Morning:
13°c
An awesome and ridiculous film that leaves you thrilled beyond the point of your natural endurance
London faces a wave of bus and Tube strikes that could cause chaos for millions of passengers as unions walkout over pay and conditions
More...
House prices 'will crash soon': Bank chiefs warn YOUR home is overvalued by 30 per cent
Last updated at 01:22am on 05.04.08
Over-valued house prices: IMF has warned that house prices will have to be corrected
After a decade-long housing boom, it fears Britain is one of the most vulnerable countries in the world to suffer a devastating price collapse.
In a further blow, both the Bank of England and mortgage brokers warned that the mortgage meltdown is going to get even worse.
The number of mortgage deals available has collapsed 13 per cent since Monday and 70 per cent since last summer's credit crunch began.
David Hollingworth, a mortgage broker at London & Country, said: "It has got to be one of the most rapidly changing and volatile weeks any of us can remember. The credit crunch has really got a grip on the mainstream mortgage market and there is nothing you can look to that shows the situation is going to improve in the near future."
The Bank of England is widely expected to cut interest rates by 0.25 per cent to 5 per cent on Thursday.
But experts say this will make very little difference as lenders have been increasing their rates rather than passing on cuts to customers.
Ray Boulger, of Charcol mortgage brokers, said a cut of 0.75 per cent was needed just to put people in the position they would normally be in if interest rates were at 5.25 per cent.
The IMF said the UK has experienced one of the world's "largest unexplained increases in house prices" over the past decade.
If its doom-laden prediction is correct, an average home - currently worth £196,000 - could actually be worth just £137,000.
For homes in the South East, typically worth £400,000, the drop will be even more severe, down to roughly £280,000.
The warning comes after 12 years of rocketing house prices. When the boom began in 1996, the average price was just £60,000.
The IMF's World Economic Outlook said it has identified a "house price gap", which is the difference between the price of a home and the country's economic fundamentals.
They include salaries, interest rates and population growth.
Ominously, a similar IMF report at the end of 2007 found the U.S. housing market - currently in meltdown - was just 10 per cent too high.
The Bank of England's regular survey of the country's biggest lenders, published yesterday, shows they expect the mortgage crisis to get even more serious over the next three months.
Lenders said more mortgage deals will disappear and the rest become more expensive.
Yesterday morning there were 4,754 mortgage deals. By the end of the day, that had dropped to 4,329, according to the information firm Moneyfacts.
Before the credit crunch crippled lenders' ability to borrow money, there were more than 15,500 deals on the market.
Of yesterday's casualties, the biggest changes were Woolwich, which increased the rates on its lifetime tracker mortgage for the second time in a week.
For people with only a small deposit of 5 per cent, it will now charge a rate of 7.24 per cent.
In a highly unusual move, Skipton introduced a £799 fee for anybody taking out a mortgage with the building society on standard variable rate. Traditionally, "SVR" mortgages have been free because they are much more expensive than the cheap, short-term deals.
It is the second building society in a week to introduce a fee, after a similar move by Hinckley & Rugby on Tuesday.
The Bank's credit conditions-survey also said lenders expect the number of people getting into arrears, or seeing their homes repossessed, to rise further.
Tory spokesman Philip Hammond, said: "Reading between the lines, the Bank of England is telling us that 'we ain't seen nothing yet'.
"Hard-pressed British families are going to pay the price of Gordon Brown's economic incompetence as the credit squeeze bites further on an ill-prepared nation."
LibDem spokesman Vince Cable said: "We are in the nightmare scenario where banks can't lend and people can't borrow.
"The UK economy has been running on little else than the wide availability of cheap credit for several years.
"With lending now drying up, there is a real danger this will have a serious impact on growth in the economy."
Charcol's Mr Boulger added: "There is no doubt that things are getting more difficult, and they are going to get more difficult before they get better."
He said the only thing that was likely to improve the situation was either a return of confidence among investors, or the Bank of England putting more money into the market.
Scroll down for more...
Is your area sub-prime?
This is the "sub-prime" map of Britain, showing for the first time the risk of a debt crisis in each area.
It was produced after an extensive study by the credit rating agency Experian.
The survey, published in this week's Spectator magazine, looked at the financial risk of every single household in Britain.
This is a measure of their likelihood of defaulting on their debts, particularly during an economic downturn.
Sub-prime borrowers are not the poorest in society, who typically get benefits and would use a loan shark to borrow money.
They are most likely to be people who had a county court judgment against them several years ago, but are now back on track and in a job.
The black spot on their credit history, however, makes them a sub-prime, higher-risk borrower, unable to get cheap loans and so more vulnerable to finding their finances stretched to breaking point.
