The emerging threat to UK house prices

Artilcle by Michael Baxter, Editor of Investment & Business News. You can sign up to his newsletter. If you had taken out a mortgage 25 years or so ago, you would have been urged to take on an interestonly mortgage and then pay another sum of money into an endowment policy. Such an idea was great as long as equities were rising. But there were two snags. First of all, your mortgage never went down.You only ever paid the interest, and from a psychological point of view, that was not good.We all like to see our debts fall, but instead, month in month out they stayed the same. We were also advised not to cash in our endowments early. Snag two: at the end of the 1990s, shares stopped rising, meaning our endowment policies had started to look unpleasant. In the days when house prices always went up, that didn’t matter. Maybe it didn’t matter too much in the days when interest rates kept falling, and indeed rates have been falling over the last 25 years. But we now know thatever cheaper credit was actually creating a new set of horrors. However, this morning’s ‘FT’ has exposed a new shock that could hit the UK housing market hard in the next few years. According to Standard & Poor’s, no less than 42.6 per cent of the UK home loans which it rates are interest only.The credit ratings agency says that such mortgages are twice as likely to be more than 90 days overdue than repayment mortgages. It expects no less than one third of all interest only mortgages to come due within the next ten years. And then the news goes into a bit of a decline, because 70 per cent of these mortgages are not matched by corresponding investments. So when the mortgages come to an end, the debt remains. So that’s 70 per cent of one third of 42.6 per cent of all mortgages.That’s a lot of percentages of percentages, but it’s still a lot of mortgages. And finally, for the final piece of this rather worrying jigsaw, many customers may struggle to renew the mortgage. So what does this mean? While we are being told that house prices will always rise, because Britain is an island and there is a shortage of property, in reality, there are reasons to fear a glut of properties coming on the market over the next few years. According to the Equity Release Council, around a quarter of a million baby boomers plan to downsize to help fund their retirement over the next few years. According to the FSA, between 5 and 8 per cent of mortgages could be subject to forbearance. And now we know that over the next years we may see a sharp rise in repossessions as fixed rate mortgages expire. It is all part of the madness of the boom years, when the British public had total faith in the idea that house prices can only ever go up; that leverage is a way to make money from nothing, and entrepreneurs are better off if they focus on the buy-to-let market. And before we leave the UK housing market, here is some news from Hometrack, out this morning. It stated:“House prices have fallen for the first time in seven months declining by -0.1 per cent over July. Notably London and the South East – areas that have supported headline price growth since the beginning of the year – are starting to slow as demand weakens and supply rises.”