Over the past few weeks within the national press, mortgages and house prices have dominated the headlines. With the addition of five times income to Abbey’s proposition, the increasing speculation that HBOS is set to launch a mortgage allowing consumers to borrow up to 125 per cent of the property price, and ever increasing house prices, much has been made of borrowers’ inability to step onto, or progress up the property ladder.
With the Monetary Policy Committee (MPC) also making the decision to increase the Bank of England Base Rate to 5 per cent in November to its highest level for five years, doom-mongers have unsurprisingly commented on the volatile market and the inability of borrowers to move up the property ladder.
However, is the market as bad as the picture being painted? While first-time buyers continues to struggle, previously niche sectors, such as buy-to-let (BTL) and self-cert now represent a huge proportion of lending, and research reveals that the mortgage market is in a strong position.
Pros
Research into the market revealed that mortgage approvals continued to rise by 2,000 from August’s findings of 293,000 to 295,000 in September. Loans approved for house purchases in September also rose, to 126,000 – representing the highest figure since 2004. This undoubtedly indicated market buoyancy, which was furthered by indications that the volume of approvals for house purchases rose.
Remortgage levels subsided, although this could be attributed to a rise in the number of borrowers opting for longer-term fixed rates.
The Council of Mortgage Lenders (CML) revealed that gross mortgage lending hit a September record of £29.5 billion. Although it reported that lending was 11 per cent down on the all-time high of £33 billion, recorded in August, the £29.5 billion figure represented a 7 per cent increase from September 2005.
While the CML indicated continued troubles for aspiring first-time buyers, research by Alliance & Leicester (A&L) indicated that individual earnings continued to rise throughout 2006, at a level of 4.2 per cent a year. Chris Rhodes, managing director of Alliance & Leicester Retail Banking, said: “2006 has been a turning point for the UK consumer. People are now seeing their unsecured borrowing fall relative to their earnings. We have not seen consumer borrowing this subdued since the recession of the early 1990s. The good news is that this time the economy is performing well and employment is at an historic high.”
An increase in regulation has also had an impact on the market, in both a positive and negative way. Although Financial Services Authority (FSA) regulation has undoubtedly helped shape the market for the better, the time and costs involved in complying with its rules mean many firms now have less time to advise and meet with customers. The further move to a principles-based approach could also see the industry go through a period of consolidation, which will undoubtedly impact on the wider market.
Cons
Despite robust levels of borrowing, indications suggest individual insolvencies and debt levels have continued to rise, leading to implications for future repossessions and a further rise in the number of people relying on non-conforming products to get onto the property ladder.
The non-conforming market caters for almost all adverse levels, and people with impaired credit are now able to obtain a mortgage relatively easily. Although lenders undoubtedly take great care in ensuring responsible lending, the rising non-conforming sector is a worry for a number of commentators.
A further cause for concern is the rise in unemployment levels, to 5.5 per cent, while a further rise in interest rates has also been predicted. Harry Katz, principal at Norwest Consultants, argued it was no big thing. “There could be a further rate rise over the next six months. Let’s hope they have the desired effect of cooling price escalation and even, dare one hope, bring prices down.”
Conclusion
What is certain is that with ever increasing house prices, lenders will have to forge new paths in product development to help aspiring first-time buyers, and those eager to upgrade their property. While solutions such as HomeBuy, shared ownership and higher income multiples and will go some way, lenders,as well as the government will have to find innovative ways of breaking the barriers facing the property market.
For the wider market, a further increase in rates could help slow price inflation, while changing lender models towards affordability based calculations should help determine borrowers’ real ability to repay a mortgage. Sarah Gwilt, mortgage adviser at Dickson Lishman Prince, said the market over the next 12 months should be at a more sustainable level. “Unless we have an increase in unemployment, house prices will increase at a more realistic and sustainable rate of about 5 per cent across the country and therefore the property market should be safe.”
