House prices have dropped, interest rates are low and plenty of people are straining at the leash to get on the housing ladder.

Now the Nationwide Building Society says house prices have risen for the first time since October 2007. 

The Nationwide cautioned about jumping to conclusions on the basis of one month’s figures but the news was enough to send the pound up against the dollar and some analysts said it was more evidence that the battered housing market may be recovering. 

On the other hand mortgages have become much harder to get and rising unemployment is working against any recovery.

What do you think? Is it premature to start talking of green shoots in housing?

-- David Kuo is a director at the financial Web site The Motley Fool. The views expressed are his own. --

What are consumers supposed to make of the latest inflation numbers? Do we have inflation, deflation or a bit of stagflation?

Truth is, it depends on who you are and what you do with your money. The Retail Prices Index or RPI tells us that prices today are exactly the same as they were a year ago. The Office for National Statistics reported that RPI was unchanged at 0%.

But be very careful when bandying around the term “prices”. The RPI includes elements of housing costs. So it is better to talk about the cost of living rather than prices. Prices have risen compared to a year ago, but the total cost of living as measured by RPI has fallen because of the disproportionately large drop in mortgage costs as a result of lower interest rates.

The proof, if proof was needed, that prices have risen from a year ago, can be seen from the Consumer Prices Index (CPI). Instead of 0%, as measured by the RPI, prices as measured by the CPI are 3.2% higher. The CPI does not include housing costs, so it is a better measure for people on fixed-rate mortgage deals, and also for people in rented accommodation.

The upshot is that if you have taken on mortgage debt and chosen to spend rather than save, then you are worse off as a result.

However, it’s worth bearing in mind that both the RPI and CPI are broad measures of inflation. Consequently, the extremely large basket that is used to gauge inflation may not necessarily reflect the true changes in the cost of living that you may experience. Put another way, if we don’t buy exactly the same things that the ONS puts into its basket then we will experience a different rate of inflation.

To measure our personal inflation rates we need to compare our household budgets today with what we spent a year ago. Interestingly, a twice-yearly study by The Motley Fool has shown that personal inflation is consistently higher than the Government’s measure of inflation.

This should set alarm bells ringing for many of us.  If inflation refuses to die in a so-called deflationary economy, then the outlook for the cost of living could worsen when the Government finishes pouring money through quantitative easing or the printing of raw money.

The jury is still out as to whether quantitative easing will work. It is almost anyone's guess. But history tells us that boosting the supply of money can be inflationary. This is because when there is too much money sloshing around an economy, chasing a limited supply of goods,  prices will inevitably rise.

Investors therefore have two clear choices. They can sit on their hand and hope that their nest eggs will not shrink to the size of quails’ eggs through inflation or they can heed the lessons of history and invest in assets that have demonstrated an ability to combat inflation.

Only two asset classes have successfully beaten inflation in the long term. These have been property and shares. Most homeowners already have a large exposure to property. So, it may be prudent to increase their exposure to shares to rebalance their way their wealth is distributed.

Interestingly, the yield on UK shares is currently around 5%. That is almost ten times more than interest earned in a traditional savings account. Of course your capital is exposed to both ups and downs.

Even better yields may be available from individual shares. But it is vital to choose carefully. After all, dividend payouts are at the discretion of the company's directors. That said, companies are often reluctant to cut dividends unless they absolutely have to. And a careful selection of companies whose dividend payouts are strong could be just the panacea for embattled investors.

-- Read David Kuo's blog here or listen to the Motley Fool podcast.

The Financial Services Authority (FSA) has published a blueprint for a shake-up of global banking regulations aimed at preventing a repeat of the current financial crisis. The report, authored by FSA Chairman Adair Turner, recommends an increase in banks’ minimum capital requirements, closer regulation of hedge funds as well as proposals to stop banks lending too much during boom years and measures to restrict the ability of banks to take excessive risks.

The report comes a week after FSA Chief Executive Hector Sants said in a speech at Thomson Reuters London offices that the banking sector should be “very frightened” of the regulator.

Here is a quick round-up of how the FSA’s blueprint has been received across the web.

