Lending Zone: Striving for balance

With opinion and statistics divided on the health of the housing market, what the mortgage industry wants is stability 


Can you remember just over two years ago, back to August 2012, with the excitement of the London Olympics barely over, when the shock of a sudden, unexpected house price increases caught many of us by surprise? In the months following this there were a couple of downwards wobbles, but the march has been almost unremittingly upwards ever since.

We now seem to have reached another turning point in the ongoing saga of the housing market but the number of conflicting elements creating inflationary and deflationary pressures upon it makes it difficult to judge what further twists and turns await us.

A few months into the changes introduced by MMR it would seem that it has not had as catastrophic an effect on mortgage approvals that some had predicted. The Council of Mortgage Lenders reported mortgage approvals at 77,000 in July, which is the highest figure of the year to date.

With a sense of déjà vu, the Nationwide monthly house price figures showed us another little surprise in July 2014 when house price growth slowed to 0.2 per cent, the lowest monthly rate since April 2013. You could sense the metaphorical storm-shutters being pulled down, as some thought the boom-times were over. However, a return to growth of 0.8 per cent in August proved us otherwise.

However, those who were unnerved by July’s figures are not unjustified in their concerns. The CML’s statistics also show that the increases are driven by first-time buyers and home-movers. Remortgaging rates have continued to be significantly lower. A reduction in the number of people purchasing new homes could lead to this vulnerability being exposed. With an election coming up, and the future of government schemes such as Help to Buy therefore uncertain, such an event is by no means impossible.

On top of this, the Royal Institution of Chartered Surveyors has reached an entirely different conclusion to the CML. It agrees that house prices continue to increase, but reports buyer enquiries decreasing for a second consecutive month, which is perhaps more indicative of future market behaviour. Perhaps the MMR did have the negative effect that some predicted, with an increase in the time required for interviews and approvals being reported by many.

Other organisations such as Shelter have been saying for some time that they believe the entire system is broken, that the noise we hear is the grinding of the market’s gears as they shudder to a halt. Although not a systemic problem, common sense indicates that continuous house price increases, above the rate of inflation and much higher than the rate of average wage increases, will eventually become unsupportable. The increased availability of higher LTV loans of up to 95 per cent has pushed this judgement day further into the future. Indeed, the proportion of mortgages at 90 per cent LTV or greater is at its highest level for six years, current data suggests. When the Bank of England’s LTI cap comes into play, when  lenders must ensure advances of more than 4.5 times earnings are a maximum of 15 per cent of new lending, we may see house prices begin to erode.

The National Housing Federation’s report Broken Market, Broken Dreams advises that the average deposit needed for a home is now ten times greater than it was in the eighties. It also advises that a first-time buyer, on average, needs to borrow 3.4 times their income, as opposed to a ratio of 1.7 in the seventies. Logic suggests that at some point a breaking point must be reached.

Five years of continuously rock-bottom interest rates have also played their part, although we should perhaps not over-emphasise this point, when as we know, prices only began to regularly increase again in 2012. Now we are reliant on them though, is it possible that the knowledge of an approaching increase in the Bank of England base rate has begun to reduce market activity? If this is the case, what will happen when the increase is actually implemented, which could occur in the early part of next year? Will this be the iceberg that sinks the ship?

One of the key upwards pressures has been the continuation of insufficient activity in the house building sector. Government reports indicate that in the 2012-2013 there was an 8 per cent net decrease in the amount of additional dwellings produced, at a time where an increase was desperately needed.

By the time you read this, the issue of Scottish Independence will also have been resolved. This article will not even attempt to explain what the ramifications of that decision will be on the Scottish market.

It is clear that whether you believe large house price increases will continue or if you think a plunge into the deep end cannot be too far away, what the mortgage industry wants from the market is house prices that support a sustainable environment for us to work within. Too hot and too cold are equally bad from our point of view. Concerted activity from ministers, regulatory bodies, lenders and the public also will be needed if we are to achieve the balance we hope to achieve.