Property - Right to BuyPosted on: 07 February 2014 by 50connect editorial
Is the UK economic recovery being fuelled by a property bubble or is there substance to predictions of more stable growth.
Are we in a property “bubble”? – Or “boom”? Or just a “recovery” or a “correction”? Take your pick. The Bank of England has announced a leap in mortgage approvals of 20% in 2013, an increase of 122,315 on the previous year. Much of the increase is down to government schemes allowing first-time buyers to return in numbers to the property marketplace.
The Bank of England announced that total lending – including mortgages and consumer debt (credit cards and overdrafts) to individuals has reached record levels. At the end of December, that total was £1,435 trillion!
Ask anyone trying to secure a mortgage these days, even with a hefty deposit, if we are careering to the carefree days of pre-2008 when the bubble burst, and they will tell you that the process has never been tougher. Credit scores, income levels and future repayment plans are all rigorously tested.
It’s about to become even tougher with the implementation of the Mortgage Market Review (MMR) on April 26th by the new money policeman, The Financial Conduct Authority (FCA), successor to the Financial Services Authority (FSA).
The self-employed – an increasing number in our service driven society – are going to struggle. The changes will outlaw self-certified products, popularly known as “liar’s loans”. According to Office for National Statistics, 92,000 were added to the self-employed list in the three months up until the end of November – compared to 30,000 in the previous three months.
Even those employed will find it harder. Simple multiples of income will be replaced by the ability to pay as lenders delve even more intrusively into the customers’ income and outgoings.
Despite these obstacles, the British are still in love with owning their own home – or at least the thought of it, although it is clear that expert advice from a broker is becoming almost essential.
Part of property’s attraction as an investment and asset is its physicality. The house becomes a home, an integral part of your life and your family’s with all the memories that brings, especially as the high cost of moving means we are staying much longer in our first home. Few feel the same way about shares, ISAS and pensions!
It’s hard to argue against property as an investment, especially when it is also a home. The nonsense of 125% loans against value just before the crash was not down to purchasers, but the lenders and the authorities that should have stopped it. You can’t blame gamblers from jumping on the bandwagon when there’s a free ride.
Those who bought and borrowed sensibly had reaped a good return during the recession, especially with the traditionally low interest rates.
Property has inspired many sayings, beyond “Location, location, location”. One is “You can’t pay too much, just buy too soon,” while Warren Buffet’s view is “It’s far better to buy a wonderful property at a fair price than a fair property at a wonderful price.”
Many feel it’s taken the financial authorities far too long to come up with a set of rules that should have been in place long before Northern Rock’s collapse in 2007. Nearly all the problems addressed in the MMR disappeared after the banking collapse the following year when common sense began to emerge from the debris of irresponsible lending.
The MMR has focused on the negative and downside of the property collapse – self-certified loans, interest-only loans, bad credit records and lack of affordability – and this pessimistic view is threatening to cause another crisis with borrowers who have never had a problem obtaining and paying their mortgage.
If the lender is going to investigate every item of expenditure, including life and medical insurance and pension, building society and ISA savings – then they should also consider them and their potential returns on the asset side, not forgetting their potential to repay the debt, alongside the option of selling the property and downsizing.
Another factor that seems to have taken a backseat is the LTV (loan to value). If you are borrowing 60% or less, why should you be required to go through quite the same exacting financial scrutiny as those borrowing 95%.
As for “interest-only” mortgages, especially on your main residence, these are now to be found alongside the black rhino, the snow leopard and the giant panda on the endangered species list.
This MMR will mean more work for mortgage brokers. Your chances of mortgage success could depend on choosing an adviser with a proven track record as well as one who is able to deliver the type of mortgage that fits and suits your requirements.
New lenders are appearing all the time, and there will soon be new banks to challenge the six big lenders, who currently issue nearly eight out of ten mortgages. The arrival of new lenders will increase competition – one of the ways for them to establish a market share is to offer better deals and, probably more importantly, more flexibility.
The established lenders will worry that the newcomers will fuel the current property “boom”. One factor in the new arrivals’ favour is that they cannot be blamed – and fined – for the financial miss selling and misbehaviour of recent times.
But is this a “boom” or a recovery? The BBC’s respected business editor, Robert Peston, believes the current increases in lending have to be put in context.
“December’s £12.4billion of mortgage approvals compares with a peak of £17.9bn in November 2006,” said Peston.
As for the number of mortgage approvals, they remain massively less than what was typical in the 15 years before the crash. From 1993-2003, monthly mortgage approvals were in the range of 80,000-125,000 a month. In the 25 months before the market died, average monthly approvals were 116.000 – 62% greater than in December last year.
“According the HMRC, there were 108,000 house purchases in December, almost 40,000 more than the number of mortgage approvals. Which means that the risk of future house-price falls may rest more with people than with banks than in previous cycles. Which, many would say, is probably how it should be.”
Peston‘s view is backed up by the Council of Mortgage Lenders, who confirmed the total lent in 2013 was £177bn – less than half the £363bn in 2007.
Getting on the property ladder has always been tough. Traditionally banks did not lend on domestic property. That all change in the 1980s with the deregulation of the financial markets and the 1986 “Big Bang” which allowed British banks access to new markets, while building societies were owned by its customers, not shareholders.
Getting a mortgage should never be easy. The few years when it was simply a case of “how much do you want?” brought the financial world to its knees. The financial institutions are still paying enormous fines and we are all still suffering the consequences.
Buying a house, especially after the last few years, will give young citizens reassurance and confidence in the future. The FCA should be doing all it can to encourage and ensure that’s possible – and spend most of its resources and investigations on keeping an eagle eye on the financial institutions that have a proven track record of ripping us off.
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