So what’s going on and more importantly where is the market headed? Let’s look at some figures.

Halifax: The Halifax figures show house prices in November fell by 1.1% the sharpest monthly decline in almost 12 months.

Nationwide: Down 0.8% for the month of November 2007.

Rightmove: Down 0.7% for the month of November 2007.

UK house prices have fallen for the third month in a row increasing pressure on the Bank of England to cut interest rates (interest rates were cut on the 6th of December by 0.25% to 5.5%).

So what’s been propping up house prices? Is it cheap money or lack of supply? I believe it’s a combination of both. Cheap money and easy borrowing terms has given homeowners the ability to rapidly move up the housing ladder and for investors to acquire investment properties using funds raised against existing properties.

The Sub Prime Crisis And Credit Crunch…

Let’s go over the pond and walk through how things look over in the USA. For a start they’re facing the deepest housing decline in 16 years and I’m sure you’ve heard of the “subprime crisis” over there?

I’ll tell you a little about it. Sub prime mortgages are given to those people who do not qualify for standard loans. They are usually charged a few percentage points above the usual rates to compensate for the additional risk.

A lot of these loans were given to people who did not have to provide tax returns or any proof of income to obtain the loan or where 100% or more of the property value was financed.

These “loose” lending standards helped to drive a massive boom in

home ownership amongst ordinary folk some of whom could barely afford the repayments.

These loans were packaged up and sold off to bigger players (a process known as securitisation). These packaged up loans were incorrectly valued based on a poor calculation of their relative safety for the banks.

When the valuation problem became apparent the banks stopped lending to this segment of the market and to each other which caused the “credit crunch”.

Why were they in this market in the place?

It’s All About Yields…

Since subprime borrowers pay more to borrow, the yields on these loans is therefore higher just like a certain type of property may produce a higher yield than another. This is all good and well except the banks messed up the risk assessment. These loans turned out to be a lot riskier than everyone once thought.

Have you heard the saying when America sneezes everybody else catches a cold? That’s exactly what has happened. The global credit crunch has meant less credit for homeowners and businesses making people more selective over where their money goes.

What About New Build In The US?

Liquidity and cashflow are the no.1 concerns for house builders. They need cashflow to pay their carrying costs and therefore remain in business. Remember, new build properties are liabilities for property developers.

They must sell a certain volume each month to remain in business. When house prices are declining, lenders tighten their belts and buyers become jittery. House builders therefore face BIG problems. A few large US developers have already gone out of business. Expect to see more next year.

At least 1.4 million homeowners in the US will lose their properties to foreclosure in 2008, according to a study released by the U.S. Conference of Mayors and the Council for the New American City.

That’s one hell of a lot of repossessions.

And now that house prices in the US are declining, people cannot simply refinance or sell their property if they fall behind into mortgage arrears = more repossessions.

What Could Happen Here Next Year?

One thing is almost guaranteed. Expect the repossession rate to rise next year.

The Council of Mortgage Lenders (CML) announced mortgage repossessions are expected to rise to 19,000 in 2007 and according to FSA data, at least 1.4m borrowers are on short-term fixed rates that will end in 2008. Some really unfortunate people would then see their mortgage repayments almost double. This spells financial disaster for many.

Having said that, the number of repossessions is still well below the peak of 1991 where 76,000 properties were repossessed at the rate of 208 every day.

Will I Buy Or Wait?

I’ll be buying more properties in 2008. I’ll buy well below market value from distressed sellers.

You see, even in a market correction (if we have one) ALL investment properties can present great value - at the right price. Would you buy a house worth £150,000 for £100,000 even if property prices were on a downward trend? You might. It depends on how much lower they could go doesn’t it? 

Looking at historical figures, they tend not to fall much more than 20% so you’d still be 10% below market value after all is said and done and you’d be back on a rising curve too. So here’s the triple whammy we have coming up:

1. Consumers wealth reduced by declining house prices
2. Economic growth cut leading to declining job security
3. Surge in mortgage interest payments as people reach the end of discounted fixed rate mortgages

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