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Property Market: Double Jeopardy For Home Owners

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Property market: double jeopardy for home owners

Home owners have been given a stark reminder of the precariousness of the housing market with a double warning.

By Richard Evans

Published: 10:14AM BST 16 Sep 2010


Streets of housing, aerial view - Property market: double jeopardy for home owners

House prices could fall by 10pc, one economist says Photo: PA

Firstly, a leading economist said that house prices could fall 10pc within the next year or so, and secondly the head of the British Bankers' Association warned that new banking rules could trigger a second credit crunch, making mortgages harder to come by.

The latest figures from the Nationwide House Price Index show that house prices fell 0.9pc in August, but Howard Archer of IHS Global Insight said worse is to come.

He said prices were likely to fall about 3pc over the final months of 2010 and that a further drop of about 5pc in house prices looked "highly possible" in 2011. "On balance, while we believe that a sharp correction in house prices is unlikely … we believe that they could be some 10pc lower by the end of 2011," he said.

The fall in house prices could hamper your chance of getting a decent rate. If, for example, you have 25pc equity in your home, you will qualify for some competitively priced home loans, such as a five-year fix at 4.19pc from Yorkshire Building Society.

But if you put off remortgaging for a year and house prices have fallen by 10pc by then, you will be left with equity of about 17pc. As equity of 25pc is the cut-off point for many good deals, you are likely to pay a considerably higher rate than you would have if prices hadn't fallen. The interest rate on a five-year fix from Yorkshire with less than 25pc equity is currently 5.29pc.

Another reason for locking into a competitive mortgage rate now is that many pundits expect home loans to become more expensive across the board, irrespective of what the Bank of England does to the official cost of borrowing, following an agreement among bank regulators to force banks to hold a bigger cushion of cash against future financial crises.

The agreement, called Basel III after the Swiss city in which it was struck, requires banks to hold much more capital in reserve and to improve liquidity – their ability to find cash to repay depositors if required.

Having to hold more capital means, in effect, that banks' costs are increased – and they are likely to pass on those costs to their customers in the form of higher interest rates.

Angela Knight, the head of the British Bankers' Association, told The Daily Telegraph: "There will certainly be an effect on the pricing of credit." She added: "These changes feed through to the price and the availability of lending. A bank is like any other business – if its fixed operating costs go up, then so does the price of its product.

"The changes are good from a stability perspective, but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over."

Mrs Knight pointed out, however, that the new rules were stricter about the quality of capital as well as the quantity.

And Ralph Silva of SRN, a research company, said: "I believe that the cost of mortgages will increase due to Basel III for a simple reason – lesser supply of funds and a greater number of people wanting funds."

Not that everyone agrees that the new banking rules will lead to more expensive mortgages.

The Council of Mortgage Lenders reckons that most major UK banks already have capital holdings in excess of the new limits. "We therefore do not expect the new requirements to have any significant impact on the pricing or affordability of mortgages in the UK in the immediate future," a spokesman said.

But let's face it, when do banks need an excuse to pass on increased costs to the consumer?

"True, Basel III should not have a negative impact on mortgage availability in this country. The banks are already well capitalised and have been given longer than expected to adapt to the new rules," said Melanie Bien of Private Finance, another broker. "But banks could use Basel III as an excuse to raise the pricing on new mortgages."

She added that the possibility of the new rules leading to higher borrowing costs might well persuade more people to take out a fix now and put the uncertainty behind them.

"With lenders relaxing their criteria in the past six months, it could transpire that we now have the best conditions we may have in a long time to get a mortgage. When interest rates do start moving, there really is only one direction that they can move – upwards – so opt for a fixed rate if you can't afford fluctuations in your mortgage payments," Ms Bien added.

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