Robert Peston, the BBC’s Business Editor, writes on his blog that much of what the FSA Chairman said was “common sense” and that “some of its gleaming new rules would in fact represent a return to a framework for limiting risk-taking by banks that prevailed until comparatively recently.”

There was also a good discussion about the FSA and international banking regulation on this morning’s Today programme on BBC4, which you can listen to here if you missed it.

Over on the Telegraph, meanwhile, Simon Denham comments that: “The new “aggressive” stance from the FSA is a legitimate reaction to the howls of outrage - some justified and others totally misplaced - about the moral and managerial turpitude within the City.

“But it remains to be seen how this will translate into action. The worst case scenario would be for regulation to become unduly cumbersome, slow the mechanisms of the City and hinder any wider recovery for the economy. That said… Lord Turner’s report is a golden opportunity for the regulator to really get behind financial services.”

Lord Turner also announced that potential homeowners may need to put down at least a 15 percent deposit to secure a mortgage. Richard Mason, Managing Director at Moneyextra.com, however, told Times Online that: “Putting a cap on mortgage lending is simply a case of shutting the stable door after the horse has bolted. This action is futile and detrimental to those that need help the most - first time buyers.

“Lenders should not allow the Government to dictate their lending criteria. Rather, the FSA should focus on challenging lenders to ensure they are operating comfortably within a stable and predictable property market.”

Lorna Bourke on Citywire.co.uk says that mortgage controls would be have “disastrous long term consequences for the housing market and is just plain wrong. “The amount borrowed by a homebuyer is just one factor in determining the person’s ability to meet repayments. The level of interest rates is equally important and their credit track record and other financial commitments are all factors to be taken into account.”

Patrick Collinson of The Guardian, on the other hand, says that a cap on income multiples is correct, but does not go far enough. “Can someone explain what societal damage will be incurred if someone is prevented from taking a home loan worth five times their income? The FSA should also consider imposing tight controls on how couples, married or not, are assessed for borrowing.”

Managementtoday.co.uk asks if the measures outlined by Lord Turner might actually do more harm than good. “Lots of people are sceptical that it will have enough knowledge and expertise to spot the danger in time, even if it gets the extra powers of intervention Turner wants.

“Turner has also called for a pan-European regulator, to try and keep an eye on the industry at a regional level. And therein lies a big problem with all this: if the regime becomes a lot stricter in the UK, but not anywhere else, the big banks will just leave London and go somewhere else that gives them an easier ride.

“Hence why some City folk are worried that all Turner’s reforms will do is reduce London’s competitiveness as a financial centre – which is likely to make the UK’s economic recovery even slower.”

Now it is over to you. What do you think of the FSA’s plans for financial reforms put forward by Lord Turner today?

There was more gloomy news for the housing market today as property website Rightmove announced that asking prices for houses in England and Wales were 9 percent lower than a year ago. New listings meanwhile were 57 percent lower than March 2008. The average asking price actually increased by 0.9 percent between February and March this year, but Rightmove warned that this was caused by new sellers being unrealistic about how much their homes are worth.

So what can be done to revive the stagnant housing market? Citywire has one radical suggestion: make sellers pay stamp duty rather than the buyers. Every year there are calls to abolish or reform this “flawed tax”, but Citywire’s Lorna Bourke says that making this switch would be an incentive to first-time buyers and would cost the government nothing. What sellers would say about this, however, is another story.

Citywire also comments on the recent report by Numis Securities in which they said that house prices could have another 40-55 percent to fall before bottoming out. Ouch. David Smith, writing in this weekend’s The Sunday Times, dismissed this report as “unconvincing.” Smith writes that the chances of the average house price in the UK slipping to £66,000 from the current £150,000 are slim, especially as interest in the market and new buyer inquiries are rising.

The Numis report predicting the rather frightening fall in house prices has sparked a great deal of debate on the web; it is the most commented on article on thisismoney.co.uk.

Even if you did want to buy, what are your chances of securing a mortgage? Not good, according to Rupert Jones writing in the Observer. Fewer than 9,000 first-time buyers were able to take out a home loan during January and the average first-timer’s deposit was a new high of 24 percent of the value of the property. So while buyer inquiries may indeed be on the up, raising the finance to actually buy a property is becoming harder and harder.

