Official figures have indicated that the average property in the UK rose by 8% in value during the year to March 2014, with the news prompting Prime Minister David Cameron to announce that he is considering making alterations to the Help to Buy scheme to address the rapidly overheating housing market.
The Office for National Statistics revealed that the year-year rise in housing prices had slowed down in March to a rate of 8%, compared to 9.2% in February.
However, it is the figures describing property price rises in London that will be the most alarmingly, with the ONSís figures illustrating that the average house costs 17% more in March this year than it did the year before.
This contrasts heavily with the stability and state of the property market in all other areas outside of the capital and the South East in the UK, where the ONSís data revealed that houses had only risen by 4.7% in the year to March.
This includes a small rise of 0.3% in Northern Ireland, a 0.8% rise in Scotland, and a 6.6% rise in the East of England.
And it is now feared that a housing bubble is becoming increasingly likely in London, with the likelihood being that if it does occur, that it will then spread to areas around the capital, as aspiring homeowners look to areas nearby to London in order to find a home with an affordable value.
The huge surge in property prices within London and the South east have been attributed to a lack of supply and sufficient house building programmes to address demand, with the governmentís Help to Buy scheme being forwarded as one of the major contributors to artificially inflating demand levels within the housing market.
Prime Minister David Cameron has suggested that he will consider any modifications to the scheme suggested to him by Bank of England Governor Mark Carney, but has defended the success of the scheme arguing that it has helped over ëten thousandí people get onto the property ladder.
The news came a day before BOE deputy Governor, Charlie Bean, suggested that raising interest rates may be the only mechanism available to the central bank in order to cool the housing market down, should the untested macro-prudential measures they are using fail to control the market as necessary.
Help to Buy
The ONS identified that property prices dropped by 0.5% in March compared with February, which is consistent with other surveys undertaken in the same area, and means that the average house price now stands at £252,000.
However, figures released by both the Halifax and Nationwide, have consistently displayed steep rises in property prices on average of the past 12 months, despite the huge disparity in the increases between different regions.
This has led to many market analysts to urge the government to scale back the second phase of their flagship Help to Buy scheme- the Mortgage Guarantee scheme- which has been cited as a major contributor to the recent surge in demand, particularly in the capital.
Under the scheme, borrowers have been able to acquire homes with as little as a 5%deposit, and have had secured loans with as high as 95% loan to value made available to them as the government assured lenders that they would compensate for 15% of the mortgage value should the homeowner fail to make their payments.
The scheme applies to mortgages as high as £600,000, with some critics suggesting that this upper limit is too high considering the low deposit and cheap borrowing costs that characterise secured lending at present.
And it has been argued that the scheme has artificially inflated demand at a time when supply is simply not being constructed quick enough to match it, which has had the knock-on effect of sending property prices soaring.
Prime Minister David Cameron has praised the scheme for helping ëthousandsí get onto the property ladder, but highlighted his willingness to modify it if economic policymakers advised him that it was the best thing to do for the market.
Mr Cameron told the BBC: “Of course, we will consider any changes that are proposed by Bank of England Governor Mark Carney.
“But, as he said, this is a well-targeted scheme and it has helped tens of thousands of people get on the housing ladder and to have mortgages.”
However, the shadow chancellor, Ed Balls, said the upper limit of the Help to Buy scheme was too high, and called for it to be lowered so that people do not take on too much debt now and are left unable to deal with the costs when rates rise in the future.
Mr Balls said: “We’ve said it should come down much closer to average house prices. A number below £400,000 would make much more sense than £600,000 which is far too big a house price for the taxpayer to be guaranteeing mortgages. “
The Treasury minister – Andrea Leadsom ñ conceded that there are a number of areas that the government will need to address in the property market to stabilise price rises, but pointed out that the majority of the issues lie in London, and not in the rest of the country.
“The thing is it’s a fine balance. In London prices are rising quite fast. In the rest of the country – and in the country as a whole – they remain 15% in real terms below their pre-crisis peak. “
Lloyds cap mortgages
Londonís booming property market has prompted Lloyds, the UKís largest mortgage lender, to introduce restrictions on its lending policy, which has further cast doubt onto the current condition of the housing market in the capital at present.
Lloyds have opted to cap applications for mortgages of over £500,000 so that they can only be acquired by people who earn at least 25% of it from their salary. The current average property price in London, based on ONS figures, is a staggering £459,000.
The move by Lloyds came on the backdrop of Bank of England governor, Mark Carney, identifying that large mortgages which have been handed out to borrowers at a value of five times their income “could store up bigger problems for the future”.
