The squeeze on Britain's housing market is only getting tighter.
Yesterday, the Co-operative Bank said it was abandoning the interest-only mortgage market. From Tuesday, it'll only offer capital repayment loans. In other words, you'll have to pay for the actual house, as well as the interest on the loan.
It's the first high-street lender to pull out of the market altogether. But most others have made it much harder to get this type of loan.
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Meanwhile, roughly a million borrowers saw their monthly payments rise this week, as lenders including Halifax and the Co-op lifted the price of their standard variable rate loans.
In short,mortgages are getting more expensive, and harder to come by, to the point where a growing number of people will simply be locked out of the market.
So what's going on? And what will all this mean for house prices?
House prices always fall during recessions
According to Nationwide, British house prices edged lower in April. Prices are now down 0.9% on this time last year. That's hardly a collapse. But the trend looks ugly.
As Ed Stansfield at Capital Economics points out, the quarterly rate of change has deteriorated sharply. House prices are now slipping at a quarterly rate of 0.7%, the fastest pace in "well over a year".
The research group also points out that every UK recession in the past 50 years has been accompanied by "real house price falls". In other words, prices have fallen once you adjust for inflation.
Now, that's not such a big deal. The fact is that house prices have been falling in real terms pretty much every month since the crash in 2008.
But Capital Economics thinks that we'll also see full-on nominal' falls in prices too over the next few years. "This is important because it is nominal price falls which create negative equity which, in turn, plays a pivotal role in households' confidence in housing as an investment."
This all makes sense of course. A weak economy tends to mean more job losses. That means more pressure on household finances. That in turn means more repossessions, and lower house prices. With inflation low by historical standards (if not by the Bank of England's target measure), it'll take nominal price declines to bring property anywhere close to more affordable levels.
The real reason to worry about the housing market
However, it's not so much the recession in the UK that would concern me. It's the impact of tightening credit, which is partly down to the recession in the eurozone. As Tanya Powley and Norma Cohen note in the FT, the reason banks are charging more for lending is because their own costs are rising.
It's not unlike manufacturers passing rising raw material costs on to their customers. On the one hand, costs in the wholesale markets are rising. That's mainly down to fears over the state of Europe's banks.
On the other, banks are also being pushed by regulators to get more of their funding from 'retail depositors' in other words, the likes of you and me. We're less flighty than wholesale lenders our money tends to sit there so it's a more stable form of funding.
But obviously, the population has a limited pool of savings. Given that we're in a recession, that pool of savings is probably under more pressure than usual. And the banks aren't just competing with each other to attract our money. Companies are increasingly looking to get a chunk of it too.
We've seen various bond issues by corporations looking to raise money and brand awareness at the same time. From big firms like John Lewis and Tesco, to small ones like hotel boutique Mr & Mrs Smith, companies are giving private investors the opportunity to lend them money at relatively attractive rates.
To be clear, this is completely different to putting money in the bank. If you lend money to a company like this particularly the smaller companies who are raising the funds to expand - then you can lose it. It's also not always easy to get your money out at short notice.
But that's not the point. The point is that the competition for capital is heating up. The Bank of England hasn't helped either with its efforts to force savers out of banks and into the stock market. By forcing individuals to get used to the idea of risking their money on dividend-paying stocks, they have reduced the resources available to banks even further.
So banks have to work harder to attract savings. While rates on bank deposits have hardly rocketed, we are seeing them tick higher. And that process is only likely to continue. That's good news for savers at least.
However, it'll also mean more pressure on borrowers. According to consumer group Which?, one in five of the homeowners they surveyed said that a £100 increase in their monthly mortgage payment would leave them without money for essentials like food.
That's frightening. It beggars belief that such a significant proportion of homeowners could be living so close to the breadline that £25 a week could mean the difference between eating and going hungry.
Of course these sorts of surveys are often exaggerated. That statistic may say more about some people's poor understanding of their own finances. But it shows just how overstretched some borrowers have become.
What does it all mean? In short, if you have a variable rate mortgage, now might be a good time to at least consider if it's worth fixing it. The market will only get tighter, and the level of equity you have in your home is unlikely to rocket in the near future.
And if you have savings, keep an eye out for chances to shift them to better-paying accounts. For example, Nationwide is now offering a 4.25% cash Isa rate it comes with various strings attached, and you can't transfer in from other Isas but it's instant access, and it does beat inflation (for now). If this is a sign of things to come, then hopefully 2012 will be a better year for savers than we've seen in a while.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
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