Most of Britain's wealth trapped in houses as value of property stock quadruples in 20 years; UK sleepwalking into another housing bubble, 57% of nation’s wealth tied up in property
Tweet Topic Started: 16 Aug 2013, 02:13 PM (1,950 Views)
Announcements by two banks fuel bubble fears a year after regulator called the deals 'a ticking timebomb'
Rupert Jones and Patrick Collinson The Guardian, Tuesday 20 August 2013 04.00 AEST
A year after they were labelled a "ticking timebomb" by the City regulator, interest-only mortgages are set for a comeback after two leading banks said they would make "low start" deals available to branch customers.
The announcement by the Clydesdale and Yorkshire banks represents the first major revival in interest-only lending after it almost collapsed during the credit crunch.
The two banks – both part of the National Australia Bank group – have launched a range of mortgages that begin on an interest-only basis for the first three years, which would halve monthly payments for some borrowers. The two lenders said they were "the only banks offering this innovative approach as part of their range of mortgage products".
For someone borrowing £250,000, the monthly repayments on the Yorkshire and Clydesdale deals start at just £560, compared with £1,146 on a conventional repayment basis.
The move represents the latest salvo in a mortgage price war which has seen home loan rates tumble to record lows since the government's Funding for Lending scheme was launched a year ago. Two-year fixed-rate deals are now available at rates of below 1.5%, while last month saw Leeds Building Society launch a mortgage with a "zero" interest rate for the first six months – with the interest being added to later payments.
While mortgage brokers were broadly supportive of the Clydesdale and Yorkshire mortgages, some will view the emergence of deals such as these as fresh evidence that the property market is heating up and fuelling the risk of a new housing bubble.
Interest-only mortgages exploded in popularity in the years running up to the credit crunch, making up a third of all new loans granted by banks and building societies in 2007. But with seven in 10 borrowers failing to have a repayment plan in place, the banks were accused of irresponsible lending.
In 2009, the Financial Services Authority (FSA) officially branded interest-only home mortgages as "high-risk", and last year its director, Martin Wheatley, told MPs they were a "ticking timebomb".
In May this year, the FSA's successor body, the Financial Conduct Authority (FCA), revealed that almost half of all people with interest-only mortgages – about 1.3 million homeowners – may not have enough money to pay them off when they mature and face an average shortfall of more than £71,000.
The clampdown, with tighter affordability checks due to take effect in 2014, saw lenders pulling out of interest-only in droves, or introducing much stricter criteria. Those lenders that still offer deals will typically only let people borrow between 50% and 70% of the property's value on this basis, and sometimes impose other requirements too.
Despite the warnings, the FCA has said interest-only loans remain "right for certain people" and has reportedly been concerned that too many lenders have abandoned them. The Clydesdale and Yorkshire banks – which are allowing homebuyers to borrow up to 80% of a home's value – said: "Low start has been designed to meet this specific need within the market for a mortgage which initially offers lower payments, but also provides the peace of mind that the full loan will be paid off over the term." The deals begin on an interest-only basis at a fixed rate for the first three years, automatically converting to capital and interest repayment for the remaining term of the loan, and are available via the banks' 330 branches.
Mortgage brokers said they expected other lenders to re-enter the interest-only market, with one building society understood to be drawing up plans for a five-year interest-only low-start deal.
Ray Boulger of mortgage broker John Charcol said: "Lenders are becoming more comfortable about lending now that the property market has stabilised. We will see more options for interest-only borrowers over the next two years and I'm aware of one lender looking into a five-year deal."
Interest-only deals can make sense for people who want to escape paying high rents, said Boulger. "For younger people, interest-only can be a good alternative to renting. Monthly repayments on a conventional mortgage are likely to be higher than the rent, but on an interest-only they are likely to be less. And in the worst case scenario, if someone takes interest-only and can't afford a repayment vehicle, they may still be better off as over the lifetime of the loan they have paid less than they would have paid in rent, and have had security of tenure during that time."
Post Office Mortgages and Virgin Money are the lenders that come top of the interest-only 'best buy' tables but limit loans to borrowers able to put up a deposit of 30% to 40% of the value of the property. Boulger said that other lenders in the interest-only market, such as Lloyds Bank, are doing very little business because of onerous lending criteria.
