We’re now waking up to the fact that we are never going back to how things were.
In March David Miles, an external member of the Bank of England’s Monetary Policy Committee, published a fascinating report entitled Demographics, House Prices and Mortgage Design.
It is replete with equations and mathematical formulae that went straight over my head, but its basic thrust is this – the way the owner-occupier market is funded is dramatically because the market itself has changed.
The premise of Miles’ argument is that lending criteria will now always be strict, as lenders have become risk-averse with a capital R.
But at the same time house prices, due to the growing population, will continue to rise.
This creates an impossible situation where people have to find bigger and bigger deposits but at the same time meet consistently strict lending criteria.
The only conclusion, in the absence of an alternative lending solution, is that the market will grind to a standstill.
Miles says the owner-occupier lending market will almost certainly need to evolve away from purely debt-financed models towards equity loans and hybrid debt-equity contracts, which reduce risks for lenders and rates for borrowers.
The owner-occupier lending market will have to move towards equity loans and debt-equity contracts
This is all interesting stuff, but it’s ultimately a problem for mainstream lenders to address.
What this report drives home is that so profound is the reassessment of risk within the wholesale borrowing markets that sectors such as bridging have now become a structural element of property finance, rather than a peripheral one.
Bridging is a permanent and necessary fixture, rather than a passing fad. So what of growth in the sector?
In the 2010/11 tax year members of the National Association of Commercial Finance Brokers arranged £2.84bn in bridging and development finance loans – more than double the £1.36bn arranged in the previous tax year. That’s one hell of a figure.
This reported growth trajectory is reflected in our own lending volumes, which have increased sharply over the past two to three years.
Compared with 2010, for example, the number of completions we saw in 2011 was 48% higher by number of loans and 58% higher by value.
The first two months of 2012 have seen this trend continue, with more investors either taking out finance for the first time or expanding their portfolios.
Compared with the first two months of 2011, completions were up 41% by number of loans and 40% by value of loans.
These figures underline how much things have improved in the past.
But for the bridging sector, thanks to the structural reassessment of risk in the market and economy, the real growth is still to come.