Experian listed the number of sub-prime households by Parliamentary constituency. Of the 200 worst-affected seats, all but 14 are held by Labour.
The biggest risk was in former Home Secretary David Blunkett's constituency of Brightside, Sheffield. Some 72.2 per cent of all households in the area, almost 23,000 homes, matched Experian's sub-prime profile.
It does not mean they actually have sub-prime borrowings, such as mortgages and loans, but that they are the most likely to.
Middle classes feel the squeeze
Middle-class families are having to take second jobs to pay soaring household bills, a report says today.
Despite earning at least £30,000 a year, they cannot keep up with increases on "basics" such as food, petrol, mortgages and energy.
More than 70 per cent are also slashing their spending, proving that families who are meant to be relatively well-off are feeling the opposite.
Cutbacks range from eating out less often to reducing pension contributions.
The survey, by the insurance giant Axa, found that 15 per cent of middle-class families are having to get a second job or send a non-working member of the household out to work.
Researchers said this typically involves a stay-at-home mother having to get a job rather than looking after the children.
Official figures show the number of women with a second job has jumped 13 per cent over the last two years, from 583,000 to 655,000. More than 1.1million men now have two jobs.
Steve Folkard of Axa said: "A typical family in Middle Britain may have a higher than average income, but millions face tough choices as the strain on their finances takes its toll."
Reader views (44)
The assumption by a number of posters that a 30% over valuation necessitates a 30% fall to achieve a correct valuation might help explain why it got so silly in the first place - people just can't do the maths!
100*(130-100)/130 = 23%
I'm expecting a lot more, it's primarily about availability of credit, not the size of the population or the supply.
- Norbert, Uxbridge
Sub-prime loans need to be illegal. A good deal means everybody comes away happy, not homeless.
- Walter Bivins, sactown U.S.A
Nigel Watson in nearby Guildford is right.
I am seeing prices in London and Surrey falling. A lack of confidence in the city is really hitting high end homes. Some in my area have falling by £400k, granted they are £1.5m homes, but a huge percentage drop nonetheless.
- Mike Livingstone, Reigate
Don't worry Gordon and the liberal media will save you from the breadline with spin!
- Mad Monk, London
At the start of the nineties my house lost 25% of its value and mortgage rates hit 15%! I will never forget those days as the endowment to cover it is heading for a substantial shortfall!
- Michael, London
>>"largest unexplained increases in house prices" over the past decade.
House prices have risen because the demand far outstrips supply. In the same period we have seen an increase in the country's population by around 6m people who all need housing. This is a Labour problem as they failed to keep tabs on immigration.
- Adam, Harrow, UK
Banks deciding to pull mortgages will trip everyone up and crash the market just as they're providing mortgages to all and sundry led to the bubble. They created and they will burst it. The banks rule the market and will always come up smelling of roses.
Local elections and then General Election coming up soon - don't moan - Vote!
- Rob, London
House price crash? More like economic Armageddon, this thing will snowball we are about to see history in the making! Little or No credit means economic contraction, less people buying in the malls, people cutting back on everyday purchases, this will lead to an increase in unemployment, which will lead to more economic contraction, which will lead to mortgages going unpaid due to lack of funds, unsecured loans and credit card bills going unpaid leading to more bank losses. Leading to even tighter lending criteria or banks calling in loans early, more bank failures, in the mean time sterling will get destroyed, if you can leave the UK do it! It will simply be awful. Great Depression two here we come! 100% Guaranteed!
- Paul Smith, Telford
This is pure nonsense as time will prove. The media are trying to manipulate house prices, which I think is disgraceful, immoral and extremely harmful.
- Alfred Morrissey, The Midlands
This is great news, finally people are realising that houses were overvalued. Prices are likely top fall to 3.5 times average salary for a one or two bedroom property.
All those buy to let investors who think they are going to pick up a bargain should be aware that interest rates are also going up higher in the next couple of years and their negative equity portfolios are likely to collapse.
- Gavin, London
Una Lowry-London.
You will of course have the dignity to return to this site in fourteen months time- and correct you opinion.
Rising unemployment....lag of about six months,
Don't forget...its not just the public unable to re finance...businesses are finding it very difficult too.
Watch this space...and log on to www.housepricecrash.co.uk to find all the top reports- that the general public never see.
And I am a houseowner....not someone whom wants to see a crash.
- Antony Graham, Southport England
I'm amused by the people here stating that the government won't permit a house price crash.
