In a speech at the Social Market Foundation Conference, Stephen Knight, executive chairman of GMAC-RFC, said average house price earnings ratios were outdated, due to the fact that they included incomes from non-homeowners, and that most mortgages were now funded by two incomes.
Knight presented statistics that suggested affordability, represented by initial mortgage payment as a percentage of gross and net income, was at one of its lowest points for 25 years, and
with new household formation and increased migration driving up demand, there was little to suggest a house price collapse unless rates, inflation and unemployment rose dramatically.
Knight explained that house prices and affordability issues had been distorted by external industry commentators, leading to regular predictions of a house price collapse.
He also warned that comments about income multiples without any real understanding of the underwriting process could mean lenders divert resources away from serving customers and go into defence mode.
Knight said: “In France for example, it is deemed to be irresponsible lending if more than a pre-determined percentage of income is advanced by way of a mortgage. As a result, there is less homeownership in that country, less product choice and no release of equity available to drive consumer empowerment and an expanding economy.”
Justin Wiggins, IFA at Heliting Financial Services, commented: “The criteria of using affordability calculations should always be the way for any type of loan. Lenders will even look to see if a client can afford variable rates even if they are getting a fixed rate mortgage to ensure the client will be able to afford their repayments should interest rates go up.”
