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NICHOLAS PINE’S HOT PROPERTY
I said last month that I would know more by Easter about where I think the market is going to go. It is now Easter and I think I am forming a view.
So what has happened in the past three months? The sub-prime mortgage crisis has worsened, causing banks worldwide to lose money (ours and theirs) with which they had recklessly gambled. I can tell you that the sub-prime crisis in America is now getting worse and is extending to the middle classes, particularly in California. This means that US banking losses are going to increase, as are worldwide banking losses. The upshot of this is that we, the poor mortgage customers, will suffer. Banks rarely suffer: if they lose one income stream, they quickly devise another to make up for it… have you noticed?
So what have the banks been doing? Well, let’s start with Northern Rock, shall we?
A friend of mine has a large Northern Rock mortgage. A year ago, they asked him if he wanted to increase this to a very large sum, at 4.5%. This was less then the deposit rate that Northern Rock was offering at the time. So he borrowed the large sum offered and lent it back to another building society (sensibly not Northern Rock just in case they twigged) but at approximately 5%, thus making a turn of 0.5%. When the mortgage came due for renewal last month, he was told that the renewal rate offer was now 7.6% but that the building society did not wish to maintain the mortgage so they asked him to please move it elsewhere. If he was unable to do so within one month, they told him, then the new rate of 7.6% would apply. Ouch!
Obviously, the government has told Northern Rock to get its money back fast before it loses even more credibility.
Banks and building societies are generally doing three things. First, they are increasing the amount of deposit that must be put down. The days of 125%, 100% and even 90% mortgages are over or very rare, and new buyers will have to put down at least 10%; more often, 15% or 25% is being demanded. Second, they are reducing the multiple of income you have to earn to borrow the money. Third, interest rates are rising across the board.
Even when bank base rates have dropped by 0.5%, most banks and building societies have put their mortgage rates up! But didn’t I tell you earlier that banks will earn their money any way they can and if one avenue is closed they will go down another? This is the avenue they are going down now. The friend I spoke about earlier, who is now remortgaging with one of the big four, has been offered a mortgage but the bank will not confirm an interest rate. The bank’s advisers tell him at the moment the interest rate is 6.1% and that it is variable. This is a ruse that we must all watch out for, because the banks are trying it on with existing customers across the board.
Normally, you have a fixed-rate percentage or a tracker mortgage, which is normally a fraction of 1% over base rate. The con now is to try and get the customer to agree to a variable rate based on the whim of the bank. The bank can increase or decrease the rate at will and when things get tough will certainly be increasing it, especially when it knows it is hard to take your business elsewhere.
So what does this mean? I have always said that the main determinant of house prices is affordability. If people can afford to borrow the money, they will: and haven’t they just during the past ten years? That is why the market has risen so high and so quickly. Now that the rug has been pulled and mortgage money is becoming rare and expensive, the exact opposite will occur. Prices will go down as far and as fast as they went up.
One investment banker I know forecasts a 40% drop in the property market this year. He could well be right. I myself favour a 20% drop and would say the market has already dropped by about 10%. Estate agents tell me it is only 5%, but I believe that to sell your house (and to sell it fast) you will need to drop the price by some 20%. This is my forecast for the remainder of the year – a fall of 20%. If I am wrong, it could be nearer 40% and probably will be if bad news from America continues to infect the banking system in the UK.
Therefore, it is still a case of not buying anything, retaining any mortgages that you hold and renegotiating them as best you can. If you need to sell things, put them in an auction, as auction prices seem to be holding up quite well, and at least you will turn your property into instant cash – and at the moment cash is king.
Nicholas Pine