Recession or recovery? Both pose potential hazards for homebuyers, warns review
The cheapest home loans since the 1950s are both a boon and a potential pitfall for first-time buyers. Falling interest rates have helped to fuel the substantial house price rises in London and the South East, at the same time as easing the burden of larger mortgages. But the Joseph Rowntree Foundation’s annual Housing Finance Review - a joint project with the Chartered Institute of Housing and the Council of Mortgage Lenders - warns of potential dangers ahead, whether we see the economy start to recover or tip into recession.
Findings published today from the 2001/02 edition anticipate that the housing market will peak this winter, and that the anticipated slow-down in the economy should see house prices ease back to more sustainable levels. However, the Review warns that the historically low cost of mortgage borrowing risks encouraging some first-time buyers and others to over-stretch themselves, without looking ahead to the costs when the economy recovers and rates start to rise. The potential for a ‘delayed affordability’ crisis would be all the greater if inflation remained low, since mortgage costs would only reduce slowly as a proportion of household income.
Prof. Steve Wilcox of the University of York, the Review’s editor, also points out that today’s first-time home buyers, like others who have taken out mortgages since 1995, are potentially excluded from any Social Security help with their repayments for the first nine months of becoming entitled to Income Support or Job Seekers’ Allowance.
He said: “Compared with home-buyers who got into trouble with their repayments in the last recession, today’s mortgage borrowers have a far less effective safety net. Although there has been some increase in the numbers taking out private mortgage policy protection since the Social Security regulations were altered, there are very large numbers of buyers without cover who would not be eligible for state support. Thus, the welcome news that mortgage arrears and repossessions in 2000 fell to their lowest levels for more than ten years is tempered by concern that an economic recession could see a resurgence to levels that would be damaging not just for the households concerned, but for the wider housing market and the prospects of future economic recovery.”
Key annual statistics in the Review show that falling interest rates have helped to ensure that mortgages and mortgage costs have remained stable as a proportion of income for first-time buyers, in spite of a 60 per cent rise in house prices between 1995 and 2000.
Prudence on the part of lenders, who have taken deposits that average 20 per cent of house prices, has also played a part in preventing any repetition of the housing boom and bust at the end of the 1980s. The average first-time buyer’s deposit in 2000 was more than £15,000, compared with less than £5,000 in 1996. In London, the average deposit reached almost £28,000; highlighting the barriers that teachers, nurses and other ‘key workers’ now face affording property in the capital.
House prices and European Monetary Union (EMU)
The Review includes a comparison between policies for managing house price inflation in the UK and those of EU states that are part of the Euro zone. The assessment, written in a personal capacity by economist John Hawksworth, finds that the European Central Bank has generally taken less account of house price movements when setting Euro zone interest rates than the Bank of England Monetary Policy Committee has in fixing rates for the UK.
It concludes that if Britain became a member of EMU, the loss of control over UK interest rates could tend to increase the volatility of house prices. But it argues that this should not be overstated, given that house prices have been volatile even when the UK has had control over interest rates, and must be weighed against the potential microeconomic benefits of eliminating exchange rate uncertainty and transaction costs if the UK joined EMU.
