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Is the state of the housing market getting you into a state?

Lenders tightening up, sub-prime problems in the USA, building society fees rising….. how do you keep your head?

Even before the recent gyrations in the stock market and the doom and gloom from the subprime `crisis` in America, many people were confused and worried by the state of the UK housing market. With interest rates rising, worries about the ending of `fixed` rate periods raising the amount of monthly mortgage payments, the difficulty of first time buyers getting a foot on the ladder, it’s not unreasonable for people to be confused and worried.

Is it still a good time to buy or move?

When times are bad people may move from one part of the country to another, get a bigger house as the family grows, or trade down when children leave the nest. These factors stay fairly constant, and despite any hiccups in the in the housing market, buying and selling still happens. It may take a bit longer to sell one’s property or find the next one to move to, but housing decisions should be seen as a long term matter.

Your reaction will depend on how you see the housing market going. Will prices go on rising or fall? Is it better to buy before prices escalate or wait in case they plunge?

Expert opinion is divided . Major financial and government institutions are making contrary predictions. Some think the market will continue to move up. some think it will go down while others think it won’t change...

For example, the Nationwide Building Society report in July showed prices up only 0.1% in June compared with 1.1% in May. HBOS on the other hand in their Aug 2nd report said prices were rising at their fastest pace in 3 months. The Dept for Communities and Local Government on August 13th reported prices up 13.1% in June. The Council of Mortgage Lenders predicted that house prices will rise by 3% in 2008. The Royal Institute of Chartered Surveyors reported in July that the number of first time buyers had dropped by its fastest rate since Aug 2004 and that the number of unsold properties on its members books was at its highest since January this year.

What about the fundamentals?

According to experts ia combination of factors is pushing prices up: an increasing population partly due to immigration; the willingness of lending institutions to advance higher than traditional income multiples to finance purchases; an influx of foreign billionaires combined with high bonuses in the City of London pushing up the prices of larger houses and having a ripple effect on everything else; the increasing number of household unit formation as young people leave home before marriage; the increasing number of divorces, so that where one house would have been needed previously now two are; the shortage of existing and new homes compared to demand.

As the demand rises house building in private and public sectors is not keeping pace. Partly it is lack of building sites: slow planning processes and lack of investment in the public sector also contribute...

Some of these factors are self correcting. Many twentysomethings are now staying the parental home longer, lending institutions may tighten up on lending policies because of current turmoil in banking and concerns about UK personal debt and a downturn in city activity may reduce city bonuses. The buy-to-let market which had soared as people grew disillusioned with conventional pensions and lenders made ample funds available has now softened due to the rise in interest rates making such deals less attractive. But the basic demographics will not be altered by these.

Finding a way ahead

Activity in the housing market doesn’t stop but it will pay to take long term view before you make any decision.

For the first time buyer, it will pay to get on the ladder as soon as possible they initially tend to struggle but given perhaps 30 or 40 years work ahead, as their income rises their income versus mortgage balance should steadily improve. Even if there is a price hiccup, the long term trend will probably still be upwards.

If t a dip in prices occurs, offers may be possible in the short term, especially from developers with unsold stock, many of whom will help with deposits and legal fees paid or added to the mortgage.

If you are trading down or up, the price of what you may buy will probably move in parallel with your existing property so a rise in purchase price or fall in sale prices should balance out.

If you are remortgaging then of course any rise or fall in the value of your property will affect how much lenders will be willing to advance. If you believe that prices could be volatile then it could be sensible to look for deals that do not lock you into to a fixed rate for too long, leaving you the flexibility to react to changes in interest rates.

The ending of fixed rate deals for many individual home owners in the next few months has attracted much press attention. Could this affect prices as people look to sell or remortage to reduce payments? Many estate agents predict that the introduction of Home Information Packs (HIPS) will bring the market to a halt.

How do I decide what to do?

If you believe that prices may stabilise or fall you will hold off. If you think prices will continue to rise you will buy sooner rather than later.

Whatever your situation, buying, selling or remortgaging, you need to examine your circumstances carefully. If interest rates rise will you still be able to afford the monthly mortgage payments? Could you afford that bigger house or should you be less ambitious? It’s important to be realistic. If you are in the public sector big pay rises may b unlikely. If you are in the private sector with bonuses forming a significant part of your income can you be sure of how much they’ll be in future?

Where do I go for advice?

An abundance of banks, building societies, financial advisers and mortgage intermediariesare on hand. Everyone will has their own views on what will happen in the housing market. You need to make your own mind up. You can be either cautious or optimistic. What is important is that you tailor your course of action to a realistic assessment of what you can afford and what you are likely to be able to afford in the medium term. If you want to keep payments low in the first couple of years, you could opt for a fixed rate mortgage, though remember that after the fixed term runs out you will have to fund the increased monthly payments. Interest only mortgages can be an attractive means of keeping payments low in the early years, but again you must consider how you will repay the capital.

When seeking advice, ensure that whoever you talk to fully understands your aims and circumstances and can recommend a product appropriate to you. You will need to know if they are limited to their own products if it’s a bank or building society or can look at wider range of open market options. If talking to an IFA or mortgage broker establish if they are tied to a single lender, work on fees or commission or can look at the whole of the market.

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