Those who are close to the housing and mortgage market know that things have been a bit challenging over the last few months!
First with Liz and Kwasi, 16 consecutive rises in bank base rate and now, stalling house sales and falling prices (the length and extent of which is still a matter of discussion).
Falling house prices, when interest rate and Bank base rate reach these levels, was kind of an inevitability.
Back in 2008, at the peak of the then market (when interest rates were around 5.0%), the average earnings to house price multiplier stood at 7.81X – by 2022, it had reached 8.84X (UK Finance).
Mortgage affordability in the last 18 months has dramatically reduced where lenders are now assessing from standard variable rates (SVRs) at around 8.0% from around half of that 18 months ago. This is perhaps rather inevitably now reflected in offering prices.
If you are a buyer now, especially a cash buyer or a first-time buyer (FTBs) with a reasonable deposit, you are in a strong position to negotiate on price.
The challenge, however, comes at higher loan-to-values (LTVs) where both lenders and customers both face market risk and where the government has recently signaled its intention to extend the Mortgage Guarantee Scheme.
The Mortgage Guarantee Scheme.
As a quick refresh, the scheme was launched in 2021 as a way of allowing and encouraging more 95% lending, which had fallen dramatically in the preceding years.
Lenders pay the Government a commercial premium to participate in the scheme which insures loans down to 80% LTV for seven years.
In the event of a loss, the Government will take 95% of the loss, the lender 5% (to ensure they have ‘skin in the game’).
Lenders prior to the scheme’s launch weren’t doing significant amounts of 95% lending as it was viewed as high risk (high default probability, high loss severity) and for the products available, this was reflected in the product pricing.
Whilst the Government scheme helps the lender, (and by default helps the customer get a cheaper loan), how much are we really thinking about the long-term customer and market outcome here?
Is this a great use of Government time and resources to encourage FTB’s to take 95% loans out when house prices are at or near the top of the market and in all likelihood falling?
What happens to all the FTB’s who take a 95% loan out on a Government backed scheme and potentially and with a high degree of probability in my view, in two years’ time find themselves in negative equity?
Is it simply okay because the lender is covered? Or is this really about one last drink at the bar and trying to prop house prices up rather than let the market take its natural course (which in most other sectors the government normally seems so keen on?)
We really need to ask the question, “what problem are we trying to solve here?”
We have had numerous inventions from the government in the housing market over the last 10+ years, many of them aimed at helping FTBs into the market.
Whilst all of them are no doubt well intentioned, the challenge most schemes have, is that they are limited in scope or have a cost which has to be borne by the borrower further down the line (Help to Buy).
Additionally, initiations such as stamp duty have simply injected fervor into markets which were already at historical high points.
It is arguable the Government and regulators didn’t do enough to stop prices going up enough over the last 10 years (aside from perhaps some LTI limits), the same argument should, to many, apply on the way down.
For many FTB’s and also home movers, the best thing that could happen would be a decent bout of house price deflation rather than a Government intent on trying to provide products that very few people would rationally appear to want in the current climate that desperately attempt prop up an over-inflated market.
The elephant in the room…
Yes, it’s the number of dwellings, occupancy levels and a population that’s continually growing.
All of the well-intentioned schemes are just trying to solve the fact we aren’t building enough homes in the right places.
The population of England has grown by eight million (ONS) in the last 25 years, whilst the number of dwellings has increased by 3.3 million (English Housing Survey).
As well as many of the homes not being in the areas of greatest demand, single occupancy has gone from 17% in 1971 to 30% today.
Whilst the average number of people per dwelling remains unchanged, more people are occupying fewer homes.
Year upon year we fall short of house building targets to the extent that the Centre for Cities estimates we now have a shortfall for the UK in excess of four million homes.
Ultimately the only way we solve this isn’t another government FTB scheme, or some other limited initiative trying overcome market economics.
It’s by building some homes in volume in areas they are needed and letting the market decide where the equilibrium house prices fall and making sure we balance and counter for the impact of interest rates. Ultimately, it’s the only way out of our dysfunctional market.
Peter Stimson is head of product at MPowered Mortgages