Stephen Noakes, director of mortgages at Lloyds, highlighted that the move to impose restrictions was made to deal with specific inflationary pressures in London, where property prices are alarmingly up 30% from their pre-recession peak back in 2007.
“This is largely driven by issues of supply which are particularly acute in London.”
Interest rates; to raise or not to raise?
Bank of England Governor Mark Carney has identified that he is monitoring the property market supremely closely, and highlighted that whilst he is aware that there is a severe lack of supply at present, that he does not the power to do anything to alleviate the problems at present.
Nevertheless he pointed out that what he does have the power to do is effect the policies and product range of lenders in the UK, and pledged to alert Chancellor George Osborne as soon as he believes that modifications will be needed to be made to any of the governmentís housing schemes.
New mortgage regulations have recently been implemented in order to address soaring levels of demand in the country, with one knock-on effect of the new rules being that the time taken to acquire a mortgage has increased. This has lowered the quantity of mortgage approvals in the past few weeks, though the effects of the new assessment
criteria have yet to be fully ascertained.
The Bank of England also has the ability to raise interest rates, which could be another potential answer to lowering demand levels in the country, though a recent study conducted by the Resolution Foundation estimated that nearly 800,000 householdís could be ìimprisonedî by a minimal capacity to change to a new mortgage deal should interest rates rise soon. This implies that around 10% of mortgage holders in Britain are at financial risk should rates rise.
The base rate of the Bank of England currently stands at 0.5%, with market analysts forecasting a rise in the second quarter of next year.
“Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates,” said Matthew Whittaker, chief economist at the
Resolution Foundation and author of the report.
“But for around one in four, even modest rate rises could create financial difficulties. Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today.
“Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today.”
However, the Bankís deputy governor, Charlie Bean, has suggested that whilst the Bank will persist with their macro-prudential policy in order to control property prices and manage financial risk, that nevertheless the fact that it is untested within this capacity could mean that raising interest rates could end up being the only game in town” to address the rapidly overheating housing market.
“Monetary policy may be a blunt tool for addressing financial stability risks, but it does have the virtue that it gets in all of the cracks,” he said in a speech at the London School of Economics.
“So, there may well be times when monetary policy is the only game in town to guard against incipient financial stability risks.”
However, Governor Carney has suggested that he will only opt to raise rates prematurely as a ëlast resortí to cool the property market, and indicated that the Financial Policy Committee, which is tasked with maintaining financial stability, could suggest implementing new affordability tests for borrowers as early as their meeting next month.
ëGet advice earlyí
The news comes on the same day that Charity Shelter reported that over 4,000 households across England are at risk of having their home repossessed each week, due to the soaring cost of housing and the lack of house building work being undertaken in the country at present.
In its evaluation of possession notices handed out in the last 12 months, Shelter concluded that a monumental 215,000 houses in England are at a high risk of either repossession or eviction and warned that any premature increase of interest rates could damage the finances of thousands of vulnerable houses, who will be unable to cope with higher monthly contributions.
Shelterís study found that the areas where households are most likely to be evicted are in Newham in London and Salford, which was described as the “eviction and repossession risk capital of the north”.
“These staggering figures show just how many families go through the trauma of learning that their home is at risk, every single week,” said Shelter chief executive Campbell Robb.
“People are hearing that the economy is recovering, but we’re seeing the reality that many families across the country are still battling to keep their heads above water and keep their homes. Just one thing such as a job loss or serious illness can tip any of us into a downward spiral that puts our home at risk.”
Shelter identified that its free advice helpline was being rung nearly 500 times every day, giving support and help to homeless households and those who are currently in a battle to retain their homes.
“Getting advice early is the best way to halt the spiral of rent or mortgage arrears and can mean the difference between losing a home and keeping it,” added Robb.
If you are a homeowner or tenant who has recently lost their job, is going through difficult financial times, or is aware that their current mortgage deal is set to expire, then it is worth calling a helpline such as Shelter now to get expert advice, because the next two years will be an uncertain one for homeowners, particularly in London and the South East.
The reality is that interest rates will rise sooner rather than later, and this will inevitably necessitate larger repayments on a mortgage each month. Considering that the average growth in wages is again below the rate of inflation, and the current rates being offered on savings accounts are hardly worth considering, measures will need to be taken now in order for low and middle income householdís to be prepared for the day that the base rate rises from 0.5%.
Getting advice now may seem overly cautious, but it will ensure that you are fully aware of the financial obligations you will be subjected to in the future, and will provide you with advice from experts who will analyse your monetary situation, assess your options, and present you with the best and most secure plan of action for the future. With money no gain for organisations such as Shelter, and altruism their defining doctrine, you simply having everything to gain and nothing to lose by seeking help for your housing difficulties, which could be alleviated with a simple call of the phone.
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