At 9.59pm on Thursday 7 May, when the likelihood of a Labour-led coalition government was very much on the table, the market faced the triple threat of a mansion tax, economic uncertainty and rising mortgage rates.
But one minute later when the exit polls indicated that the Conservatives would be the leading party, the industry breathed a collective sigh of relief – at least, judging by the reactions of many of the key players to whom Mortgage Strategy spoke.
When mortgage professionals are forecasting the likely impact of the Conservative victory, stability appears to be the key message. While many are generally positive about the result – which some say could stimulate greater demand – many challenges still lie ahead.
A key issue is the need to address supply, given the lack of homes being built in the face of already high demand, and many experts believe that Tory policies to address the housing shortage will either not work or have negative side-effects.
Business as usual
There is certainly a feeling of business as usual – such as the fact that the much-heralded Help to Buy Isas will go ahead as planned this autumn – given the limited changes involved in moving from a Conservative-led coalition to a Conservative majority.
“What is feared most by investors is uncertainty,” says John Charcol senior technical manager Ray Boulger.
“The fact that the election did not result in the messy conclusion indicated by the polls is important for markets, and more so because of the expected uncertainty prior to the election.
“The fact that the election was won by a party that the markets have confidence will run the economy prudently is also important because it takes away the worry of a rise in gilt yields, and hence mortgage rates, as a result of political uncertainty, although of course rates may rise for other reasons.”
Indeed, within minutes of the exit poll, markets had reacted positively. At 9.59pm, £1 bought $1.524, but by 10.05pm that had jumped to $1.541, showing increased confidence in the UK economy. In fact, the pound has continued to strengthen since.
London & Country associated director of communications David Hollingworth says: “The big surprise of the night was that the country didn’t face a period of uncertainty as it waited to see the make-up of the new government.
“The expectation was that we’d have to see what the new administration would look like before we could start to speculate on which pledge would make it or otherwise. The fact that the Conservatives managed a majority has perhaps given the market a feeling of less uncertainty.”
Hollingworth predicts that the buy-to-let market will grow, given that it could have been dented by a different government that might have imposed tighter regulations on landlords.
Nationwide for Intermediaries head of corporate accounts Gary Salter says: “Following the election of a single party with a majority, the immediate outcome is likely to be one of stability. Without a coalition, we won’t have one party cancelling out the other’s policies and we will have some clarity around what measures we can expect.”
Boulger’s point that a Tory government means less chance of rising mortgage rates provides food for thought, especially given the ultra-low rates at present. Any threat to the current climate would naturally be viewed with concern. HSBC’s recent five-year fix at 1.99 per cent with a £1,499 fee captured attention as the first-ever sub-2 per cent five-year fix and was seen by many as a symbol of how far rates had fallen.
It is also claimed that the end of uncertainty could give the market a boost after its slowdown during the past few months.
Gross lending reached an estimated £16bn in April, down 4 per cent year-on-year. This followed a year-on-year rise in March, the only annual increase this year, emphasising the slow start to 2015.
Many commentators have attributed the slowdown at the start of the year partly to public nervousness about the outcome of the general election.
“As the Conservatives have won a majority, I expect to see an increase in activity,” says Boulger.
This applies not only to mortgage lending but to homebuying in general, with pent-up demand also likely among those looking to buy with cash.
Land Registry figures show that from October 2014 to January 2015, total sales transactions averaged 71,090 a month. This is a decrease from the same period a year earlier, when they averaged 76,056 per month.
Myhomemove chief executive Doug Crawford says: “The decisiveness of the result should provide a sure footing of stability and predictability that will deliver more confidence to the housing market.
“This should help to push up the number of house sales from the decline that has been seen because of the uncertainty of the election.”
This opinion has prevailed in the market for several months. In January, SPF Private Clients chief executive Mark Harris said: “With the housing market, very little is likely to happen in 2015 until the general election is over.
“However, once the outcome is known, we expect it to be buzzing as pent-up demand from the start of the year is released.”
No mansion tax
A key factor in releasing that demand could be that the Conservative victory has placed the proposed mansion tax on the scrapheap. The Labour-supported idea would have seen an annual levy of 1 per cent on the additional value of homes above £2m, although sources suggest Labour is looking to abandon support for the proposal.
Boulger says: “The threat of a mansion tax has been consigned to the dustbin of bad ideas for at least five years and, hopefully, given a decent burial.
“The LibDems were already moving towards the much more sensible policy of adding extra council tax bands rather than inventing a new tax.”
