Property gets a reality makeover

Property gets a reality makeover

Cheer up, house prices are falling. Nationwide said this week that values have fallen again, for the eighth month in a row. Everything else is going up - food, petrol, electricity - but houses, our biggest and most expensive purchase, are falling. Hurrah!

Newspapers reported the story in their usual gloomy fashion: economists "fear" further declines; experts say the market is "the worst for decades". Figures show new mortgage approvals are at their lowest level since 1993, and down 64% over the past year. Cue more wailing about a "meltdown".

Down in the real world, where young adults have long been priced out of the market by avaricious investors, price falls are unalloyed good news.

Ah, the pessimists say, first-time buyers are no better off because the price of mortgages is rising. That's true - fixed rates are moving above 7% and it's virtually impossible to find a loan without putting down a 10% deposit. But that's only a problem if the first-time buyer is insane enough to buy now.

Young adults refusing to do so are being perfectly rational. Mortgage approvals have collapsed because first-timers have, sensibly, joined a buyers' strike. Why buy now, when prices will be lower in a year's time, and interest rates may be falling? Even one of the country's biggest mortgage brokers - whose job after all is to sell loans - told me last week he could find no reason to recommend a first-time buyer take out a mortgage in current conditions.

Lenders.....continued below

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are acting rationally, too, in demanding high deposits. No one in their right mind would lend 100% of the value of a property when prices are in free fall. The size of deposit demanded and the scale of the fees charged is a better guide to what lenders really think about the underlying state of the market than what they say in their press releases. HSBC last week raised the maximum fee on its mortgages to an extraordinary £10,000. The bank knows it has to be compensated for the risk it is taking.

But there are victims in what is an otherwise long-overdue correction in house prices. These are the people conned into paying fancy prices for apartments just a year or two ago who are coming to the end of their fixed-rate periods. Now they face a situation in which their property has fallen in price, and the mortgage is about to go up. Result: misery.

One short-term solution is simply to move on to the lender's standard variable rate (SVR). For years, personal finance journalists such as myself have scoffed at the idea of leaving your borrowings on the standard rate, when you could be a "rate tart" and remortgage to something cheaper.

Now the SVR is suddenly appealing. It has no fees or charges (compared with £1,000 plus for not particularly good fixed rates) and some (such as Nationwide) are as low as 6.49%. What's more, borrowers can switch out of the SVR into another loan at no cost whenever they want to.

But it is only mild consolation for anyone coming off fixed rates of 4.5%-5%. They still face a nasty payment shock when they switch to the SVR. But when the credit crunch eases - and Ray Boulger at John Charcol believes we will look back on June 2008 as the very worst month - then hard-pressed borrowers will be able to hop off the SVR to a better deal elsewhere. And don't forget that residential property in the UK is still absurdly over-priced.