And it could be about to get even more difficult. Telegraph.co.uk reports that home buyers could be prevented from borrowing more than three times their annual salaries under new mortgage rules to be announced by the Financial Services Authority.

All of which raises a number of important questions about you and your home. Is it a good time to sell or buy? Would you be better off renting? What sort of mortgage should you apply for? Thankfully, there are a number of great tools on the web to help you decide.

The Times has this handy mortgage calculator to calculate what your repayments would be were you to rent or buy. Moneysavingexpert.com meanwhile has a great tool which helps you decide if you should go for a fixed, discount or tracker mortgage for those of you looking to buy or remortgage.

If you want to know how much your home could be worth but can not be bothered dealing with an estate agent, then you can search the UK Land Registry database of houses sold in England and Wales since 2000 or find out more information about properties and monitor average house prices at the Land Registry website.

– Jane King is an independent mortgage adviser at Ash-Ridge Asset Management. The views expressed are her own. –

In the current climate, we have the irony of property suddenly becoming more affordable and yet lending is down by 52 percent in the year to January. The commonly held view is that it is almost impossible to get a mortgage and many first-time buyers are still frustrated in their efforts to get on the ladder. But it’s not all doom and gloom.

Firstly, there are providers with funds who want to lend. What they don’t want is the sub-prime type of borrower that got many banks into trouble in the first place, and this is set to be the long term approach of many who decide to remain in this market. This will be good for future stability and something that should be encouraged.

Anyone seriously looking to purchase or remortgage should take independent advice from a properly qualified mortgage adviser (try www.impartial.co.uk). First meetings are usually free of charge.

For first-time buyers and key workers there are government-funded schemes available, which are not widely advertised but are incredibly popular. The criteria and flexibility have widened in recent times and the schemes now encompass many individuals who would not have qualified in the past.

For key workers such as policeman and nurses and other eligible groups there are Shared Equity Schemes whereby you purchase part of your property and rent the remaining portion.

Try your local housing association in the first instance - they will let you know what properties are available and will advise as to your eligibility. An independent mortgage adviser will have access to the lenders who provide the mortgages for these shared equity loans and will be able to find you the best deal for you. I cannot recommend these schemes highly enough and as new funding is often released in April, the timing could not be better. For information about housing associations try Directgov.

For borrowers looking to remortgage, they should compare their current lender’s offering before moving. With low interest rates, it’s often not worth moving lenders once arrangement, valuation and legal fees are taken into account. A good adviser will always make this comparison before recommending any alternative.

When you start looking you will find that, because of low interest rates, there are some great deals out there. If you have a hefty deposit or plenty of equity in your property then you can access some very competitive rates. For a list of some of the best deals go to moneyfacts.co.uk

Do not be tempted to consolidate debt and secure this against your property. This can seem like a good idea but needs careful thought. In today’s uncertain environment one option is to insure your mortgage payments against redundancy if you are eligible.

Although the government has offered limited help for those facing arrears, the details are still sketchy and will only cover interest payments. If you are facing repayment problems, always contact your lender as soon as you can, as it will have options available to you - it is not in the lender’s interest to repossess.

Do not assume that your usual High Street bank has all the answers - shop around, use the Internet and ask friends and colleagues for recommendations.

I believe that this situation will continue at least until the end of 2009 - the recovery will only start when consumers regain their confidence in the economy and are comfortable that their jobs are relatively safe.

The Bank of England’s decision to cut interest rates to a record low of 1.0 percent may have been widely predicted, but this did little to hold back the avalanche of commentary that began the moment the news came through at noon today.

Interest rates, which have now been cut five months in a row, are at the lowest level in the Bank’s 315-year history, and the list of people calling yet another easing pointless appeared to be getting longer.

Economist Ros Altman, writing on www.theguardian.co.uk, said: “This is another policy mistake. More panic cuts are not the answer to our economic crisis. Policymakers are desperately trying to boost the flagging economy and encourage more spending… but lower rates are a very crude weapon. They punish those who have got money to spend while benefiting the very groups (banks in particular) whose actions caused the mess in the first place.”

