Many of us are glad that Mr Carney, The Governor of The BoE, has raised his concern that the price rises, both in London and more recently spreading across the UK, appear to be out-of-sync with our economic recovery.
Sales bottlenecks combined with frustrated vendors resulting from the new mortgage application processing delays, illustrate one thing and one thing only. The housing market, or specifically the price levels being quoted in the market are assuming sufficient availability of increased mortgage borrowing.
But, what is actually needed is borrowing which is more strictly measured to make sure that those actually needing mortgage finance are given the priority they deserve and that there is a limit to the amount of money available to be borrowed of course for macro-economic reasons.
The market itself is, and always was, mature enough to cope perfectly well with such restrictions but as many will probably understand our housing market does have problems that need to be resolved concerning the way houses are marketed currently.
Here are four of the most important financial fundamentals that need to be understood before anyone can home-in on the real problem.
1. (This is of paramount importance). In the 70’s most people borrowed up to three times their earnings. Now, it’s five times average earnings or more. This may be the latest trend but one should ask, “Is this, necessarily, a sustainable way to lend?”
In 2005, bank data shows that fewer than 5 per cent of mortgages in the UK were granted using more than 4.5 times income (and even in London it was only 6%).
By comparison today, using the Help-to-Buy schemes, those who can afford to do so can now borrow very large multiples of their current earnings (up to £600,000 each transaction) by raising mortgages – at staggeringly low rates of interest in market terms, owing to the cost of the nation’s structural debt holding down interest rates! By doing this they are leveraging their individual levels of wealth severalfold, whilst at the same time causing house prices themselves to escalate! This is a dangerous anomaly in the marketplace and it is abundantly clear that it needs to be much more carefully managed.
In the 70’s the top multiplier of 3.5 times a single income or 2.75 times a joint income used to be the norm.
The serious question is, can our government rise to the challenge of bringing this fundamental back in order to mirror what used to be considered normal?
2. Secondly, back in the 70’s, loan-to value ratios were thought to be too high if they topped 80%. What’s changed in finance? We were not wrong back then.
Over in Singapore, Liew Mun Leong, the young but now retired president of CapitaLand recently said. “In Singapore, the size of any mortgage is limited to below 60% of the current value of the property.” This helps to ensure that there isn’t a house-price bubble.
Whilst prices still increase, they do not ‘mushroom’ in the way we are currently seeing in the UK!!
Maybe we have a lesson to be leaned from Singapore, for a change.
3. The third factor that helps to stabilise house prices in other countries is the more extensive use of long-term fixed interest rate mortgages. Using these for a majority of home loans has been found to help smooth out price spikes, by smoothing out the cost of borrowing. A debate should be tabled as to whether most home loans ought to be made with mortgages using long-term fixed interest rate loans instead. This could, of course be dangerously inflationary however.
4. The fourth and more recently worrying factor is the idea that mortgage lenders are now extending loan terms beyond 30 years, in order to lessen the monthly financial cost to borrowers and in doing so, increasing mortgage debt beyond the normal working life-cycle of a human. This can only be described as lender-centric, high risk money-marketing as it must stoke up house prices even where forced sales are the probably outcome. The effect for some borrowers will probably be that will loose their homes at some point and also that even their offspring would never be able to fully pay off the debt!
One has to ask the question, is all this money-lending geared to mop up the quantitative easing which the government has had to sanction, owing the 2008 but still enduring serious financial crisis?
In the UK today and as a result of relaxation in the financial restrictions in foreign currency allowing rich foreign investors to buy into London and buy houses that used to be affordable but have now become UNaffordable, except by those who don’t actually need to borrow large multiples of their annual earnings but still do. How can this possibly be sensible from the viewpoint of the those needing homes in the main cities?
We need new and functional measures to keep house prices in-sync with the main economy. In the absence of these I have now formulated such measures.
One thing our British island economy historically does well in, is spawning new and innovative ideas for becoming more efficient and competitive. In this we can still punch above our weight when difficulties need to be overcome. The latest idea, as well as empowering The BOE to fully manage the above four fundamentals, is to change the way the housing market is serviced by estate agents.
In a nutshell the proposed urgently needed fix is not a monetary adjustment or an accountant-led fix at all. The fix I am advocating is a housing market ‘imperfection’ fix.
Instead of the government being ‘forced’ into having to raise interest rates in a desperate attempt to quell the latest bubble, this fix is lateral-thinking in terms of addressing the house-price rise crisis both in the short and longer term.
The fix is to improve the way the housing market itself functions, because there are far too many imperfections in the way it works currently. The very first task, however, is to correctly identify the most significant imperfection involved.
If each imperfection was systematically removed this would serve to attenuate the prices within the marketplace. This, in conjunction with the above four points, would overcome the current crisis; at least while the housebuilding industry was able to get back up onto its feet and the construction of new housing in sufficient numbers was well under way.
Doing this would also have the effect of helping to make land prices stay more affordable as the cost of land is, (and always was), directly geared to the capital value of residential property itself.
Here are the proposals:
The proposals are that estate agents should work primarily for buyers but also deal with selling the houses which their buying clients want to move out of.
To implement them, would require a change in thinking amongst present-day estate agents and so I call on them to scrutinise, discuss and hopefully agree these proposals in full in order to improve the way the market currently works.
If no such action is taken that would mean the continuance of the status quo with continuing price spikes, more aborted sales and continuing stress in the marketplace – including per se, lower net earnings by estate agents themselves.
Full details of my proposals and how they could be implemented may be read on the link below:
My proposal for the way housing in England and Wales should be marketed is based on changing from vendor-centric estate agencies to buyer-oriented ones. It is called The Hendry Solution. It would not cost very much at all to implement and would bring massive benefits to all local marketplaces.
It is how to improve the UK housing market.
Peter Hendry, Consultant in Housing Valuation