Financial Perspectives

This recession is turning into a much longer and deeper one than anyone expected which is becoming more visible to a wider range of people as time goes on.

Individual house sales are a fairly rare event for most people so we’re still seeing people putting houses on the market at prices based on a purchase price from a few years ago which, in many cases, was a higher price than the current market will support. That houses won’t sell at these prices is obvious but in many cases the owners simply can’t afford to sell them at the current prices so they add to the collection of “for sale” signs which in turn make things seem a little bit worse as their numbers build. As an example of how far away from the current prices these can be take the example of a house a few hundred yards from me which was bought at the peak of the market at around £300,000 whereas identical houses are now selling (slowly) for around £170,000. Had those people bought on an 80% mortgage they’d need house prices to rise another 40% from their current level just to cover the mortgage.

However, even when houses are priced at an appropriate level that still doesn’t mean that they’ll sell quickly as once a buyer is found and the house is taken off the market it’s quite likely to get the “for sale” sign back as buyers frequently can’t get mortgages: in one local case it took three buyers before reaching one who could get a mortgage.

Sadly all this means that people will be stuck in their houses potentially for decades if they can’t simply write off what could be a substantial loss.

With the credit squeeze still upon us, it shouldn’t be a great surprise to learn that many parents are still tapping the Bank of Mum & Dad even as adults.

The research commissioned by Scottish Widows indicates that over a third of parents have had to tap into their retirement savings to fund these requests from their children. That’s a scary thought as it implies that those parents may well need to call in that loan at some point if/when they run out of money for their own retirement and I’m sure it’s not something that the “kids” have considered.

It’s not peanuts either as the research indicates that the amount involved is well over £60 BILLION.

Now, it’s probably fine for the 30% who were asking for money to fund the deposit on a house in that they’ve actually got something “in the bank” so to speak but over 40% were asking for the money to repay debt and that’s money that’s quite simply gone. Quite what those “children” are going to do when their parents come to them asking for the money back so that they can retire in the manner in which they’d planned to is a very good question. One suspects that they’ll end up needing to consider secured loans on the parental home at some point.

Rental prices tend to lag the corresponding rises in house prices, essentially because rental contracts are generally 6 to 12 months in duration.

With the incredibly strong rise in house prices in Northern Ireland over the last year to 18 months it could only be expected that the rents being asked for would make a move after the customary time lag. Now, the house prices have levelled off at the moment but that’s not stopped the rents starting to shift upwards.

For example, in one estate which we have a vested interest in, a typical house was £130k in September 2006 vs £225k now. The increase in rents being asked is also heading upwards over that time from a typical £425 last year to £495 now. So far that’s only a 16% rental increase compared to the 73% price rise but I suspect that it’s merely a taster of things to come from the landlords as they test the water for reactions to that rise. Certainly if the prices of the houses resume their progress upwards I would be surprised if there wasn’t a certain amount of catching up happening this time next year with the rents.