Landlords Wanted
This year is likely to be a busy one for lenders. Paul Smee, director general of the Council of Mortgage Lenders, gives his thoughts on the CML forecasts, the housing market and the possibility of Bank of England intervention.
After a long and hectic year, we hope that our recently published market forecasts delivered a bit of Christmas cheer. After a recovery that blossomed suddenly in the spring and then strengthened rapidly, prospects for the next two years are encouraging. We are now anticipating lending to grow by almost 20 per cent last year, with an expected increase of a further 15 per cent in 2014.
So, do numbers like that mean that the market is in imminent danger of over-heating? We don’t think so. At this stage, recovery is robust, but from a low base. Mortgage lending is expected to total £195 billion this year, and the record annual amount of £363 billion seems a long way off. Transactions are expected to increase, but will still total around 1.1 million in 2014 and 2015, considerably lower than the long-term average of about 1.5 million a year. And although recovery looks strong now, affordability pressures may mean that the market slows of its own accord in 2015 and beyond.
House prices
With housing supply still constrained, the increase in activity has fuelled price growth. Outside London, however, the picture is quite different, and prices are more muted. Despite some lurid headlines, we are not in house price boom territory yet. And, in our view, there are several reasons why we are unlikely to get there.
First, affordability constraints will kick in, not just because of rising house prices, but because real household incomes have now fallen for several years, and are continuing to do so.
Second, many lenders are already applying the new mortgage rules that formally come into effect next April, and their effect will be to bear down on lending.
Third, borrowing rates are now near a historical low point, and may begin to rise, albeit gently, from here.
Finally, the Bank of England has given a clear signal that it will intervene to dampen down any signs of an overheating housing market, if it sees any need to do so.
High LTVs
There are, of course, other forces that will encourage market activity. We have factored into our forecasts the full launch of the mortgage guarantee part of the Help to Buy scheme, which comes into effect from January. At this stage, however, there is still uncertainty about the extent to which lenders and borrowers will participate.
We expect to see a further increase in the availability of higher loan-to-value mortgages, but European state aid rules mean lenders will have to pay a commercial fee for the guarantee, and that will affect pricing.
Meanwhile, an improvement in funding conditions this year has already contributed to more competition for 90 per cent mortgages. So, much of the initial interest in the impact of Help to Buy may, therefore, focus on what happens in the higher range, between 90 per cent and 95 per cent.
Some commentators are predicting that Help to Buy will account for several hundred thousand transactions over three years, but we are not so sure. There is considerable uncertainty about the overall financial position of households, and our own research shows that the scheme is not necessarily a panacea for all borrowers. We can clearly see that affordability rules are leading to the rejection of a significant minority of applicants.
Bank of England
Meanwhile, we have standing on the side lines – but watching very closely – the Bank of England, which may yet play a significant role in determining what happens with Help to Buy. In its Financial Stability Report last month, the Bank gave a clear reminder to the markets that it has an extensive range of tools to curb activity in the housing market, if it sees the need. Included was its ability to recommend to the Treasury that it should reduce the stimulus provided by Help to Buy, if necessary. The chancellor has already said that it is highly unlikely he would not heed the Bank’s recommendation.
We were encouraged that the Bank is emphasising that, if it sees a need to intervene, it would seek to deliver a “proportionate and graduated response.” What happens in practice will depend largely on whether the Bank selects the right tool, and the right timing. It can also exert a great deal of influence in how it chooses to communicate its views to the market.
The Bank’s potential to intervene on Help to Buy provides a safeguard. If there is a need to use it, and it is used in the right way, it is a measure that we support, given our strongly-held view that we do not want the mortgage guarantee scheme to become a permanent feature.
There is just time to wish everyone a belated happy and peaceful Christmas. All too soon, we will be dealing with the challenges of 2014, including new mortgage rules, the full impact of Help to Buy and a looming general election. It certainly won’t be dull!
Source: mortgage finance gazette.