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Light at the end of the tunnel

Despite a discouraging start to the year there are faint signs of renewed buyer interest in the housing market, says David Aylmer, business development and marketing director at Trigold

It would be a brave man who suggested that the current situation is not concerning for everyone involved in the housing market.

The beginning of the crisis seems such a long time ago now, and it’s hard to believe there was once a time when the phrase credit crunch had to be explained.

Can you remember September 2007 when the BBC revealed that emergency funding was to be given to Northern Rock?

Whatever your position on the power of the press, the image of Northern Rock with the word crisis in big letters next to it was the main reason that the following day depositors withdrew £1bn in what we now recognise as the biggest run on a UK bank for a century.

Subsequent attempts to find a buyer were fruitless and so in February 2008, taxpayers took ownership of the bank.

More recently the Bank of England has announced its sixth base rate cut in a row, resulting in a 315-year record low rate of 0.5%. What was the idea behind this? To ease the effects of the credit crunch and encourage banks to lend again.

Also, we have been required to add a new phrase to our vocabulary – quantitative easing. This is not an industrial laxative but an injection of some £75bn into the monetary system.

The usual strategy of banks boosting lending by cutting interest rates has not worked and with rates unlikely to go any lower – famous last words? – the government’s last resort is this injection of cash. Basically, the Bank will buy financial assets such as corporate bonds using a £75bn war chest.

The hope is that banks and insurance companies that are currently in a rut will be so uplifted that they will use the money to start again – i.e. launch new products.

Will this work? I have looked at the predictions of several economists the consensus seems to be – we hope so. I’d favour a more positive or compelling argument but I suppose it’s better than nothing.

Perhaps the willingness of banks to lend to businesses and individuals will be boosted with the money now flooding into their accounts. After all, it is there to be lent and if it is passed down the supply chain activity will be boosted across the economy.

Also, when bonds are bought by banks it leaves fewer in the economy so demand increases, making it cheaper for businesses to borrow.

In considering whether quantitative easing will work a question must be asked which does not yet have a definitive answer – has the strategy been implemented aggressively enough?

For banks, it’s a question of whether the money instils a sense that they are back on track and an awareness that it is there to be lent. But the risk is that they might just heave a sigh of relief that they finally have some reserves and lock these away for the next rainy day.

The flip side of the above scenario is that if too much money has been printed hyperinflation is a risk. If this happens, ensure you have a sturdy wheelbarrow available – you’ll need it to transport the cash required to buy a Sunday newspaper.

So what are the banks doing? Sadly, the answer seems to be losing money. Lloyds Banking Group is set to become a government-controlled bank with £260bn worth of toxic assets insured by taxpayers for a stake in the business.

Taxpayers currently own 43.5% of the beleaguered bank but this will rise to approximately 65% as Lloyds converts its existing £4bn of government preference shares into equity. There will be some benefit for shareholders who will be offered the chance to buy new shares at a small discount.

The £16bn fee the bank paid to join the government’s asset protection scheme could have been a major fly in the ointment but this is being covered by the Treasury, resulting in taxpayers’ stake reaching the 77%.

One thing’s for sure – better will be expected in future of those in charge of the group by government and taxpayers alike.

This reporting season Northern Rock was another bank to get poor marks, suffering a full-year pre-tax loss of £1.4bn and write-downs on retail customer loans of £894.4m. Sadly this was another in a list of poor results. The nationalised lender reported a loss of £585m in the first half of last year following a loss of £167.6m in 2007.

Gross mortgage lending at Northern Rock fell from £29.5bn in 2007 to just £2.9bn in 2008 and its residential mortgage balances fell from £90.8bn at the end of 2007 to just £667bn.

But it’s the arrears situation at Northern Rock that is causing most concern. Its percentage of accounts in arrears of three months or more leapt from 0.45 % to 2.92 % during the year compared with the Council of Mortgage Lenders’ stated av-erage of 1.88%.

But Northern Rock is set to return to the mortgage market, with £14bn earmarked to fund new lending in the next two years and more emphasis will be placed on attracting savers. This strategy found some success in 2008, with deposit balances rising £9.1bn to £19.6bn.

