By admin September 14th, 2011

UK house prices dont exist in a bubble and are affected by both national and international events. Here we take a look at how the financial markets affect you as a homebuyer or seller.

Inflation

Inflation influences the interest rate we get on our savings and the rate we pay on our mortgages.

It is calculated by comparing the prices of 120,000 goods we commonly buy every month and seeing how they’ve changed from the month before. The rate of inflation is shown as a percentage.

The Consumer Prices Index (CPI) and the Retail Prices Index (RPI) are the two most significant measures of inflation – and the RPI includes housing costs such as mortgage interest payments and council tax (the CPI doesn’t).

The Bank of England use information from these indices to set the interest rates on a monthly basis, making inflation a crucial factor in determining the rates banks charge for mortgages and the rates they offer on savings accounts.

Interest rates

The Bank of England use information about inflation to set interest rates. If the Banks Monetary Policy Committee thinks inflation will be above 2% in the next 18 months or so, it may increase interest rates to try to subdue it.

By the same token, if it thinks inflation is likely to be below 2%, it may cut interest rates.

You pay interest on your mortgage, so the interest rate has a direct impact on how much you pay.

International economies

Due to the tightening of global lending conditions since the credit crunch, there has been a lot of downward pressure on economic conditions. Countries are more cautious about lending to each other, which can affect how much money the banks have available to lend.

UK interest rates look like staying lower for longer due to weaknesses in some of the world’s major economies including America and the eurozone.

International stock markets reflect the value of companies. If these lose money it can affect the housing market by having a direct impact on wages and employment eg companies in the construction sector.

Banks

Banks and building societies do not have as much money to lend due to the credit crunch. For mortgages they are typically asking for deposits of at least 20% of the purchase price.

If the deterioration in funding conditions carries on, it’ll become harder for banks to lend money for loans and mortgages, and these could become more expensive or stop being available to some UK households.

House price surveys

Different surveys take data at different times and focus on different areas of the house-buying process, which is why different surveys can show different results.

The Land Registry records the price of all property sales and measures the change in the price of properties that have been sold before. Properties not included are commercial, discount residential sales, repossessions and property transfers following divorce.

The Government price survey and the Nationwide and Halifax surveys are compiled using data from mortgages (so excluding cash sales). The Nationwide and Halifax surveys cover the whole of the UK but are based on a sample of each lenders own loans each month.

The Royal Institution of Chartered Surveyors measure confidence in the property market – they ask around 250 estate agents in the UK if they feel prices in their own areas have been rising or falling in the preceding three months. This survey is often the first to pick up trends and changes in the market.

Hometrack and Rightmove report on the ‘achievable selling price’ and asking prices for properties, respectively.

Housing demand

New house building is at a post-war low and the UK population has grown by 2.1m to 61.8m between 2001 and 2009, being driven up by more births than deaths and more immigration.

This has put pressure on the demand for homes, owned or rented, which has kept prices and rents high.

Various factors affect house building – planning laws, the tailing off of building council houses to let, the recession and continuing economic stagnation.

Unemployment

Unemployment can affect the housing market because those out of work are unlikely to be looking to purchase property. Lending conditions for those out work are also much stricter than for those who are employed.

The lack of new homes being built has also affected the labour market, by not employing those in the construction industry.

What can I do to safeguard my future?

No one knows what’s around the corner but there are things you can put in place to safeguard your financial future, whether it’s remortgaging to a fixed term or insuring against unemployment.

Independent mortgage advisor Stephen Thatcher is based at Location and can offer products to suit your needs, including:

o Mortgages

o Life assurance

o Critical illness insurance

Your home may be repossessed if you do not keep up repayments on your mortgage.

Please note that you should never cancel an existing policy prior to taking out a new one without fully investigating the generic and individual elements that are covered.