House price rise can help us to rebuild the economy
A return to health for the market is welcome.as long as we don't get carried away and return to the days of buying frenzy, says Paddy Gray
According to the NI Residential Property Price Index published yesterday, residential property prices rose by 2% between the first and second quarter of the year and all property types have increased in value.
This, of course, will be welcome news to the 470,000 homeowners throughout Northern Ireland who have seen the value of their homes fall year-on-year since 2007.
Nothing gives someone who owns their own home such a sense of material wellbeing than the news that house prices are going up. Whilst the majority of households rejoice in what they see as the green shoots of recovery, what impact might increased house prices have?
According to a recent report from the Council for Mortgage Lenders, the proportion of new mortgages for house purchases here rose significantly in the first quarter of this year with 60% of all house purchase loans advanced to first-time buyers. Around 75% bought properties of less than £125,000 (only 7% bought at this price in 2007).
This price point is attractive as stamp duty does not kick in for properties below this figure. This can be a substantial saving for those struggling to get on the housing ladder for the first time as 1% stamp duty could mean an extra expense of £1,250 on a property costing £125,000. Therefore falling house prices are particularly attractive to those entering the market.
Since the crash in 2007, lenders were requiring much greater deposits of between 20% and 30%.
Indeed, many new purchasers relied on the "bank of mum and dad" to help them raise the required deposit. But many didn't have that family support and were excluded from the market or borrowed higher loans at much higher interest rates where lenders felt they were more at risk. As house prices have fallen so has the actual amount of deposit required.
Therefore, any increase in house prices will affect this group.
Then there are the "mover-uppers" or those who wish to trade up for a variety of reasons. Many have been caught in negative equity since the crash (ie, owe more than their house is worth). Even if they wanted to move they can't so this group will welcome any upturn in property values.
In the past, people have also used the equity that they have built up in their existing property as a deposit as they trade up but this option has been substantially eroded in recent years leaving many people trapped in their existing homes and unable to move.
The reality is that the only people moving in this situation are those forced to move due to changes in personal circumstances, such as relationship breakdown or income reduction.
A recent announcement by George Osborne that phase 2 of the Help to Buy scheme will apply across the UK from January 2014 will increase lender confidence in the market. In this initiative, government will guarantee 15% of the deposit on new and existing properties meaning that purchasers should be able to avail of reduced deposits and reduced interest rates. The danger with this scheme, however, is that we may be creating a credit boom rather than a housing boom.
It is too early to suggest that we are returning to a housing bubble but the signs from recent surveys are more encouraging as we see a return to stability and confidence in the market.
If we can encourage more house-building then that has to be welcome as this will create a range of jobs and will be a positive step towards recovery of the economy.
We need to be cautious, however, as to how these figures are interpreted. There are regional variations and whilst some areas may see an increase, others may not.
We may be witnessing a two-speed housing market with some areas increasing at a much faster rate than others. A recovery of the market is healthy but we must not see a return to the frenzy of three years preceding 2007 where people were buying anything, anywhere, to get on to a much-inflated housing market.