With the 3 month rate of house price reductions slowing and prices having fallen back to those seen in mid 2005, you could be forgiven for thinking that the falls in house prices are over, but you’d be wrong.
Even though affordability levels have fallen to more normal levels would be buyers and in particular first time buyers are frustrated by their inability to obtain mortgage finance. Fact – banks are reluctant to lend above 75% loan to value. Few first time buyers have a 25% deposit, so the housing market stalls at the bottom rung.
From a lenders point of view, they are uncomfortable lending at 90% ltv in an uncertain market. Factor into that the possibility of a further 15% price fall in 2009 and the 75% limit begins to make sense.
For example, if a prospective buyer wishes to buy a property for £150,000 with a 10% deposit (£15,000), they need a mortgage of 90% or £135,000. If the price of the property falls by 15% to £127,500 then we have negative equity and the bank has a potential bad loan on their books.
In the same scenario but with a 25% deposit and mortgage of £112,500 the property is in positive equity and the lender remains happy.
So banks will not lend at higher loan to values because they expect prices to fall, and because they won’t lend, prices WILL fall.
Expect stability to return to the housing market when prices have fallen a further 15% AND have remained level for a period of perhaps 6 months. This points to market stability sometime mid 2010.
