ms Earley said that the Bank of England's £50bn plan for banks to swap potentially risky mortgage debts for secure government bonds was "well thought out".

She said it would stabilise the volatile mortgage market of the past few weeks, but it would not lead to house prices and mortgage lending returning to the levels seen this time last year.

She added that, unlike the 1990s crash, more people were on fixed-rate than variable-rate mortgage deals and this helped the stability of the market.

[Rudy]

She added that, unlike the 1990s crash, more people were on fixed-rate than variable-rate mortgage deals and this helped the stability of the market.

any about 1.5m fixed rates will finish this year and have to move onto higher rates. therefore, there will be a lot of pain for many......including me!

[Gringo]

House prices 'could fall by 30%'

House prices could drop by around 30% over the next few years if interest rates are not cut, a senior Bank of England official has warned.

But Monetary Policy Committee (MPC) member David Blanchflower said such a fall would restore the market to a "more sustainable" house price-to-earnings ratio.

He also warned that "aggressive action" was needed to prevent the UK economy from falling into recession.

Mr Blanchflower, one of nine MPC members at the Bank who set the UK's interest rates, made the comments during a speech in Edinburgh.

He said: "In my view a correction of approximately one third in house prices does not seem implausible in the UK over a period of two or three years if house price-to-earnings ratios are to be restored to more sustainable levels.

"That would mean the ratio of over six would have to come down to around four, which is closer to its long run value."

Current projections from the International Monetary Fund suggested that UK house prices were "30% higher than justified by fundamentals", he added.

"I am not suggesting that such a drop will necessarily occur, but it may. Cutting interest rates now may help to prevent such a dramatic fall."

The Bank of England has made three 0.25% interest rate cuts in the past five months, taking the rate down to 5%. The cuts appear to have had little impact on the slowing UK housing market. One survey this week suggested prices had dropped nearly 1% compared to a year ago.

Mr Blanchflower said: "My biggest concern right now is that the credit crisis will trigger a rapid downward spiral in activity. I do feel that the slower rates fall, the further they will eventually have to go down to boost the economy."

[Jon]

House prices 'could fall by 30%'

well, if that is going to be the case, then surely nobody should be buying now. You'd be a fool to, as prices are highly likely to keep dropping for some time yet.....

[snowychap]

Repossession action climbs 16%

The number of homeowners facing court action after failing to keep up with mortgage payments is up in England and Wales, says the Ministry of Justice.

It says the number of mortgage possession claims - the first stage of the repossession process - rose 16% in the first quarter of 2008.

There were 38,688 claims compared with 33,344 in the same period of 2007.

The credit crunch has led to more expensive repayments for new mortgages and a cut in the availability of deals.

The number threatened with losing their homes was 7% higher than the final three months of 2007.

The number of mortgage possession orders - when a court grants an order for possession of a home - was also up, the figures show.

Some 27,530 mortgage possession orders were made in the first three months of the year, 17% higher than in the first quarter of 2007 and 9% higher than in the fourth quarter of 2007.

Tighter household budgets

Household bills have also risen owing to the rising price of food and fuel. The availability of credit has also been cut.

The Ministry of Justice figures show mortgage possession claims in England and Wales by local authority and private mortgage lenders.

Most of these do not end with a property being repossessed, mainly because the borrower presents the court with a case for not proceeding or the lender comes to an arrangement with the borrower.

The number of actual repossessions, across the UK and by private lenders only, is shown in figures from the Council of Mortgage Lenders (CML) published twice a year.

The data for the first half of 2008 will be published in August. The CML predicts that there will be 45,000 repossessions in 2008, up from 27,100 in the previous year.

The CML says there are 11.8 million outstanding mortgages in the UK.

Help for homeowners

The figures come on the day the government has given details of plans aimed at helping homeowners who are struggling to pay their mortgages.

It said there will be more free legal advice for those at risk of repossession, along with specialist training for debt advice agencies.

Housing Minister Caroline Flint said: "It is important to recognise we are dealing with an entirely different situation in the market from what was experienced in the early 1990s."

"The fundamentals of the housing market remain strong with high employment, low interest rates, and long-term demand for homes from first-time buyers."

[snowychap]

Mortgage lending hits 33-year low

Mortgage lending to home buyers has hit its lowest level for 33 years, according to figures from the Council of Mortgage Lenders (CML).

Just 47,000 such mortgages were lent in March, taking the total for the first three months of the year to 142,000.

