Mixed messages on mortgagesPosted on: 09 May 2014 by 50connect editorial
Are your grandchildren being priced out of owning their own home? What are the option for 'Generation Rent' and how can they be helped.
One day a rooster – the next a feather duster! Is the glass half full or half empty for those living in Cornwall, or those jumping on the property ladder? Is it “boom-or-bust” time?
At the end of April, Her Majesty’s Government announced that Cornish people were to be recognised as a national minority group for the first time. That means they are now classified under the European Framework Convention for the Protection of National Minorities in the same way as the United Kingdom’s other Celtic people – the Scots, the Welsh and the Irish.
Those celebrations were dampened when less than a fortnight later, figures from the European Union declared that people living in Cornwall were worse of than those living in Poland, Lithuania and Hungary!
The study by Eurostat, which compiles economic data across the EU, used a wealth measure, known as “purchasing power standards”. By taking prices into account, as well as economic activity, it aims to give a more realistic idea of how far earnings will go.
So how do these two bits of news leave those in Cornwall feeling about themselves? Still proud to be Cornish – not much doubt about that – with very little inclination (or none) to swap their Cornish lifestyle with those from Eastern Europe!
Property bubble time bomb
It is the same with houses. You are either sitting on the greatest investment of your life, or on a ticking time-bomb that is getting louder and louder by the day.
That will not bother the Ukrainian or Russian recent buyer of the UK’s most expensive flat – the £140million penthouse in the One Hyde Park complex in London. The spending is not over; an estimated £20m will be needed to have it furnished to super-rich standard.
Few were surprised when research by the think-tank, Civitas, revealed that 85% of London homes were bought by foreign investors in 2012.
Every day the media reports on double-digit house-price increases, not just in London, but at property hotspots all over the country. In those areas, some owners are earning more (on paper) from their homes than from their work. If your property is your main residence, that gain is tax-fee.
Yet the deputy governor of the Bank of England, Sir Jon Cunliffe, believes these rising house prices are the biggest threat to the stability of the UK’s financial system.
As Cunliffe’s responsibility at the BoE is “financial stability”, his words, regarding the “blinking warning lights” he believes are a dangerous risk to Britain’s banks, must be studied carefully.
“The growing momentum in the [housing] market is now in my view the brightest light on the dashboard. It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year.”
Is the Treasury doing enough?
The Treasury has set up the financial policy committee (FPC) to monitor risks to prevent any repeat of the financial crisis of 2008. The banks will be stress-tested on the basis of a 35% drop in current property value and an interest rate of 4% (eight times the current BoE lending rate of 0.5%)
At the start of October 2008, that official rate was 5%, then it dropped to 4.5% (8 Oct), 3% (6 Nov), 2% (4 Dec), 1.5% (8 Jan 2009), 1% (5 Feb) and finally to 0.5% (5 March) where it has remained ever since.
It is hoped that the recent introduction of “affordability” as the main criteria for mortgage lending as a result of the Mortgage Market Review recommendations will take some of the heat out of the market – yet the Organisation for Economic Co-operation and Development (OECD) blames the government’s “Help-to-Buy” scheme for helping fuel the property fire.
Now, it is predicted that the “Help-to-Buy” scheme could net the Treasury a £4.5 billion windfall. As buyers are handed up to 20% of a home’s value, the government will take 20% of any increase when it is sold with the loan still active.
The “Help-to-Buy” Scheme is not responsible for London’s property explosion, as even with the government’s help, prices are outside the average worker’s “affordability” scope. Many of London’s buyers pay “cash” and are “foreign”.
The creation of Generation Rent
Small wonder heads are spinning when prospective buyers meet with an Independent Financial Adviser (IFA) to assist and smooth the path to getting a mortgage.
That help is invaluable, especially in choosing the product that suits the customer best, what they are going to be most comfortable with in the future and what reflects their situation.
But your IFA cannot make the decision for you – whether to buy or rent. Normally, the customer will have decided that a long time ago. But the pitfalls – as well as the benefits – of home ownership must be examined openly and carefully before making an informed judgement.
The dream of owning your own home remains a strong motivation for many – as has been the fight for a more independent Cornwall.
In the 2001 census, over 37,000 people decided to have a Cornish identity, rather than be English or British. Those 37,000-plus crossed out the “British” box and then wrote Cornish in the “others” box.
Cornwall’s recent recognition as a national minority group came after 15 years of campaigning. It now means that when Government policy is considered, ministers must think how it will affect people in Cornwall.
That “minority” recognition has made all their efforts worthwhile. Many feel the same way regarding their property purchase. There are many hoops to jump through, some seemingly meaningless, and difficulties to overcome, but nothing will distract them from the ultimate prize – a home!
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