Month: November 2020

Big house price falls are likely across the UK over the next 12 months, but first-time buyers will not find it easier to get on the property ladder because of tighter credit conditions and falling incomes, according to a leading think-tank.  With the UK’s economy falling into its deepest recession on record, and unemployment rising dramatically as the government’s furlough scheme for workers winds down, most analysts are forecasting that house prices will suffer. But according to the Resolution Foundation, even if average prices collapse by more than 20 per cent, in line with the most pessimistic forecast by the Office for Budget Responsibility — the fiscal watchdog, first-time buyers will still have a harder time buying a property than before the coronavirus crisis. “lining for principal research, and policy analyst at the Resolution Foundation. “Although prices are projected to fall — perhaps dramatically — in the wake of the pandemic-induced recession. falling incomes and credit restrictions will likely make home ownership every bit as difficult as before for many young people,” she added.

The economic fallout of the pandemic was also likely to deepen inequality of access to housing, said Neal Hudson, an independent property market expert. Those with an existing cash pile or access to the bank of mum and dad would be able to take advantage if prices fall, but a home would still be out of reach for first-time buyers without deposits in place. There’s no silver lining for [young people] when it comes to house prices Lindsay Judge “When the price falls do happen, they will be linked to a weakening economy and falling incomes. The house price-to-income ratio will remain relatively similar, possibly even worse,” he said.  According to the government’s most recent English Housing Survey, 34 per cent of first-time buyers use a gift or a loan from relatives to cover their deposit. A further 6 per cent use an inheritance.  According to the Resolution Foundation, it would take a young couple, both on an average salary, 21 years to save enough for a deposit if they put away 5 per cent of their earnings a year. In 1990, it would have taken them just four years.  First-time buyers without parental funding are also hamstrung by the withdrawal of higher loan-to-value mortgage products from the market, meaning they need to save a substantial deposit to buy. Almost every bank and building society pulled their 90 or 95 per cent loan-to-value mortgage products when the housing market was reopened in May.  Recommended Personal Finance ‘Bank of mum and dad’ less likely to lend One option for first-time buyers is to tap the government’s Help to Buy Equity Loan scheme, which allows them to purchase a house with only a 5 per cent deposit. Use of the loan has soared in recent months, according to some of the country’s largest housebuilders, in part thanks to the lack of other options for those without savings to put towards a deposit.  But the scheme is only available for newly built properties, which tend to be more expensive than second-hand homes.  “A crash is not the solution. The best solution is a period of recovery and economic growth, with house prices not growing as fast [as incomes],” said Mr Hudson.

Banks are turning away mortgage business by increasing interest rates on many new home loans, as they struggle to cope with surging demand for borrowing in a buoyant post-lockdown housing market.

In a reversal of the cut-throat competition of recent years, lenders are putting up rates to deter potential borrowers, as coronavirus restrictions have left many staff working from home, limiting their capacity to process applications.

A temporary stamp duty holiday that offers purchasers a tax saving of up to £15,000 has fuelled a V-shaped recovery in the housing market since May. Buyers are hurrying to progress deals now so they can complete before the nine-month holiday ends on March 31, 2021.

An executive at one of the UK’s largest mortgage lenders said on some days recently it had been receiving more than double the number of mortgage applications it would normally be able to process.

“This is as busy as I’ve seen the market since 2008, just before the credit crunch,” the executive said. “Post-lockdown, in late May to June, we were busy, heading back towards [normal] numbers, but the stamp duty change, when that dropped, put a massive urgency into buying a home.”

Metro Bank this week temporarily halted registrations from new brokers looking to send clients to the lender, to allow it to process its existing workload. Dan Frumkin, Metro’s chief executive, said: “We’re continuing to see exceptional demand in the mortgage market.”

Halifax, TSB, Nationwide, NatWest, Barclays, and Yorkshire and Chelsea building societies are among the lenders to have raised interest rates over the past three weeks, even as the Bank of England base rate has remained at its record low of 0.1 per cent.

Virgin Money on Thursday raised its interest rates on lower-risk mortgages — where the loan is 65 or 75 per cent of the value of the property — by 0.3 percentage points, and those at 85 per cent by 0.6 percentage points.

