Better ordnance was given to the property bulls camp when the Bank of England released its latest report on mortgage approvals yesterday. 115,000 mortgages for house purchases were approved in July. The last time the monthly figure was higher than that was back in February.
The likes of the Halifax and Nationwide still insist that while house price inflation will slow down over the next year or so, the underlying fundamentals are good. Recently the Halifax said, “the estimated 2.8 million borrowers who took out a fixed rate mortgage in 2005 and 2006 account for around 25 per cent of all mortgage borrowers. The overwhelming majority of these borrowers are expected to be able to absorb the increase in payments. Most people’s earnings will have risen since they took out the mortgage – average earnings have risen by 7 per cent over the past two years in monetary terms – providing more income to finance the higher interest payments. In addition, most borrowers facing higher payments will have accumulated a significant cushion of housing equity as a result of house price inflation since they took out their mortgage.”
Note those two words, “monetary terms,” which were slipped into the comment above. The Halifax suggests that mortgage borrowers have seen their income rise by 7 per cent over the last year, therefore they can easily afford an increase in mortgage costs. But this reported 7 per cent increase in income was before inflation. In fact, wage increases have been lagging behind inflation. The Halifax report rather conveniently ignored all those other reports saying that our disposable income has actually been falling. See Investment and Business News 28 June .You have never had it so good – well actually you have.
The Halifax went on from its twist of facts to a twist of numbers. “A borrower with a Â£114,000 mortgage, the average in 2005, taken out at the average two-year fixed rate in 2005 of 5.08 per cent,” says the Halifax, “would be making monthly repayments of Â£669.02. When the deal expires this year, the new monthly repayments would be Â£733.72 – an increase of 10 per cent or Â£65 – assuming that the borrower moves onto the current average two-year fixed rate of 6.04 per cent.”
In other words, the official rate of interest has risen from 4.5 per cent to 5.75 per cent in two years, and yet an individual on a fixed rate when rates were 4.75 and then going variable today when rates are 5.75 per cent will see mortgages payments rise by just 10 per cent. It’s a mere Â£65 a month more on a Â£114,000 mortgage. How can that be? Well, the Halifax was not comparing like with like. If the mortgage borrowers chose instead to renew the fixed mortgage for another two years, then the repayments would have been a lot higher.
Also sitting in the bull camp, although not quite so firmly as the Halifax, is the Nationwide. Yesterday, it released its latest figures on house price inflation. It recorded a 0.6 per cent rise in the average house price in August, up from 0.1 per cent, in July. “The US sub-prime crisis has created turmoil in international financial markets, but this is unlikely to have a significant additional effect on the rate of growth of house prices in the UK in the short term. We still expect house price growth in 2007 to come in close to the middle of our forecast range of between 5 per cent and 8 per cent.”
To cap all these bullish reports, National Housing and Planning Advice Unit recently said that the average house prices will soar to Â£300,000 by 2012, that’s ten times average income by 2012.
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