This was the lowest quarterly total since the first three months of 1975.

The CML predicted lending and house sales would fall even further in the next few months because of the credit crunch affecting the banking system.

"House purchase transaction volumes will continue to deteriorate in the coming months as recent approvals data from the Bank of England has shown," said Michael Coogan, director general of the CML.

The figures chime with the latest survey from the Royal Institution of Chartered Surveyors, which said that falls in house prices were now more widespread than at any time since 1978.

,,,more on link

House price falls 'are spreading'

The number of UK surveyors reporting falls in property prices has risen for the ninth month in a row.

In the latest survey from the Royal Institution of Chartered Surveyors (Rics), 82% of surveyors saw prices fall in the three months to April.

That figure was up from 66% in March, with all surveyors in East Anglia, and the North and North West of England, reporting price falls.

There has also been a continued fall in enquiries from prospective buyers.

The number of house sales being completed over the past 3 months has fallen significantly said Rics, with an average of just 18 sales per surveyor

"The real issue is the collapse in the number of housing transactions," said Rics spokesman Ian Perry.

"This has very real implications, not just for the property industry but also the High Street and the wider economy," he added.

...more on link

Northern Rock sees arrears rise

Nationalised-lender Northern Rock says the UK mortgage market remains "uncertain" and arrears have increased.

The Newcastle-based bank said mortgages in arrears for at least three months stood at 0.95% of total lending on 30 April, up from 0.57% on 31 December.

Chairman Ron Sandler said while arrears rose, the credit quality of its loans was still "satisfactory".

He said the bank's turnaround plan, aimed at returning it to private ownership, was progressing.

"We remain firmly focused on our business priorities of repaying the government debt," Mr Sandler said in the bank's quarterly trading update.

The bank is redeeming mortgages by transferring customers to other lenders to reduce its debt and pay off its emergency loans from the Bank of England.

The loan facilities stood at £24.1bn at the end of March, down from £26.9bn at the end of 2007, the bank said.

...more on link

[snowychap]

Minister's housing fears revealed

UK house prices could fall "at best" by 5-10% this year, according to secret Cabinet briefing notes accidentally revealed by a housing minister.

Caroline Flint's notes also said: "We can't know how bad it will get."

The assessment was in typed briefing notes being carried by Ms Flint and photographed as she entered Number 10 for the weekly Cabinet session.

The government does not issue forecasts on the market and Gordon Brown has previously rejected fears of a crash.

House price falls 'are spreading'

Data published by Ms Flint's department, Communities and Local Government, earlier on Tuesday showed house prices fell 0.1% during the first three months of the year.

But Ms Flint's briefing note for the Cabinet says "given present trends they will clearly show sizeable falls in prices later this year - at best down 5-10% year-on-year".

A drop of 10% would knock more than £20,000 off the value of the average house and put people at risk of being in negative equity - where the value of their house falls below the size of their mortgage.

...more on link

[Gringo]

Picking up speed, down 2.5% in one month

House price falls 'accelerating'

House prices have recorded their largest monthly fall since 1991, says the Nationwide building society.

Prices have fallen by 2.5% during May, according to its latest monthly survey.

The lender said prices were now 4.4% lower than a year ago, a fall of £8,000 which has taken the average UK house price down to £173,583.

The Nationwide, the UK's second-largest lender, said price falls were now accelerating and had continued for seven months in a row.

"The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market," said Fionnuala Earley, the Nationwide's chief economist.

"At seven months, this is also the longest consecutive period of monthly falls since 1992," she added.

Can't get as bad as the 90's? The laws of limited supply and high demand will keep the market from plopping? Take cover.

[ianrobo1]

but there is no high demand thus prices falls

natural market conditions really

[Gringo]

but there is no high demand thus prices falls

natural market conditions really

Apologies Ian - just my little tongue in cheek snipe at comments like

As it I don't think there will be a crash, demand is too high, interest rates still historically low and now real sign of mass unemployement (no matter what Tony thinks)

and

A small fall is what everyone is predicting not a crash, still demand for mortgages out there

or

But the demand down there is still there, so a simple price adjustment for the nexxt 12 months

- one for the road

it won't crash in this country because the demand far outstrips supply and look at the number of houses that will need to be built

Apologies Ian, couldn't resist (or slightly bored this morning maybe?)

Of course, we haven't reached crash yet, still in the realms of correction. But another couple of months on this scale, we reach tipping point.