Hollingworth adds: “Given that the Conservatives were the party that didn’t flirt with the idea of a tax, buyers at the top end are likely to feel more confident in making their purchase, while vendors will no doubt be breathing a sigh of relief.”
Naturally the tax would have put off many buyers of expensive properties, with those in London and the South-east particularly hit.
By the end of 2014, there were just over 108,000 homes in the UK valued at more than £2m, according to property search website Zoopla. Of these, 85,461 were in London (88 per cent of the total) and a further 14,261 were in the South-east, while in Wales just 87 homes would have been liable to the tax. One London borough, Kensington and Chelsea, would have contributed about 35 per cent of the total tax paid, Zoopla added.
Salter says: “With the removal of the prospect of a mansion tax that would mainly hit London, it is almost certain that the market there will turn positive.”
If demand rises as predicted following the election result, this will place further strain on what many consider to be an insufficient supply of available homes, which in turn is playing its part in the continued rise in house prices. While that may comfort homeowners with little intention of moving, first-time buyers and second steppers will find it much harder to purchase a property.
Government statistics show that construction began on 160,250 homes in the 2013/14 financial year, compared with the 250,000 new homes that most experts agree are required to satisfy demand.
The number has risen from 138,510 in 2010/11 but 2014 witnessed a decline in England, with the construction of 63,050 homes beginning in the second half of the year compared with 73,070 in the first half.
Figures for recent years are also well down on those of a decade ago. Between 2004 and 2008, work began on 219,000 to 234,000 houses per year.
The Conservatives insist that their policies during five years in the coalition government have reversed the trend of reduced housebuilding. While that is technically true, the figures were far higher during the middle part of the previous decade when Labour was in power – which, crucially, was before the full effects of the credit crunch took hold.
The Conservative manifesto states that the Government will build more affordable homes, including 200,000 starter homes over the next parliament, which will be sold at a 20 per cent discount and will be built exclusively for first-time buyers under the age of 40.
In addition, it promises to deliver 275,000 extra affordable homes by 2020.
It also wants to encourage more people to build their own home, with the aim of doubling the number of custom- and self-built homes by 2020.
Major developer Barratt said in a trading update earlier this month: “With the election now behind us, we anticipate a supportive environment and further improvements to the planning system. The new government has identified increasing housing as an important priority area and we are committed to playing our part.”
The company predicts a 9 per cent rise in its completions this year.
Scepticism over targets
However, many doubt whether the Government has a realistic chance of meeting its targets.
Boulger says: “The Government’s housing policy will be judged in five years on how successful its various schemes have been in promoting the building of more new homes.
“I confidently predict that it will miss its target and so the question is: by how much? Many of the schemes are very sensible on an individual basis but the major developers all say that the biggest hold-ups are caused by the planning system.”
Salter agrees: “I can’t see how we can boost the building of homes to the levels that have often been promised. For example, the starter homes scheme is fine in theory but the practicalities are that, since the days of Harold Macmillan, we have built no more than 270,000 homes a year, and most years very many fewer than that.
“The reality is that we would have to double housebuilding from today’s level and, while a fine aspiration, it is unlikely to be achieved.”
On the issue of planning, some experts believe that the Government will have to make some difficult decisions if it is to hit its targets.
Mortgage Advice Bureau head of lending Brian Murphy says: “The Government will need to take bold steps to ensure that local authorities have 10-year plans for new housing.
“Realistically, it may have to make harsh decisions on issues surrounding building on greenbelt land. A lot of these areas are not put aside for conservation and should be considered for residential use.”
The Government has pledged to support first-time buyers in particular. The Conservative manifesto states: “We are setting an ambition to double the number of first-time buyers compared to the past five years – helping one million more people to own their own home.”
Its plans include extending the Help to Buy mortgage guarantee scheme – which encourages lenders to offer more 95 per cent loan-to-value mortgages – until the start of 2017.
It also pledges that the Help to Buy equity loan scheme, which was due to end next year, will last until at least 2020. This is where the Government provides a loan of up to 20 per cent of the purchase price of a new-build home worth up to £600,000, if the buyer has at least a 5 per cent deposit.
As announced in this year’s Budget, a Help to Buy Isa will be introduced in the autumn. This will see the Government add a 25 per cent top-up to first-time buyers’ savings, up to a maximum of £3,000. The bonus will be paid on a maximum deposit of £200 per month, on top of the £1,000 initial deposit allowed.
