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Global threat to house prices
House prices have trebled in the last decade but rising yields in global bond markets may finally bring the party to an end...
So far, house prices have been able to withstand four interest rate rises from the Bank of England partly because of the popularity of fixed-rate mortgages that have allowed borrowers to keep their payments steady.
Surging bond yields and swap rates could change all this, however, as many borrowers who took out cheap two-year deals after the Bank of England cut rates in August 2005 are forced to refinance at much higher rates.
"Fixed-rate deals are typically more than a percentage point higher than there were two years ago," said Drew Wotherspoon at independent mortgage adviser John Charcoal. "Mortgaging to the hilt is not something we would advise."
Central banks ‘forced’ to raise rates
Bond yields have soared around the world in recent weeks as markets anticipate strong economic growth will force central banks to raise interest rates further than originally expected to curb inflation.
U.S. Treasury yields rose to five-year highs last week while those on British government bonds have hit levels last seen in 1998.
Two-year swap rates -- a benchmark for fixed-rate mortgages -- have gone up around 175 basis points in the last 18 months, meaning a dwindling number of lenders are prepared to offer fixed-rate loans at less than 6 percent.
Bank of England Governor Mervyn King warned people last week not to borrow on the assumption that repayments would stay the same.
Many Britons already suffering
The Council of Mortgage Lenders (CML) believe more than two million fixed-rate loans will come to an end over the next 18 months, with most borrowers facing mortgage rate increases of between 75 and 150 basis points.
Almost 70 percent of new mortgages taken out since mid-2005 have been on fixed rates compared with an average of just 40 percent since 1993. But the pain for these borrowers has only been postponed.
"For those individuals who need to refinance their two-year mortgages later this year, the impact will be significant," says George Buckley, an economist at Deutsche Bank.
Buckley calculates such borrowers face an average rise in their mortgage bills of 1,500 pounds a year and reckons house prices could even fall next year.
Many Britons are already suffering. Personal bankruptcies are at record levels and mortgage repossessions are up even with house prices rising strongly as borrowers struggle with higher repayments and sharp increases in the cost of living.
Best to abandon BTL?
Higher borrowing costs could also give Britain's growing army of buy-to-let investors -- a record 333,000 mortgages were taken out by landlords last year -- a growing incentive to take their money elsewhere.
Why put up with a rental yield of 5 percent -- or more like 3.5 percent when repairs, agency fees and vacant periods are taken into account -- when you could get more than 6 percent parking your money in a three-year bond?
With most measures of house price inflation still in double digits, landlords may feel that capital appreciation more than compensates for the lower rental yield.
But if house prices stop rising -- and forward-looking indicators such as mortgage approvals and new buyer enquiries have been falling -- there could be a stampede for the exit.
BTL investors ‘throwing in the towel’
A survey from the Royal Institute of Chartered Surveyors shows that more than five percent of buy-to-let investors threw in the towel in the first quarter of this year, the highest proportion in two years.
This trickle could turn into a gush in the coming months as the cheap fixed-rate mortgage deals expire.
"A large number of people will be remortgaging in a rising interest rate environment," said a spokesman at the CML. "We expect this will contribute to a slowing housing market."
Source: http://www.reuters.co.uk
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