The withdrawal of most 90% and 95% mortgage products means that first-time buyers face a steep … [+]
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Amidst the pandemic the housing market has ridden turbulent waves as we bluster through varying stages of uncertainty, but since restrictions were lifted on May 13 there have been strong indicators of rapid recovery in the market as pent-up demand and returning consumer confidence look to feed the horse that drives the British economy.
Nevertheless, there is a concern that this recovery may be short-lived as the released demand plateaus and the challenges facing the economy and incomes of Britain’s myriad savers come to the forefront.
A Reuters poll of property market analysts published yesterday reported that house prices are anticipated to fall by 5% this year as elevated unemployment levels due to coronavirus and the subsequent lockdown diminish demand. The fall in house prices as projected through the Reuters poll is anticipated to be relatively short-lived, with prices to increase 1.5% next year and 3.5% in 2022. But a worst-case scenario from the 21 polled analysts concerns an 11% fall in the house prices this year.
This potential issue is overshadowed by the greater issue that is the decimation of almost 90% of the first-time buyer mortgage market, as many lenders withdraw their 90-95% loan-to-value (LTV) products – the biggest casualty of which was last week’s announcement from Nationwide, the nation’s biggest lender, which reduced the home value it was willing to lend against from 95% to 85%. Meaning that savers would need a deposit three times greater than before to afford a mortgage.
Mortgages in remission
I have discussed before my concerns over some of the doomsaying surround house price falls this year, as I do not believe that the damage will be as severe as many are anticipating. There is no doubt pain to come, as from the ashes of this pandemic, and the government response, there will be winners and losers. However, I have stood by my assessment that any damage to the housing market will be minimalised and short-lived as the country and the economy recovers.
Sadly, the withdrawal of mortgage products at this level might set in motion a domino effect with far reaching impact. I understand the basis behind it – banks wish to avoid the risk of negative equity befalling homeowners if the payments of their mortgage exceed the value of their home due to a drop in house prices. Nevertheless, I take this as a relatively short-sighted view, if we consider that the value on one’s home should be perceived as a long-term investment. Prices will go back to normal, even the most depressing of price fall depictions are open about that.
The withdrawal of most 90% and 95% mortgage products means that first-time buyers face a steep hurdle at a time when savings are already dampened due to historic low interest and savings rates. If the government intended to reinvigorate the economy by loosening lockdown restrictions on the property market, then this action is clearly counter-intuitive. And what good will the Bank of England’s key interest rate at a mere 0.1% do for the economy, if mortgages remain firmly out of reach for first-time buyers?
Consider also that if first-time buyers now struggle to get on the ladder, homeowners the next rung up will have difficulty selling their own properties; in turn perhaps forcing them to lower prices to entice a buyer, which will fuel the banks’ concerns of negative equity spilling over.
The withdrawal of mortgage products has already led to confusion and difficulty in the marketplace. A survey conducted by Butterfield Mortgages between May 29 and June 02 of more than 1,300 homeowners and prospective buyers found that approximately half of buyers had been denied a mortgage this year as a result of coronavirus, despite having a mortgage in principle. This has had a damaging effect on property transactions, and only serves to fuel uncertainty the recovery of the housing market.
Where banks fear to tread
Lenders have argued that with many of their staff still on furlough, they lack the resources in place to adequately process the high volume of mortgage applications that have hit their desks. But this is also because they anticipate a rise in unemployment when the government withdraws support schemes in the autumn.
There are significant financial concerns over the state of the employment market and personal savings in the months to come as the threat of redundancy and business collapse remains. And with the government looking to ask businesses to take on a greater share of furlough contributions from August, there is a risk of more workers facing redundancy if their employer cannot support their position. If this were to lead to a wider sell-off in property it will only serve to drive down house prices further and add further challenges to the housing market as the banks’ fears of negative equity grow in stature. The withdrawal of these mortgage products would then cease to be a short-term measure as the U.K. would likely be facing a more prolonged economic recession before recovery.
Can the lenders find the courage to lead?
When the government relaxed restrictions on the housing market last month, they did so because they recognised that property is the apple cart of the U.K. economy. The health of the former supports the health of the latter, and so doing acts as a barometer of the health of the country in house prices – if people are not buying, then there is a problem.
This starts at the bottom of the ladder, and in one of my previous Forbes pieces I set out why first-time buyers need more help, and some possible solutions through which the government can step in to address. These included an extension of the Help-to-Buy scheme, both by reopening it to new first-time buyers and to the resell market as well. The other major suggestion I continue to support is a temporary reduction to Stamp Duty Land Tax (SDLT) which would spare up some additional cash for buyers up the chain to put towards a larger deposit share on a mortgage. But as first-time buyers are entitled to relief on SDLT up to the first £300,000, this would have little to no benefit for most purchasers.
But the onus is not just on the government to support the housing market, banks too have a responsibility to support the health and growth the economy. Yet banks on this occasion have taken a very cautious approach to risk where their confidence in the recovery of the market holds forbearance.
Perhaps this comes from the overemphasis on house prices; the most recent Nationwide House Price Index noted a 1.7% fall in house prices during May, likely precipitating the withdrawal of many of their mortgage products as further declines are feared.
In my antithesis to Nationwide’s stats however, I argued using data from Reapit – going back to before the lockdown commenced – that the housing market’s quick recovery in the weeks since restrictions were lifted showed that consumer demand is still on a moving treadmill that won’t stop running now that the market is open again. There may be dips in the months ahead, and a W-shaped recovery is the most likely outcome for the time being, but the market will keep moving forwards. Which is why additional support from the banks would go some way to boost the home-owning chances of the country’s savers.
I am not here making a fevered pitch for lenders to throw caution to the wind and issue out mortgages to anyone who asks for them – caution should remain paramount. But I am suggesting that the banks can do more to help, to bet on the British economy’s long-term recovery rather than its short-term losses.
We bailed out the banks in 2008 after the financial crisis. Perhaps now is the time for the banks to return the favor.