Do they realise how much money the government would need to put in to prop up the market? Their liability in Northern Rock is equivalent to several percent of their entire budget, and Northern Rock made up only 20% of lending. Simply put, the government doesn't have even a fraction of the money required to prop up house prices at even close to current levels.
If governments have the power to stop crashes, don't you think the USA (the most powerful nation on earth) might have chosen not to have one? Don't you think the Tories would have stopped the 90s crash? The fact is that not even governments have the money required to shore up these financing holes.
House prices probably need to fall 30% but history shows us they always fall further (ie they over-correct). The people who argued house prices could go on rising forever have already been proved wrong - the credit crunch is the inevitable end point when house prices rise beyond what most people can afford. Without banks dishing out silly amounts of money, house prices can only move one way, and that isn't up.
- Mart, London, UK
No credit = no demand
Soaring house prices were caused by an inflated demand for housing created by an explosion in reckless sub-prime lending e.g. 125% LTV, 7 times salary loans, interest only and worst of the lot, self-cert Lie to Buy loans.
The house price crash will be caused by a fall in the effective demand for housing - a direct result of credit becoming less readily available. House prices could easily fall by 1/2.
- Nigel Watson, guildford
"if the worst comes to the worst just rent it out"
and herein lies the reason why there will be a big crash. I live in a flat that would cost me £2500pm on an interest only mortgage. My rent has just increased to £1550pm. In the days when property was appreciating this probably made some sense - but with property depreciating who in their right mind is going to continue to sub me a grand a month. This is not an uncommon situation.
- Alan Lubin, se1
Television shows like "location, location";"find a house in the country"; and under the hammer" have all added to the house buying frenzy. They sometimes encouraged people to "buy to let" and become a small time property developer. They do nothing to help the situation, and by the time they go on air are mostly out of date anyway. The "buy to let" boom obviously has a role to play here in helping to push up prices,with the result that 1st time buyers are pushed out in favour of those who already have more than 1 property , particularly in areas of great beauty like Cornwall. I think a tax on 2nd & 3rd homes should be imposed to help this growing problem. But , with the ever increasing demands on housing that the open door immigration policy generates, I don't think the house price crash will be as severe as is being predicted. As long as the demand remains the same, the prices will too.
- W Dettmer, London
30% drop? What tosh. We're in the housing doldrums for the next year or so not the eye of a hurricane!
Recognise this: for a drop of this magnitude you need an economy in trouble with rising interest rates, increasing unemployment, overall net emmigration, negative pent up buyer demand, collapsing consumer confidence and a share price slump akin to the early 90's.
Just how and when does the IMF see this happening in the UK? Lending policies have always been tighter here than in the US; we are not an overcooked Ireland, nor an overbuilt Spain/USA and we don't have a sub-prime problem anything as large as the USA - UK is estimated at 3% vs 29% in the US.
Some over-built housing areas will undoubtedly face the cold wind of competition in order to sell but once the UK financial market gets over its credit indigestion things will be full speed ahead again.
- Una Lowrey, london
Quelle surprise, the housing market wasn't such a licence to print money after all. If it takes a hit, then as far as I'm concerned, it will be a good thing for a society (or section of society) grown decadent and complacent on the fruits of what are, in effect, unearned and undeserved fortunes. The "buy to let" boom has simultaneously fuelled house price inflation and excluded first time buyers from the market, thus giving young professionals no choice but to line the pockets of landlords rather investing in their own homes. I believe the smirk is just about to be wiped off the faces of a great number of people, and about time too.
- Jonjo, London
If prices dropped by a third I would be the first in the queue with my cheque book open ready to pick up these bargains. Supply and demand dictates that house prices will remain high and we are all aware of how furious the renting market is, if worst comes to the worst rent your house of you cant afford to live in it.
- Gordon Calver, London
Alas, people in Britain and the USA seem to value themselves according to the value of the property they own, so we could be in for depressing times ahead. If the IMF is correct (a big if) about the impending 30% decline in property values in Britain, the effect on living standards could be very severe because it seems that Britons derive so much of their spending power from property appreciation. In fact it is striking to a visiting ex-pat how little real wealth-creating employment there appears to be in Britain - managing other people's money? tourism? the arts? err that's it.
Perhaps some Britons will end up realizing exchange rate-derived equity from property they own in the €-zone, except that Spanish property is declining sharply in value too. I hear Chechnya still has some upside at the moment with an appreciating Ruble, a peace dividend and high world scrap metal prices.
- Steve Doherty, Washington DC USA
The banks are not fleecing anyone. In a free capitalist society, we all have choice. Nobody's forcing you to take out an expensive mortgage. And if you think that banks make loads of free money, why don't you start one up, and start lending out money, and make a million dollars. It's quite simple really.
