Expert Update | Mortgages: On the move

Expert Update | Mortgages: On the move

Ray Boulger, Senior Mortgage Technical Manager at John Charcol, discusses the mortgage and property markets.

After a strong start to the year, my initial reaction to the lockdown was that house prices would fall back by about 10%, but even before the market reopened it was becoming clear this was too pessimistic. There was no rush to sell and, although potential buyers who had been limited to virtual viewings were expecting to be able to secure a property below pre-lockdown prices, any agreed reductions were small.

When the market reopened activity was limited by lack of supply rather than lack of buyers and the Chancellor’s SDLT (Stamp Duty Land Tax) announcement on 8th July supercharged the market. Offering only a short window of opportunity to save so much tax was absolutely the right way to generate an initial immediate stimulus not only to the property market but also the wider economy. However, it is already becoming clear that in many parts of the country the additional demand risks an over-exuberant market for the next 6 months and then a collapse in demand just as the impact of the expected further increase in redundancies becomes greater.

Having achieved his initial objective and seen how effective the SDLT cut has been, the Chancellor should in his Autumn Budget announce an extension of the cut until, say, 31st March 2022. This would leave the market with a deadline but reduce the risk of distorting the market in the short term. It would also allow the Chancellor more time to assess the significant benefits to the whole economy by stimulating more housing market activity.

The Nationwide house price index rose by 2.6% in the first 7 months of 2020 – including a 2.1% increase in July – and I expect 2020 to end with an increase of 7-8%. The figures I have quoted are all based on the actual figures Nationwide publishes, not the seasonally adjusted ones often quoted. This year in particular the impact of COVID and the SDLT cut will make seasonal adjustments even more of a nonsense than usual and the sooner all providers adopt the UKHPI policy of quoting real figures the better.

There is already evidence of buyers taking a view that changed working patterns will be permanent and as a result moving away from London to regional cities as much as two hours from London by train. Consequently the growth in the national house price indices will continue to be constrained by weakness in London. The regional levelling up which many governments have tried and failed to achieve is now happening in a limited way as a result of something completely out of their control!

The changes to Help to Buy from April 2021, as well as the scheme’s planned abolition in March 2023, pose major challenges to developers. Up to now 18% of buyers using Help to Buy have not been first-time buyers and they will not have access to it for completions from April 2021. A significant proportion of other buyers have bought properties at prices in excess of the new regional price caps, so I expect use of the scheme for completions from April 2021 will fall by at least 40%.

Although affordability is impeded if Help to Buy is not used – meaning less opportunity for buyers to trade up – with interest rates so low its limited future availability might not matter too much if there were more mortgages with high LTVs (loan-to-values) available. This was a major problem in respect of new build properties before COVID but is even worse now. Availability of even 90% LTV mortgages – let alone 95% – is very limited generally and restrictions are greater on new build properties.

With the Government very reluctant to extend Help to Buy and the marginal cost of the top 5% of a 95% LTV mortgage typically over 20%, what the market needs is a private sector solution for high LTV mortgages. Despite some companies working on this no solutions offering reasonable volume are yet available. Until this problem is solved or we see the re-emergence of similar schemes to those offered in the past by developers, this must inevitably influence the number of new properties targeted at first-time buyers. With an FCA mortgage authorisation now required to offer second charge mortgages I don’t expect to see many developers wanting to go down that road.

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