Mark Harris, chief executive of mortgage broker SPF Private Clients, welcomed the return of low-start, interest-only deals. "Interest-only mortgages have fallen out of fashion, with many lenders no longer offering them or significantly restricting their criteria. However, for the right borrower who has a considered repayment strategy in place, such as sizeable and regular bonuses, they can be a useful alternative to a capital and interest mortgage.
"Borrowers will benefit from some respite to purchase white goods or enable them to re-establish some savings during the three-year interest-only period, safe in the knowledge that the mortgage will still be repaid in full by the end of the term.
"However, borrowers need to beware of the payment shock after the three-year fixed-rate period ends and they move onto a repayment mortgage. Interest rates may also be rising by then, resulting in a double whammy."
David Hollingworth at mortgage broker London & Country said some borrowers would appreciate the flexibility that such a deal offered. "What it's doing is recognising where people can sensibly use interest-only. I like the structure of it."
I make no apologies for my obsession with the issue of housing. There is no other area of policy — aside from education — that better captures the enduring injustice of British society; and, more to the point, there is no other area — including education — in which our politicians are such hypocrites.
Various dunderheads among them were trotted out last week to suggest London’s housing market is just fine, following the revelation that house prices have risen by 8.1 per cent over the past year. Never mind Richmond and Highgate: in Merton, Camden and Hackney, prices rose 10, 10.7, and 11 per cent. One headline in yesterday’s Business pages was: “London house prices ‘poised to soar 40 per cent’” — and that’s before the disgraceful Help to Buy has kicked in, from January. If this isn’t a bubble, I don’t know what is.
The basic injustice of all this bears repetition. Strong inflation in house prices increases the wealth of the old and rich — at the expense of the poor and young. If you think governments should spend their energy and resources investing in the future, or looking after the downtrodden, then housing policy is as big a slap in the chops as you can imagine.
If we had the guts to properly reform planning and take on Britain’s nimbys, a radical programme of house-building could reduce prices in the medium term, reduce the appalling £20 billion-plus we spend on housing benefit, create jobs and ease the North-South divide. Alas, it’s a big “if”.
The hypocrisy of it all stinks. I lost count of the number of times when I was writing editorials for The Independent I would look on the news list and see that George Osborne or David Cameron were giving a speech condemning Labour for its addiction to debt-fuelled spending.
Osbornomics was once defined as the shift from borrow-and-spend to save-and-invest. But with an anaemic economy, and the next election fast approaching, as sure as clockwork a desperate government inflates assets to generate a hollow confidence, knowing that asset-owners drive the economy and are more likely to vote. New Labour did this reliably too. The point is not that we refuse to learn from history; rather, it’s that the lessons of history are ignored when they are a barrier to re-election.
I sometimes think the root of our failure is our political language. Rename housing benefit “landlord subsidy”, Help to Buy “Help to Rig”, and Funding for Lending “Funding for Stealing” and we might tolerate them less. Research commissioned by aides to Ed Miliband show that, in the past two decades, attitudes to home-ownership have fundamentally altered. Where once our home was our castle, or our pension, now we think of our homes as a financial gift to our children: the surest way to ensure their security. Some around the Labour leader think this shift in attitude could be helpful in weaning parents off their addiction to property.
Let us hope so. Those aides ought to know that it was Proudhon, not Marx, who said that property is theft; and as Standard readers — who pay the price every day for this folly — well know, housing policy in Britain is now tantamount to daylight robbery.
In a nation obsessed with homeownership, rising house prices are in the government's best interests
Frances Cairncross
National debts cannot continue to rise, the head of Exeter College, Oxford warns. Photograph: Wolfram Schroll/ Wolfram Schroll/zefa/Corbis
Housing sales are perking up and prices are rising faster than at anytime since their 2006 peak, outstripping inflation for a third month in a row in June. In London, a market fuelled by foreign money, prices are increasing by over 8% a year. But even in the supposedly desolate north-east, surveyors report that the number of potential buyers is rising at its fastest rate since August 1999.
Does this mean the age of austerity is finally drawing to a close? Sadly not.