She wasn’t alone. BBC blogger Stephanie Flanders wrote: “It is hurting. But so far it isn’t working… Savers say they are being punished for nothing - rate cuts are hitting their income, while having less and less impact on the economy at large. They have a point.”

Meanwhile, Melanie Bien, of mortgage brokers Savills Private Finance, was quoted in several publications as saying: “Today’s cut was expected by the markets. It will assist those on base-rate trackers with no collars or standard variable rates if those lenders pass on any of the cut. But beyond that it will have little effect.”

The Sun didn’t hold back either, calling the rate cut a “desperate attempt to revive the flagging housing market” while The Daily Mail website said the MPC was “going for broke”.

Proponents of the drop were harder to find, but not non-existent. Ashley Seager, writing for The Guardian, said: “The argument doing the rounds that the Bank should have left interest rates at 1.5% while carrying out quantitative easing is nonsense. While it is true that the real problem has become the quantity, rather than the price, of credit, the idea that cutting rates makes no difference is simply not true.

“With around 40% of homeowners on tracker mortgages, the impact on many households’ families is immediate, and will reduce the burden on those homeowners unfortunate enough to have lost their jobs.”

Ian McCafferty, chief economic adviser to the Confederation of British Industry, was quoted as a supporter of the cut. “This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy.”

There was however a general consensus that rate cuts alone are not the answer to the economic crisis and that the Bank of England should do more to get banks lending again.

Have your say on the rate cut by posting a comment here.

The Bank of England has gone into further into uncharted territory with its decision to cut rates by half a point to just one percent. Many economists think they will be down to zero by the Spring.

But like gunfighter running out of bullets, the Bank is, in the view of some observers, just wasting ammunition by using the interest rate weapon.

The problem lies, they say, in the availability of credit, not the price of it. What use is a nice cheap loan on a house if a bank is demanding a whopping 25 percent deposit?

Do you think the Bank of England could do more to stimulate confidence and get credit flowing again — and if so, what could the central bank or the government do?

Melanie Bien, director, Savills Private Finance, is a guest commentator. The opinions expressed in this commentary are her own.

It is too early to say whether the latest bank rescue plan will have the desired effect of persuading the banks to start lending again. But it is a step in the right direction and we welcome it as a positive move as it may just remove the remaining stumbling blocks to getting the credit and mortgage markets functioning properly once more.
Clearly, something further had to be done. October’s £37bn bank recapitalisation did little to persuade banks to regain their appetite for lending. Credit continues to be difficult to come by – unless you have a large deposit or equity in your home and a clean credit history.

The latest bailout aims to guarantee lending and insure banks’ bad debts, such as sub-prime lending in the US. The idea is that banks won’t need to hold back vast sums in case of default on loans – something they have been doing until now. What is particularly encouraging is that this is a comprehensive package of measures which taken together is likely to have more of an impact on increasing new lending than addressing one area at a time.

The new £100bn mortgage guarantee scheme to underwrite lending between banks and financial institutions as recommended in Sir James Crosby’s report, is perhaps the most significant development. Before the credit crunch hit, the securitisation market was a key source of funding for the mortgage market, responsible for a third of all lending. This scheme should help rejuvenate the securitisation market, which has all but closed.

There is a danger that it may prove to be too restrictive, however, as only AAA-rated securities are covered.
Much also depends on how honest the banks are about their exposure to bad debt. A fee-based insurance scheme whereby the Treasury and banks will identify bad loans  or toxic debts that will ultimately be covered by the taxpayer should remove some of the blockages in the system that are preventing the flow of mortgage lending. But without an honest and open declaration of exposure by all the banks, it will be very difficult to draw a line under what has gone before and start afresh.

The extension to the £250bn credit guarantee scheme announced in October until the end of this year should also have a positive impact, allowing banks and building societies to roll over new debt, as should the new liquidity scheme to replace the Special Liquidity Scheme allowing banks to swap illiquid assets for gilts.