- Haskey, London SE1
High value property means greater levels of tax generation both in IHT, and stamp duty. Which is just about the only way UK plc has been sustaining itself in recent years.
Also by having affordable decent sized living space people will be able to have bigger families and balance up the demographic.
This means we will not be so reliant on immigrants to make up the numbers. So yes bring it on lets have a correction of house prices.
- Ian Creates, London
I am not English and was wondering all the time why the housing market in the UK is so unsustainable and such a 'dinner' conversation. I mean, people on average earn less than in Europe and most take Ryanair or Esyjet for a pint of beer to Spain..Financing a life style and feeling rich, based on a property boom (bubble) and credit. I mean no-one must be educated above average to see that something like this can't last forever. A house should be financed for living, as a home, and not for speculation only. I am owning a house where already my grandfather used to live and I wouldn't sell it, even if this could allow me a long lasting shopping spree on the high street. People who bought earlier can go through it again, like in the 90'. People who bought with a solid financing should do it as well. To all other I recommend to sell it now.
- Mike, London
The market is not going to fall anywhere near the figures suggested. People won't sell for such a loss, why not rent your property out. The issue is that the banks are having to take a hit but they will get over it. UK rates will fall, can you really believe that any government would allow it. Please..
- Michael, Switzerland
I don't know how you can call the house price rises unexplained, it's clear that they went up because people felt compelled to pay the prices, often pressurised into doing so by unethical estate agents.
- Nu, london
Part of the trouble is the change of allowing more than one person's salary to count towards the mortgage: this works well for groups of people who want to buy a house, or couples where both parties work, but it has made it impossible for most families where the mother looks after the children and for single people on a moderate wage, to buy a home.
It also doesn't help that the Chancellor creams of such a proportion: when a house is sold the seller has to recover not only the cost of the house, but the tax on top - thus putting the price of the house up every time - hence they are 'over-valued'.
- Roz, Chamonix, France
boom, bankrupt, Brown.
- Fly, London
What goes up must come down. You only have yourself to blame if you get into a lot of debt.Jokes about shop-aholics and shop-till-you-drop have trivialised the problem for years. "What's the government going to do about it?" Will be their bleating anthem from now on. You had all the gain now have all the pain. Houses are homes not money machines or do you enjoy living just to pay of a mortgage?
- Frederick, London
About time prices corrected. High houses prices represent an unfair transfer of wealth from workers to retirees / from young people to older people. Normally the transfer should go the other way.
Many of my friends in UK are struggling to afford decent place to live. It is impacting their ability to form relationships, settle down. Some people in their 20s and 30s even still live in bedsits.
It is also affecting man /women relationships with young women preferring to find an man in his 50s, who has a house and stable financial position rather than a younger person. All my 50+ colleagues have wives in their 20s. Maybe this has always been the case?
Even a colleague who works at an investment bank, says he has trouble affording a decent place to live in London.
He has decided to skip the UK and buy property abroad instead. I know others doing the same thing. Better to be on the housing ladder somewhere than not at all. Cyprus, Bulgaria, Asia, Africa can be very appealing to live in and have reasonably priced property.
Homelessness seems to be on the rise in the UK. As does poverty. Hard for me to prove, but it just looks that way when I visit from time to time.
- Matthew, Luxembourg
Well I think most of us saw this coming 3 years ago, I sold up 2 years ago and started to rent, the interest on my money almost pays my rent, I intend to buy back into the housing market after the crash, as they are saying 30% we could all see an over shoot to about 40% before the upturn again. Good luck all.
- F A Stone, UK
House prices in the UK are overvalued by at least 30%. The market needs a serious correction. It is a tragic situation for first-timers and others who have bought into this market in the last few years. I myself lost 30k back in the last property crash.
But the reality is that you cannot have any kind of housing market without first time buyers. If they cannot afford to get on the property ladder then there is no market. Simple as that.
Let's get back to realistic prices that working people can afford and then things can get back to normal.... which is steady stable sane increases in real estate.
- Anthony Ian Cowlam, New York, NY
I have been waiting for 7 years to buy a property in the UK. I thought prices were high then and I was going to get very little for my money. Now it's just insane! I earn a decent income, but I don't want to borrow more than than 3.5 times my income. With a 15% deposit, in my area I can only buy afford a small 2 bedroom apartment.
I will not buy at this level. I will not even buy if it falls 20%. I am going to wait until prices have fallen by 40% because only then will I feel that the prices are about right. I believe that will happen within 2 years. The crash will be much faster and more severe than people expect. It will inevitably affect the economy and pull us into recession.