Rather, there is an election on the horizon. The incumbent government generally does best when prices are rising. Far more voters already own their homes than identify as struggling first-time buyers worrying about being priced out of the market. And even those first-time buyers are now snapping up homes once more, thanks partly to the government's controversial Help to Buy scheme.
Rising house prices may be a relief to the government but more important will be the desperate need to keep interest rates down, even if it means that voters approaching retirement are furious about the collapse of annuity rates.
The government is still running a larger deficit, in terms of the overall size of the economy, than any rich country apart from Japan and the total stock of public debt is still growing inexorably. To cover it, the government needs to borrow, month in, month out. Up to now, it has been lucky.
Unlike the southern eurozone countries, most of which are now adding to their stock of public debt more slowly than we are, Britain can borrow relatively cheaply at 2.5%, compared with 4 to 5% for Italy. The markets haven't gone for us yet, but this can't continue.
Sooner or later, the debt has to stop growing as a share of the economy. If the economy continues to chug along, that will certainly help. In fact, the gloom and doom about the economy was always overdone, as anyone who looked at real world numbers would have noticed: for a year and more, car sales have been increasing, new jobs have been being created and national insurance payments have been on the rise.
But by the same token, the relief today is probably too strong. Many problems in our economy still need to be fixed.
Above all, we need to rethink what we want from public spending, which now by default is increasingly concentrated on the protected areas of health and pensions. Reviving the housing market is easy compared with that.
Almost two million would be home owners in the UK, mostly families, can’t get on the property ladder because they can’t afford to save for the deposit needed, new research suggests.
According to housing charity Shelter around 1.8 million families face a life time of renting a home with three quarter priced out of the market and even with the government’s flagship Help to Buy scheme some 78% are unable to afford the repayments on a family sized home.
In contrast, the report finds that mortgage repayments on a shared ownership home would be affordable for 95% of families on low or middle incomes.
The charity is calling for a major new house building programme of shared ownership homes to revolutionise ownership for what is describes as ‘forgotten families’. This would allow families to find an affordable home of their own, and provide a real alternative to the confusing postcode lottery of existing small scale schemes, or the overheated private rental market.
The report says that investing £12 billion, less than 1% of GDP, could build 600,000 new shared ownership homes which would be enough to give almost half of England’s private renting families the chance to own their own home.
‘We need to see a new generation of shared ownership for the ordinary families priced out of home ownership. The reality is that soaring house prices mean that the traditional market is no longer working for ordinary people,’ said Kay Boycott, director of campaigns and policy at Shelter.
‘Building the new shared ownership homes we desperately need is the only way to give thousands of families a stake in the stable home they want at a price they can afford,’ she added.
But the government says it is doing more to help families onto the housing ladder. As well as schemes like Help to Buy and Funding for Lending, both credited with boosting the number of first time buyers, it points to the fact that it has also launched a new scheme to bring back empty homes into the housing stock.
It is working with the public and private sector through the National Empty Homes Loan Fund (NEHLF) to give borrowers access to a secured loan at a fixed 5% interest to renovate some of the 710,000 empty homes in England.
A joint £3 million initiative has been launched with the charity Empty Homes, the Ecology Building Society and 39 participating local authorities to help home owners who cannot afford to bring the property up to a useable standard.
The Ecology Building Society, a specialist mortgage lender that supports sustainable communities, said that it should provide funding for hundreds of properties and is available to individuals aged 18 and over who own a property that has been empty for six months or more.
‘We know that many homes are empty because it is difficult for owners to raise the money that is required to bring them back up to a habitable standard. This initiative will kick start efforts to tackle this. This scheme is a first in England and is a great example of central government working together with the public and private sector to try and reduce the number of empty homes in the UK,’ said David Ireland, chief executive of Empty Homes.
Paul Ellis, chief executive of the Ecology Building Society, said that at a time when there is increasing demand for homes but an acute lack of supply it makes sense to bring new life to existing but neglected properties.
The Brits make a regular habit of doing housing bubbles. To the point the IMF kicks their arses over it a bit nowadays. But whatta do when you've got squat all other than banking and housing and immigration going for you? - Damn; I'm glad we've got mining! ...
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
Rising house prices, growing numbers of first-time buyers and a drop in mortgage defaults have combined to give Britain’s housing market a dramatic uplift, new figures have revealed.
