Banks must avoid lending temptation

Banks are queuing up to sell off their mortgage books and it is to be hoped that the financial cushion this provides will not tempt them into reckless lending, says Richard Coulson

As Andrew Hilton highlighted in London’s Evening Standard recently, banks are queuing up to sell off their mortgage books. This is not a new practice but it seems as though it’s being done rather often at the moment.

All the big names including Lloyds TSB and NatWest have been active in this area over the past 12 months, with Northern Rock looking to sell 3.25bn worth of loans. Abbey is also hoping to divest itself of 3.5bn.

The experts reassure us that this type of trading is nothing to worry about but looking at the figures, it’s hard for brokers and their clients not to worry.

During the first nine months of this year, more than 100bn of mortgage securities were sold – an increase of 70% on the previous year, according to the European Securitisation Forum. Banks say this type of trading is necessary so that they can offer new deals to new customers.

That is true. But what banks don’t reveal is that by selling their mortgage books they are protecting themselves against a housing market crash. The Evening Standard asks whether this will make them less prudent in their lending in 2007, particularly given recent innovations that include less than prudent loans of 125% LTV and 5 x salary.

With the housing market showing little sign of a slowdown and the threat of a further base rate rise being signalled by the Bank of England’s Monetary Policy Committee, next year will be tough for first-time buyers in particular.

Lenders will be competing to grab this significant slice of business. I only hope that normally risk-averse lenders aren’t tempted into recklessness, knowing they can be cushioned against the consequences of their lending criteria by selling off their books in the future.

Challenges and opportunities face the estate agency sector next year

Estate agents doubtless will be looking forward to next year’s launch of Home Information Packs, by far the most significant development in their industry for years.

A recent Sunday Times carried a great story about the abuse estate agents receive as a result of their clients accepting higher offers from other buyers, or having to tell clients that buyers have reduced their offers.

“It’s why we’re called negotiators,” said the columnist. How long before the signs we see in hospitals and on trains warning the public against physically and verbally abusing staff make their way into estate agents’ offices?

This year, more than any other, estate agents have seen an incredible shift in their focus. What were once rare events are now everyday occurrences as agents – especially in London – manage multiple offers on desirable residences, a rapid and sustainable price escalation and a buy-to-let investment boom.

Of course, the Scottish property market – which so many south of the border see as a superb role model – is founded on multiple offers. Many agents in England, Wales and Northern Ireland now recommend that sellers follow the Scottish format with open house viewings and sealed bids. But I’m not convinced that the rest of the population, let alone the agents, are ready to embrace this model. For many, the view is that while buyers and sellers barter there is hope on both sides. The other route feels more clinical with many losers and only one winner.

US estate agents have already faced up to the problem by introducing escalation clauses to limit the amount over value that buyers can offer. I doubt this would work here because borrowers are already time-limited by the exchange of contracts. They would be further limited by the lender’s valuation of the property.

But huge City bonuses mean we can expect a small but influential group of property investors whose buying habits are certain to push the market price up over the next six months.

It often appears as though alter egos take over when people are buying or selling property. Greed and exploitation are rife, usually resulting in rapid, sustainable but not necessarily deserved price escalations. If three houses in a street sell for 249,000, the neighbouring ones that come to market will cost an extra 20%. In certain areas buyers will continue to buy at the higher rate. Without house price ceilings to curb expectations, properties are worth what people pay for them.

There has been an explosion of interest in property as an investment. Professional property investment clubs are springing up across the country, buying up, managing and building property portfolios both at home and abroad. Buy-to-let is close to usurping first-time buyers as a borrowing demographic and off-plan investors are snapping up new homes with a view to selling them at a profit once they are completed. Property as an asset class now accounts for 60% of the UK’s total assets and is worth 3.575trillion, states PricewaterhouseCoopers.

Estate agents are clear about what has fuelled and sustained the market in 2006 – attractive interest rates. And interest rates rises are the only thing likely to stop the fun.

Looking ahead then, estate agents believe:

• Buyers will look for a bathroom for each bedroom and not much in the way of garden.

• The market’s top end will take care of itself and buy-to-let investment will continue to grow, exacerbating of first-time buyers’ problems with getting on the housing ladder.

• Protection levels will continue to fall as buyers spend to the limit to afford the houses of their dreams.

• Demand will outstrip supply which will result in accelerated housing stock improvements.

• Many home owners will seek to improve their present homes instead of move – some 65,000 such applications are on the cards.

• Houses of multiple occupation licensing, where enforced, will create further demand for rental property.

• HIPs will have a profound effect on the estate agency sector, depending on how effectively practitioners prepare for the launch. It will either see smaller independent practitioners hanging up their boots in the face of competition or open up new revenue opportunities such as an inclusive fee covering property marketing, mortgage arrangement, conveyancing and energy assessment. ratings.