Cheap home loans could pose hazards for homebuyers regardless of whether the UK economy recovers or heads for recession, a new report says.
The warning, carried in the annual Housing Finance Review published by the Joseph Rowntree Foundation, warns that first time buyers could be encouraged by low interest rates to stretch their resources too far.
If the current slowdown continues, house prices should peak at the end of this year and start falling back in 2002, the report says.
That could leave some homeowners facing negative equity, the report warns. The rapid snowballing of company layoffs also poses a threat to the housing market.
And the problem will be exacerbated by the likelihood of continuing low inflation. As prices rise, the value of the loan decreases, easing the burden on home buyers, so an extended period of low inflation means added pain if house prices start to fall.
Recovery still spells risk
The report does present a ray of light, in the shape of evidence that falling interest rates have kept the ratio of mortgage costs to income stable for first time buyers, even though house prices have risen 60% between 1995 and 2000.
But even should the economy recover quickly, that still poses problems, the survey says.
A healthier economic outlook would probably lead to higher interest rates, adding to the strain on the finances of first-time buyers in particular.
And state support for those who run into difficulties through unexpectedly losing their jobs is much less generous for those who have bought houses after 1995.
In that year, social security regulations were changed to stop anyone getting Job Seekers' Allowance or Income Support from receiving mortgage repayment help for the first nine months of claiming the benefit. According to the report's editor, that leaves worrying numbers of people excluded from public safety nets and without private mortgage policy protection.
"Compared with home-buyers who got into trouble with their repayments in the last recession, today's mortgage borrowers have a far less effective safety net," said Professor Steve Wilcox of the University of York .
The welcome news that mortgage arrears and repossessions in 2000 fell to their lowest levels for more than ten years is thus tempered by concern that an economic recession could see resurgence to levels that would be damaging, not just for the households concerned, but for the wider housing market and the prospects of future economic recovery."
Source:: news.bbc.co.uk
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