According to a new report from the Intermediary Mortgage Lenders Association (IMLA) policymakers should concentrate on making the Help to Buys scheme more targeted as broader action would be premature in the wakes of the recent MMR mortgage rules which are already slowing the market.
The message comes the day before the Bank of England’s Financial Policy Committee (FPC) meets and after UK Chancellor George Osborne cleared the way for the bank to be given new powers to intervene in the mortgage market.
The move is due to concerns about the market overheating in London but experts points out that in the north east and Northern Ireland prices are recovering at a much slower pace and drastic action should not be taken just because of what is happening in the capital city as it is not representative of the whole country.
Sharply rising UK house prices have fuelled speculation that the FPC will use its new macro-prudential powers for the first time in the near future to manage associated risks and prevent excessive growth in household debt. There is already a talk of an interest rate rise in the coming months, and certainly before the end of the year.
The IMLA report says that the strength of the housing market reflects the growing use of cash. More than a third of houses, 36%, were bought entirely in cash during the first quarter of 2014, compared with less than a quarter seven years earlier. The percentage of total housing demand that is financed by cash reached an estimated all-time high of 61% in the first three months of the year.
It also points out that the mortgage market remains very subdued. Mortgage debt is still shrinking in real terms and on aggregate, households have been putting over £10 billion of equity into their homes every quarter since the middle of 2010.
The report says that borrower quality remains robust. Average mortgage loan to value (LTV) ratios have been exceptionally depressed since the financial crisis and, despite the gradual rising trend since 2009, median first time buyer LTVs remain lower than at any point prior to 2007.
While the Bank of England has flagged concerns about rising loan to income (LTI) ratios, the affordability rules arising from the Mortgage Market Review (MMR) mean that new owner occupiers seeking a mortgage will only be granted a loan that is manageable at considerably higher interest rates, it adds.
IMLA’s report suggests the combination of a high LTV on a large mortgage loan raises its risk profile, which might justify a lowering of the maximum purchase price under the Help to Buy mortgage guarantee from £600,000. The latest Treasury data shows that just 7% of loans under the scheme were for properties valued above £250,000.
Alternatively, risk factors associated with the combination of high LTVs and LTIs could prompt the FPC to recommend an LTI ceiling for Help to Buy 2 and a similar LTI cap on first charge mortgage loans under the Help to Buy equity loan scheme.
Overall it concludes that broader macro-prudential changes would be premature and are not required at present or until the recovery is more established. It argues that other elements of the new ‘triple-lock’ of regulation, such as higher capital requirements for lenders and the MMR, will also temper future mortgage lending, with the danger that further action will stifle the continued economic recovery.
Both the introduction of MMR rules and the ending of the Funding for Lending Scheme (FLS) for mortgages are likely to have influenced the slowdown in mortgage approvals during April, with IMLA emphasising that six to 12 months are needed to assess the full impact of these changes.
‘With understandable concerns over the rate of house price increases in recent months, the FPC faces a difficult task, even more so with the prospect of additional powers at its disposal in the near future. What is important is to uncover exactly why these rises are happening by examining current trends in both housing and mortgage markets to make a full assessment,’ said Peter Williams, executive director of the IMLA.
‘Delving beneath the house price data and the overarching UK averages paints a picture of a housing market where the use of cash has become a key driver. There are broader questions for government about the implications of this, though in part it has been driven by a shortage of mortgages: a situation that is being corrected. But for the FPC, whose remit is to maintain financial stability, it suggests that additional intervention into the mortgage market is not warranted at the present time,’ he explained.
‘Two conflicting growth stories are playing out. House prices are rising strongly in parts of the country as a result of inadequate supply, but mortgage lending is still abnormally subdued. There is room for fine-tuning of Help to Buy, but broader action on mortgages might inadvertently shift the balance of power in the housing market even further towards cash-rich buyers,’ he added.