The change in strategy with Northern Rock is interesting. Instead of encouraging the lender to run down its business and shrink its mortgage book, the government has changed tack. The bank will now encourage existing customers to stay, presumably with more attractive reversion deals. It will also look to attract new borrowers – hopefully those purchasing, not just remortgaging, with more attractive rates.

We wait to see whether this package will have the desired effect and get banks lending again. Mortgages are already becoming cheaper but tend to be most readily available to the lowest-risk borrowers with significant deposits or equity in their homes. An increase in liquidity should encourage more lenders into the market and more competitive rates.

James Saft is a Reuters columnist. The opinions expressed are his own.

Even in the good times, many British consumers were borrowing against their houses just to fund routine consumption, indicating a big hit to come for retail sales and for the banks who hold the loans.

With house prices falling rapidly and mortgage debt tougher to get, it is no surprise that homeowners are less able and inclined to borrow against their houses in order to spend.

That will be hitting the High Street now - analysts are expecting a 0.6 percent fall on the month in retail sales for November when data are released later this week. But a rise in unemployment next year could expose a really serious weakness in household finances, as consumers who counted on being able to extract wealth from their houses to smooth consumption in bad times find that, when bad times come, the wealth isn't there and the banks don't want to lend anyway.

Researchers at Durham University looking at survey data found that 37 percent of homeowners borrowed against their house between 2002 and 2005, typically realising about 6,000 pounds. That's a lot people borrowing a lot of money against very illiquid and now hard to realise assets.

Even more interesting is the pattern of what householders were doing with the money and what was happening to them when they decided to borrow. Over time the proportion of people borrowing to re-invest in their houses through improvements fell, while more was finding its way into day-to-day costs, according to Susan J. Smith, a professor at Durham and one of the authors of the study.

This was borne out by a high percentage of equity borrowers who had lost their jobs, become pregnant or had a child in the year they borrowed.

How exactly a borrower who has lost his job gets a bigger mortgage is a puzzle, but one that evidently banks and borrowers in Britain together have somehow managed to solve. The record in the United States shows that the housing boom brought with it a tremendous amount of mortgage fraud, much of it abetted by people within the lending industry.

In short, it seems that even during boom times in Britain people weren't borrowing against their houses simply to buy BMWs and fund vacations, but often to keep their households ticking over during tough times.

"The rising property market was central to encouraging people to borrow more for non housing expenditure," said Ross Walker, economist at Royal Bank of Scotland in London.  "And with the housing market now in reverse you would expect to see a retrenchment. It reinforces the potential fault line for the UK household sector: there is a big debt exposure and the real test will come next year as unemployment rises."

BORROW NOW, DEFAULT LATER
The housing safety net, such as it was, simply won't be there next year when unemployment vaults higher, which is very likely to exacerbate a spending slowdown which itself will feed unemployment. And remember, these weren't people who were defaulting on their house loans in order to be able to pay their grocery bills, but people who were in part paying their grocery bills because they could borrow against their houses.

I wouldn't want to be the bank that made those loans, or the government that insures that bank. It also goes some way, in my view, towards explaining the very precipitous fall in the pound, which is down more than 30 percent on a trade-weighted basis this year.

According to a survey of households just released by the Bank of England, credit is much harder to get as compared with a year ago. A total of 16 percent of households said they had put off spending because they were concerned about access to credit, up by a quarter from a year ago.

Only six percent of mortgage borrowers said they had taken out an additional secured loan, compared with 10 percent last year and 14 percent in 2006. Nearly 40 percent took out these loans to pay down other debts. That points to higher credit card losses and delinquencies next year, as unemployment interacts with an inability to access fresh secured loans.

So 2009 looks like it will feature higher unemployment, much reduced consumer spending, impaired access to credit and a default cycle that will worsen the already difficult capital problems of the banking sector. There has been a lot of effort and exhortation to try and keep banks lending to consumers in Britain, presumably on the view that it's best to sober up gradually.

That can only work so long, and if it comes at the expense of capital for businesses that make and sell things, especially overseas, it may in prove to be a mistake.

And while big ticket items like automobiles, which are easy to defer, are now suffering, next year may see very tough times on the British high street for more basic items.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)