The top-up will be available only on homes worth up to £450,000 in London or £250,000 elsewhere in the UK.
However, some experts doubt whether these scheme extensions will have a sufficient impact.
Boulger says: “The Conservative manifesto did not offer any solution for the reluctance of lenders to offer 95 per cent LTV mortgages, apart from continuing with the current Help to Buy schemes.
“This reluctance is primarily because of regulators’ perception of risk and at some stage the Government will need an exit strategy for its participation in the mortgage business. Fortunately the private sector is working on this.”
Others are thankful that the first-time buyer problem is being addressed by the new Government but agree that more may need to be done.
Murphy says: “Although there are some who feel that policymakers have placed too much focus on first-time buyers at the expense of downsizers and second-time buyers, the Government needs to continue to support this group and ensure that they can access the market.
“Recent initiatives such as Help to Buy have been hugely successful. The extension of the Help to Buy equity loan scheme should provide some assurance to developers but, as welcome as this is, we need to be thinking beyond a five-year timeframe.
“After Help to Buy, unless lenders are prepared to continue to support high-LTV lending through the provision of the private insurance market, we may need the Government to continue to provide a guarantee for high-LTV lending.”
Another Conservative plan is to extend the Right to Buy scheme to tenants in housing associations. At present, council tenants can buy their own home at a discount but 1.3 million housing association tenants cannot.
The new policy has been criticised for prioritising social-sector over private-sector renters and for potentially depleting the social housing stock, meaning that only the least desirable homes remain available.
Certain aspects of any government’s policy will always come under scrutiny and attack. But the stability provided by the election of a Conservative government appears to have left the mortgage market feeling anything but blue.
Conservative manifesto promises
- Help to keep mortgage rates lower by continuing to work through its long-term economic plan
- Build more homes that people can afford, including 200,000 new starter homes exclusively for first-time buyers aged under 40
- Double the number of first-time buyers and help more people to own their home
- Extend the Help to Buy equity loan scheme to 2020 to help more people climb onto and up the housing ladder, and introduce a Help to Buy Isa to support people saving for a deposit
- Give more people the chance to own their home by extending Right to Buy to tenants of housing associations, and create a Brownfield Fund to unlock homes on brownfield land
- Ensure that local people have more control over planning and protect the greenbelt
Labour party manifesto promises – what could have been
- Introduce annual tax on properties worth over £2m
- Make sure that at least 200,000 homes a year are built by 2020 – almost double the current level
- Give local authorities the power to give first call to first-time buyers on new homes in areas of housing growth
- Unlock a Future Homes Fund by requiring that the billions of pounds saved in Help to Buy Isas are invested in increasing housing supply
- Build more affordable homes by prioritising capital investment for housing and reforming the council house financing system
- Legislate to make three-year tenancies the norm, with a ceiling on excessive rent rises. A ban on unfair letting agent fees will save renters more than £600
Comment: Bernard Clarke, CML spokesman
The Queen’s Speech will make the Government’s goals clearer but the details on delivery will only emerge over time.
So, since the general election and the appointment of the Government’s new ministerial team, we have been working hard to build on existing political relationships and establish some new ones.
We set out our views on housing needs before the election in our own manifesto and we think it still provides a useful template against which the Government’s policy aspirations can be assessed.
For young people, the main issue is the sheer cost of housing. So we would like to see the Government focus on increasing the supply of homes in all tenures, enabling more people to fulfil their aspiration to gain a housing foothold.
We also want the Government to recognise that, for many, shared equity or shared ownership could be a permanent tenure, rather than a stepping stone to full ownership. Measures to make it easier to move within these tenures would therefore be very welcome.
Older people face the challenge of balancing competing needs for income, releasing equity, care and housing. So we would like to see measures to address the regulatory stumbling blocks affecting lending into retirement and to make it easier to move between the mainstream mortgage market, lifetime mortgages and downsizing.
The Government should also ensure that new housing meets the needs and aspirations of an ageing population. Creating opportunities to downsize would help this and promote more efficient use of the housing stock.
For those in between, the challenges can still include achieving homeownership and financial security, as well as moving up the housing ladder. This group needs regulation that does not create unnecessary barriers for credit-worthy borrowers, and a more effective safety net to protect against the risk of change in household circumstances.
Clearly, there are big challenges ahead for ministers, who are operating within tight fiscal constraints. But the CML, as ever, is ready to work with the new Government to help shape policy on housing and mortgages that meets complex needs and can be delivered successfully.