Newcastle Building Society suffered heavy fallout from the failure of Icelandic banks. Thanks to an exposure of £43m to these it reported a 2008 pre-tax loss of £35.7m. The severity of the impact of the Icelandic situation can be seen in the fact that in 2007 Newcastle posted a profit of £17.6m. The result also reflects the cost to the society of the Financial Services Compensation Scheme, which required a £6.8m contribution.

Newcastle is not the only mutual to have suffered as a result of contributions for the FSCS, with profits being slashed at both Skipton and Britannia.

The repercussions of the Icelandic situation also struck Chelsea, which suffered a loss before tax of £39.3m. Once again, exposure to Icelandic banks to the tune of £55m hit hard, especially when combined with an FSCS provision of £10.2m. Chelsea’s fall from a 2007 profit of £63m to this year’s loss shows the scale of impact of the credit crunch.

But let’s congratulate two societies that showed profits. The Yorkshire and Norwich and Peterborough announced 2008 pre-tax profits of £8.3m and £5.9m respectively. Both were hit with FSCS charges, with the Yorkshire paying £14.7m and N&P contributing £5.5m, but both still managed to post profits.

With most banks posting losses there was unlikely to be much good news for the mortgage market early this year, and this was the case, with just 23,400 mortgages being completed in January – not great when compared with 48,000 in December and poor compared with January 2008, when completions topped 48,000.

The CML reports that both home movers and first-time buyers were in short supply in January, with a fairly even spread of interest between the two groups. There were 5,700 fewer home move completions and 3,300 fewer first-time buyers. There’s no doubt that the reduction in product availability contributed to this trend.

For readers who have stuck with it this far without getting too depressed, I can reveal a chink of light for the market.

In the first two months of this year the Asset Management Group reported a significant rise in interest in sales of repossessed properties. It also revealed a 10% rise in the number of houses under offer. This is comparable to activity levels last seen in 2005. So not only is there renewed buyer interest but there’s also a rising commitment to purchasing. Good news.

Although these figures relate to activity concerning repossessed stock, first-time buyers as well as professional investors are showing interest. Sadly, this is a sector that looks set to grow.

This year the CML predicts some 75,000 repossessions which is certainly a cause for concern but at least there is buyer activity and stock is moving, which is fundamental to a recovering market.

Another reason for the increase in activity is that there’s not a huge amount of general housing stock coming onto the market so repossessed homes form a higher proportion of those available.

Growth may also be due in part to the fact that repossessed properties are often purchased by professionals for investment purposes and as buy-to-lets. With savings returning such low yields and a relatively strong rental market this is becoming an attractive alternative for investors.

Also, this should be of some comfort to the borrowers for whom these properties are being sold, although the prices they are achieving are short of initial valuations. At least the properties are being sold rather than left dormant to become dilapidated.

We still have a long way to go but let’s all hope that with renewed interest in house purchasing and a renewed appetite to lend from banks, quantitative easing becomes known as the strategy that LSfinally crushed the credit crunch.

A snapshot of the mortgage market at the start of the year

  • The typical first-time buyer deposit in January was 24%, the largest amount on record. But at the same time lower interest rates and income multiples made payments easier for those able to obtain credit.
  • First-time buyers typically borrowed 3 x income in January and the average loan was £97,000.
  • The typical first-time buyer spent 15.8% of their income on mortgage interest payments, the lowest proportion since July 2004. Meanwhile, the average home mover borrowed £117,300 and spent 11.9% of their income on interest payments, the lowest proportion since March 2004.
  • Remortgaging activity increased, with 44,000 remortgage loans worth £6bn being granted – up from 41,000 loans worth £5.6bn in December. Despite a modest month-on-month increase, demand for remortgaging is expected to remain weak in 2009 as the most attractive option for many borrowers will be to stay on reversion rates.
  • Gross lending in January declined to £11.7bn, the lowest monthly figure since April 2001.
  • Tracker mortgages increased in popularity, accounting for 38% of loans in January compared with 35% in December as the average tracker rate fell from 4.26% to 3.64% against a backdrop of lower rates. For the first time since March 2005 the majority of new lending was not on fixed rates – only 49% of new loans were fixed in the month.
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