Too much money has been borrowed by too many people. It's out of control and now we are going to pay for it. This is going to be very long and painful and it is exactly what we need. Either house prices go up steadily along with inflation (3% perhaps) or they go up massively (10% per year) and then fall massively. It's always been like that and it always will be. You cannot have house prices going up by 10% a year forever.
I speak on behalf of all the young people in Britain in welcoming this crash. Let's all learn the lesson that we should only borrow what we can afford to pay back.
- Jake Brumby, High Wycombe, UK
Comment for Neil
Fact, Bank of England is not a Private company. It was nationalised in 1947.
If you choose to live in this country then you are part of this, ie the bank of England lends government money for services/infrastructure, have you ever or do you know anyone who has driven on a road? used health service? or education? police?
A lender can only exist if people borrow money, to follow your simplistic argument you could equally blame it on the greed of borrowers, no bank have ever been able to take a borrowers discrimination away and force them to borrow.
I fail to see how playing a self righteous blame game is constructive. To be of value you need to first see what is actually going on and what your part is in it.
- Hugh ,, London
...Well, no wonder the default rate on mortgages is rising. If the banks persist on raising the rates on 'good' mortgage customers, to cover some of the losses from 'bad' ones...then they will precipitate the failure of many of the 'good' customers. Insanity.
- Andrew, London, UK
Houses, like any commodity, are worth exactly what you pay for them. Reports like this try to undermine public confidence and hence cause the problem that they predict.
There is no need to drop prices, but maybe allow the status quo to remain for a while.
- Graham, Reading, England
Is the the beginning of the end?
Will this recession develop into a full-blown depression?
How many family homes will be repossessed?
How many insolvencies will there be?
How many banckruptcies will there be?
With over £trillion of "consumer debt", money being scare and interest rates rising many individuals and their families are now facing a colossal NIGHTMARE!
How many YEARS will it take the UK to recover from this latest financial mess?
- Fraser, Telford Park
Money is issued by private companies such as "The Bank of England" or the "Federal Reserve" and loaned to the government who must then repay it with interest. Most income tax money just about covers the interest ("National Debt"). The entire banking system is a giant confidence trick. They turn numbers on a computer screen (a "loan") into tangible wealth ie your house when they repossess it. In this way are the banks engaged in a giant wealth grab.
- Neil, London UK
I received an email from my credit card company yesterday saying they were raising their rates from 15.9% to 18.9% which doesn't bother me as I only have £300 on my card but it did pique my interest.
I decided to have a look at interest rates on mortgages too, and it appears that they have sky rocketed. Considering that 2 years ago mortgage rates were around 0.25-0.5% above the BOE base rate, they now stand at around 1% - 2% above the base rate. I can understand a fixed mortgage being 2% above the BOE base rate as the rate would reflect where the market will go in the fixed period, but for a tracker to be over 1% above the base rate looks to be blatant profiteering by the banks due to them losing copious amounts of money on their own frivolous lending. A tracker will follow the BOE base rate so fixing at 0.5% above the rate will still give them a healthy return, but presumably they have to fleece the public so that their shareholders and employees will get the bumper bonuses they're used to.
- T Leafbank, London
Are these the same people that drew down "equity" to spend on flat screen TVs, weekend trips to Latvia, decking for their little gardens and paying off credit cards? In that case, my sympathies lie not with them!
- Neil, london uk
The banks have a history of keeping the little people in their place...and that is exactly what is happening now, with the government unwilling or unable to do anything about it. The sham of a wild-west economy which has allowed the richest to become wealthier at the expense of the rest of society is being laid bare.
- Nick, London
It must be great being a banker: when things are going well you make loads off other people's money, when things are bad you make them pay for your mistakes.
- Iain, Covent Garden
And when this whole mess comes to an end can we please NOT align ourselves with the US economy anymore. The only winners in this whole shambles are the Hedge fund managers and people like G.Soros. It makes me wonder if this whole situation has been deliberately engineered. Also the constant media reporting is not helping!
- Fly, London
LibDem spokesman Vince Cable said the figure, based on expert City analysis, was not alarmist but "highly plausible". Would this be the same City and Wall Street experts who caused all this mess with the sub prime loans, if so god help us all.
- Dr Finlays Casebook, London, UK
Labour has had as long in power as Margaret Thatcher did in order to implement its vision: It was this.
There is one man who is solely responsible throughout: Gordon Brown. The worrying thing is, I only see a choice of 'politicians' as the alternative: to pull it out of this mess the country is going to need a Statesman.
- Roz, Chamonix, France
Give it a rest.
- Nev Equity, Belsize Park
