The UK housing market is no longer subject to a North-South divide, but is rather based on the housing haves and have nots.
A report by the National Housing and Planning Advisory Unit confirms that unless we increase house building dramatically, property will become un-affordable for most first-time buyers.
The problem is demand. A growing population fuelled by immigration plus rising household formation are squeezing housing stock. Some 223,000 new households are created every year, but we’re only building 174,060 new homes.
Whitehall’s ambition is to build 190,000 new properties a year, but even that won’t satisfy demand.
So house prices will continue to rise above inflation and wage increases. Affordability is becoming the killer blow for aspiring home owners.
The NHPAU anticipates that most 30-somethings will be priced out of the market by 2026. What’s more, the average home in the UK, which now costs 7 x average annual income, will rise to 10 x income by then.
So is this good or bad news for the mortgage market? Demand exceeding supply and rising house prices could be interpreted as good news – plenty of work for brokers and lenders.
But you don’t need to be an expert to see that these forecasts aren’t good news for anyone. First-time buyers are the lifeblood of the market and if they can’t afford to get on the property ladder, we all suffer.
If rising house prices start to stifle social mobility, home owners will also be more inclined to stay put, which means less demand for new mortgages.
Whitehall needs to come up with a strategic solution to this problem. But based on its recent performance with Home Information Packs, we’ve every reason to be pessimistic.
Don’t blame FTB crisis on buy-to-let
So what’s the best way to help first-time buyers get onto the housing ladder?
Research by the Council of Mortgage Lenders suggests that most people believe the answer lies in reducing rates at the start of mortgages, extending loan terms and relaxing lending criteria.
Its research also shows that a high percentage of parents help their children raise deposits.
Other suggestions include cutting Stamp Duty and restoring mortgage tax relief. Some have even said that greater controls should be placed on the buy-to-let market for fear that it is denying first-timers access to property.
Buy-to-let can be an emotive subject. Owning two or more properties is viewed by some as greedy and unacceptable since housing is in such short supply.
But the other side of coin is that private landlords are now providing top quality rented accommodation that just a few years ago the government and local authorities would have supplied. The problem is that the state has sold off most of its social housing stock.
There are many reasons why first-time buyers are struggling to buy property, but the finger cannot be pointed at the buy-to-let sector.
Many youngsters are delaying buying property, not only because of rising house prices but also because they want to maintain flexibility for the future.
Buy-to-let provides them with the high quality city centre accommodation they demand.
Lending needs brokers like airplanes need pilots
Another pessimistic piece of research published recently confirms that up to two million young home owners are struggling with their finances as a result of recent interest rate rises. Many stretched themselves to buy property and don’t have much slack left to cope with base rate rises.
At the same time, the Financial Services Authority has warned that its thematic work will check that brokers and lenders are considering both affordability and responsible lending when dealing with clients. Initially its focus will be on the most vulnerable areas, such as sub-prime.
“We’re interested to see whether firms consider affordability throughout the term of the mortgage, taking into account any reasonably anticipated changes,” says Vernon Everitt, director of retail themes at the FSA.
The regulator is planning to publish the results of its work at the end of this month.
All this emphasises just how important it is for lenders and brokers to work together to assess clients’ affordability. Many lenders have moved to affordability models that are sensitive to rising interest rates in a way that income multiples are not, but it’s important to remember they are only models.
They offer a theoretical assessment of whether borrowers can afford the mortgages for which they are applying. But brokers have the benefit of face-to-face contact with clients. They are in the best position to consider borrowers’ personal circumstances, which will influence their future ability to pay.
There’s a danger some brokers will take the view that if lenders’ affordability calculations give borrowers the green light, the deal must be OK. That’s like saying that because an aeroplane can be flown electronically there’s no need to have a pilot at the controls.
Airlines still have pilots because there’s no substitute for skilled people at the sharp end looking out for the signs of trouble that technology can miss. The same goes for mortgage lending – lenders may have the technology but brokers offer skilled eyes and ears.
If we want to prevent clients from getting into financial difficulties in the future, it’s up to lenders and brokers to work together to ensure adequate affordability checks are undertaken.