Is the housing market recovering or is it much of the same?

We invite experts in the housing field to give us their opinion on a hot topic of their choice, they also have the opportunity to make three housing themed wishes. 

Our first contributor is Professor Paddy Gray who gives us his opinion on the recovery in Northern Ireland's housing market.

Rise in new mortgages

The Council for Mortgage lenders (CML) recently released figures that the proportion of new mortgages for house purchases in NI had risen significantly in the first quarter of this year for first time buyers. 60% of all house purchase loans were advanced to first time buyers (FTBs). Whilst the figures are refreshing and some have been talking about a bottoming out of the housing market or even a slow recovery, it is important to think carefully before any assertions are made.

Housing certainly is becoming more affordable at the lower end of the market with recent figures released by the University of Ulster suggesting that the average house price is now around £130,000 (nearly half of the peak in 2007 when the average price stood at £250,000). 75% of FTBs bought properties of less than £125,000 (only 7% bought at this price in 2007). This compares to 40% of FTBs in the UK as a whole buying at below this price. There are reasons for this.

On the one hand, house prices in NI are much lower now than many parts of the UK as a whole with more properties below the £125,000 threshold becoming available on the market making these price points attractive and also the fact that 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 £1,300 on a property costing £130,000. The average deposit that is required by lending institutions is 20% which is already a substantial burden (£20,000 on a £100,000 property) so any savings are welcome particularly for those young people starting out who are on low incomes and where ‘the bank of mum and dad’ doesn’t assist with the deposit.

Moving on and the impact of negative equity

The situation is not so good, however, for the home movers or the ‘mover uppers’. Many households who wish to trade up to higher priced housing in more favourable locations are finding it difficult to move. In some cases this is due to values of their existing properties having fallen so much since the peak in 2007 meaning that they are still waiting for a recovery in the market to increase whatever equity they hold (the difference in the outstanding mortgage and the house value).

This gets even more complicated for those that have outstanding loans greater than the value of their homes or what is referred to as ‘negative equity’. In NI we have by far the highest level of negative equity in the UK according to figures released by the CML in March 2013 with 69,000 or 35% of homes owing more than their properties are worth. This equates to £2.9 billion worth of negative equity. It is those who bought at the peak of the property boom who are most affected, many taking out 100% loans and even greater when lending was much less restricted. This in effect means that even if these households wanted to move they can’t as they would owe substantial sums to the bank after selling their property at a much reduced price.

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 circumstance such as relationship breakdown or reduction of income.

Indeed repossessions have risen and recent figures suggest that over 1,000 homes were repossessed last year alone. Many of these properties are ending up in auctions and are being bought up in many cases by cash rich investors who then rent them out in the private rented sector, a tenure that has grown substantially in the last decade. In 2001 there were 49,400 properties being rented out by private landlords. Ten years later this had grown to 125,400 in 2011 which on average works out at 7,600 a year or 150 per week or 21 a day. Rental yields, although not rising, are particularly buoyant averaging between £500 and £600 per month.

So, it is important to exercise caution when predicting green shoots in the housing market. It certainly is looking much better for first time buyers as house prices continue to fall below the £125,000 stamp duty threshold.  There is still a need to raise on average a 20% deposit and many still cannot do this as incomes fall and employment prospects are bleak. However, recent figures from the University of Ulster for the first quarter in 2013 suggest that transactions were up on the same period in 2012. There are regional variations and as prices continue to fall sales are going up for the lower priced properties.

It is those who are wishing to move who already own an existing property who are finding the market more difficult particularly those who owe more than their property is worth.  The upturn in the market may still be someway off and do we really want a return to the days when prices were rising by 50% per year pricing many, particularly first time buyers, out of the market completely?

Read Paddy Gray's 3 wishes for the Housing Genie.