The recent housing and mortgage forecast from the Council of Mortgage Lenders (CML) suggests that during 2008 overall house sales will fall within a region of 15 per cent below activity levels in 2007 and the volume of mortgage lending will be approximately £340 billion – some £20 billion below the expected figure for this year.
For most people entering the housing market, the single biggest factor that will determine their decision is confidence. However, with the hope that the dent in consumer confidence witnessed since the Northern Rock fallout will begin to smooth over, greater influential factors affecting the market are afoot.
As the credit crunch continues to play out and reverberate across the markets, availability of wholesale funding to finance specialist mortgage lenders is being further squeezed and mainstream players are also beginning to feel the pinch.
With finances tightening a number of changes have taken place; lenders withdrawing from the market as a whole, lenders withdrawing from certain sectors, restriction of the level of funds lenders are prepared to offer and restriction of loan-to-value (LTV). These changes are particularly true of the non-conforming market in the heavy or unlimited adverse arena.
Left out in the cold
While it is still too early in the day to form solid predictions from these changes, it is fair to say that, should the credit crunch continue to affect the market, we could be faced with the prospect of certain groups of borrowers being unable to obtain mortgages at the levels they require.
The average LTV for all mortgages arranged in the market has been roughly 80 per cent since January 2006. However, many lenders in the non-conforming market have reduced their maximum LTV to 75 per cent.
Although the proportion of mortgage customers with non-conforming circumstances is a comparatively small percentage of the overall mortgage market, if more lenders are exiting certain sectors and tightening their lending criteria we could potentially see a group of customers who will not have access to sufficient funds to buy the properties they need.
Payment shock
In addition, all lenders within the non-conforming arena have raised rates significantly – rises of more than 1 per cent have been fairly commonly applied. As most borrowers have a finite budget to work within, this also effectively limits another potential borrower group as price will inevitably force many people out of the market.
The increasing costs of servicing a mortgage in the non-conforming market is also mirrored in the conforming sector as swathes of borrowers hit ‘payment shock’. As comparably cheap fixed rate deals come to an end, those borrowers who choose to do nothing can be faced with their lender’s standard variable rate averaging nearly 8 per cent.
Remortgaging for many of these borrowers will alleviate most of the pain but for some whose financial circumstances may have changed, the lack of availability witnessed in the non-conforming market will once again take its toll.
Many of these latter borrowers will not be able to remortgage as they would have been able to only three months ago – potentially alienating yet another group of borrowers and increasing the level of mortgages defined as in arrears and the number of properties taken into possession.
Sombre concerns
Even if consumer confidence returns to the housing market, the issues highlighted present some rather sombre concerns for 2008. As more borrowers face difficulties obtaining finances, fewer individuals will be able to move up the property ladder and, as has been shown in current reports, house prices will begin to fall.
So do these factors combined offer a lifeline for the UK’s first-time buyers? Unfortunately again, I would suggest the answer is rather bleak. Data from the CML demonstrates that in the mortgage market as a whole, the proportion of income required to service mortgage interest payments has risen from 10.9 per cent in Q2 2003 to over 18.2 per cent by August 2007.
This does not take into account the recent volatility and price increases. With salaries failing to increase at a comparable level to house prices, price levels would have to drop dramatically before a first-time buyer, on what is considered to be a reasonable salary, could contemplate getting their foot on the property ladder.
One potential positive to come from the current climate is the very real possibility of the Base Rate decreasing to 5 per cent in 2008. Swap rates have also begun to recede, which in turn should reduce the rates of conforming fixed rate deals particularly. Some respite is therefore potentially in sight for certain borrowers. However, those who rely on non-conforming lending may have to sit tight for rather much longer.
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