By Andrew Oxlade 10:08 PM BST 06 Sep 2013
Property values are rising at their fastest rate for three years and first-time buyers are at a six-year high, new figures reveal, creating a “virtuous circle” which has given banks and building societies more freedom to lend at the current historically low interest rates.
The result is a “contagious” confidence in the housing market, which will have a knock-on effect for the wider economy, according to industry experts.
The latest evidence of Britain’s economic recovery comes days after forecasts for the country’s annual economic growth were doubled from 0.8 to 1.5 per cent.
The Halifax’s latest monthly index recorded an annual rise of 5.4 per cent, taking the price of the average home up from £160,292 to £170,231, the fastest rate of growth since 2010.
Meanwhile figures compiled by LSL Property Services’ First Time Buyer Monitor showed 26,100 first-time buyers took out loans in July, the highest number for six years and a 45 per cent rise on the same month last year.
David Newnes, director at LSL, said: “Mortgages are much more affordable for first-time buyers compared to last year, which has opened the door to thousands of would-be buyers who were shut out of the market.
“Economic confidence is returning, nudging many more buyers in the direction of property, and nudging lenders to offer more loans to buyers with smaller deposits. The uptick in confidence, beneficial to both parties, is contagious.”
The recovery in the property market has also eroded negative equity, giving banks greater confidence to lend. Analysis conducted for The Daily Telegraph shows the value of bad mortgages, where borrowers were unable to keep up with repayments, has fallen 40 per cent since the peak of the financial crisis in 2009.
Accountants UHY Hacker Young, which analysed Bank of England data, found the value of mortgages written off for the year to March was £543m, compared with a peak of £902m five years ago.
Mark Giddens, head of private client services at the firm, said this could help create a “virtuous circle”. He said: “This improvement in the market has meant more homeowners struggling with their mortgages have been able to sell up without having to worry about negative equity. In cases where the worst has happened and homes have been repossessed, an improvement in the housing market means banks are able to achieve better prices on repossessions sales.”
The Government’s efforts to support the property market include last year’s Funding for Lending scheme, which made £80 billion available to banks for loans, the vast majority of which has gone to mortgage lending.
In April ministers launched the Help to Buy scheme, lending 20 per cent of a new-build property’s price, interest-free for five years, for those with only a five per cent deposit.
The scheme will be widened beyond new-build properties in January and will also be available to people moving up the property ladder.
There are, however, critics of the scheme, including the International Monetary Fund, which has warned it could create a new house price bubble.
Buyers have also been warned not to over-stretch themselves, as house prices remain high against average wages and interest rates will eventually rise.
Mr Giddens said: “New borrowers need to ensure that they can afford interest rate rises as current low interest rates won’t be around forever. It is important that the new optimism about the housing market doesn’t lead to a return to the reckless lending of the past.”
The Bank of England should use its powers to limit house price increases to 5% a year to "take the froth out" of price booms, a surveyors' group says.
The Royal Institution of Chartered Surveyors (Rics) said that a 5% annual rise should trigger caps on how much people could borrow relative to their incomes or the value of the property.
It is not suggesting that sellers should face a limit on how much they could charge for their homes.
The Bank said it was being vigilant.
Activity in the UK housing market has picked up in recent months after a few years of inactivity during the financial crisis.
There has been considerable debate during the week about the future of the UK housing market and the potential for government schemes to create an artificial price bubble.
Some forecasters are suggesting increases in house prices could break through the 5% barrier this year, owing to increasing demand from first-time buyers at a time when the number of homes for sale remains low. 'Firmly anchored expectations'
Joshua Miller, senior economist at Rics, said that it was important to stop any debt-fuelled house price advance.
"The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases. Capping price growth at, say, 5% is one way of doing this," he said.
"This cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt."
The Bank's governor, Mark Carney, told MPs on Thursday that the Bank was vigilant on house prices but that parts of the country had not seen any recovery in the housing market.
In previous speeches, he has said that he has a toolkit in place to keep a lid on any potentially damaging boom.
This includes asking, but not telling, banks to limit how much they can lend to individuals and making them set aside more capital if they want to carry on providing mortgages.
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