As someone who’s been involved in the property industry for over a decade I’m forever being asked what my predictions are on where the market is heading and when and how it might recover.
Of course I can’t give a definitive answer but I do have my thoughts on how the market will pick-up and I can already see the first signs of its recovery. For one, the US property market is starting to recover, with house prices rising 1 percent in the second quarter of 2012, which is good news for the rest of the global economy.
The property market works in the same way as any other commodity, on a basis of supply and demand. What we are waiting for is the demand for property to improve. Since subprime lending caused the market to crash and huge problems for the banks involved, mortgage lenders have demanded high LTV deposits and any products that may have once been attainable for first time buyers disappeared.
However, the 90 and 95 percent mortgages were not the problem. With those loans lenders still had buffer of up to 10 percent – so when the value of their property dropped they wouldn’t automatically be in negative equity. It was banks like Northern Rock who were irresponsibly basing their 110 and 120 percent mortgage deals on the assumption that property prices would continue to rise that caused the huge fallout in the property market.
Following the subprime mortgage crisis, lenders retracted and first time buyers were left needing to find deposits of 30 and 40 percent of the property value. They simply couldn’t and so the housing market slumped to a standstill.
Now we’re beginning to see some signs that first time buyers will be returning to the market. This time last year there were none or very few 90 and 95 percent mortgage deals. Yet now it seems banks are beginning to realise that mortgages are the key to rebuilding their reputation and worthiness – the 95 percent product is back, it comes with low interest rates and the number of lenders offering it are increasing.
I think this is the route that will lead to house prices improving. The housing market will probably take two to three years to recover fully but it will be strong and steady recovery.
The buy-to let mortgage market is also continuing to grow and in June the volume of loans was up 14% (from 29,100) and the amount advanced up 18% (from £3.3 billion) compared to the same period last year.
However, landlords will need to err on the side of caution as the market improves. In the last rental boom 80 percent or more landlords looked at capital appreciation but as prices dropped and interest rates fell it became the norm to invest based on the monthly income and profit from rents. Rental yields on the current interest rates are high but when interest rates rise yields will suffer.
Now maybe the time investors need to look again for capital appreciation potential and look for property in up and coming areas or for homes that can be improved or extended and sold on for a profit.
Managing Director, KIS Lettings