On Tuesday, Santander increased rates on some of its 60, 75 and 85 per cent loan-to-value deals by up to 0.35 percentage points.

Aaron Strutt, product director at mortgage broker, Trinity Financial, said lenders were taking action to avoid being exposed as the cheapest deal in the market. “They are making big rate changes to make sure they’re not at the top of the tree”.

Banks had already withdrawn many of their deals on low-deposit home loans earlier in the year, hitting first-time buyers who typically put down 5 or 10 per cent of the house price as a deposit. But they have now widened the scope of their action on rates.

Hina Bhudia, partner at Knight Frank Finance, said: “What was a significant problem for first time buyers will now start affecting buyers at every level of the property ladder.”

As demand has surged, lenders have seen their service times slip significantly, said Andrew Montlake, managing director of mortgage broker Coreco. “They’re not looking at things for two weeks at least. There’s concern that as we start to get to the end of the stamp duty holiday a lot of people are not going to get their deals through in time.”

Ms Bhudia added: “If you’ve secured a rate with a lender, lock it in as soon as you can because there’s no guarantee it’s going to be there tomorrow.”

Average rates on two-year fixed mortgages at 65 per cent LTV — regarded as lower-risk borrowing — have risen from 1.66 per cent on July 1 to 1.96 per cent on October 22, according to finance website Moneyfacts. Rates on five-year fixed rates at 65 per cent LTV moved from 1.77 per cent to 2.19 per cent over the same period.

Raising rates is the most common method by which lenders control the volume of business they accept, but they may also toughen their credit score criteria to filter out more borrowers, raise minimum loan levels to deter smaller mortgage applications or restrict certain mortgages to houses, not flats. The most effective, if draconian, tactic is to withdraw mortgage products entirely, as Santander did this week for its 85 per cent LTV two-year fixed purchase and reportage products.

Raising rates allows banks to fall down the “best buy” mortgage lists watched by consumers, but when applied by all lenders leads to successive waves of rate increases. “If you price yourself slightly out of the market then others will take up the slack. The problem at the moment is that everyone is doing the same thing,” said Mr Montlake.

House prices soared to record highs last month, rising at their fastest pace in 16 years as the stamp duty holiday took effect and buyers sought new homes after months of living in lockdown. The Nationwide Building Society reported on Wednesday that UK house prices rose 2 per cent in nominal terms, despite the country entering its deepest recession on record in the second quarter. The surge in prices stemmed from the reopening of the housing market in May alongside the stamp duty holiday on property values of less than £500,000, announced in July, which runs until the end of next March. The recovery in activity has pushed average prices up to a level 3.7 per cent higher than a year earlier, the Building Society said. “House prices have now reversed the losses recorded in May and June and are at a new all-time high,” said Robert Gardner, Nationwide’s Chief Economist.

The new housing market is far removed from pre-pandemic conditions, however, with many variations based on types of property in demand and their location as people consider a future where proximity to the office is less important. Jonathan Hopper, Chief Executive of Garrington Property Finders, said: “Prices are rising fastest among coastal and country properties as buyers [are] planning for a new work-life balance built around less commuting and seek more green space, fresh air and better value.” In hotspots outside London, properties are selling at rates rarely seen since before the 2008-09 financial crisis. “A stunning proportion of properties are now going for the asking price or more, and offers are flooding in. It’s like lockdown was a bad dream,” said Lucy Pendleton, of independent estate agent James Pendleton.

Separate research from property portal Zoopla showed that in the third quarter there had been a surge in demand for larger properties in London, while demand for one-bedroom flats tumbled. Nationally, surveyors expect prices to fall in London but to rise in most other regions, according to the latest survey by the Royal Institution of Chartered Surveyors.  In such a divergent market where the mix of properties sold has been changing rapidly, finding a genuine average price for the whole UK is proving extremely difficult, according to Richard Donnell, Director of Research at Zoopla. More large homes in wealthier areas have been listed and sold, Mr Donnell said, with the effect that the unadjusted median asking price on the Zoopla portal was 12 per cent higher than a year ago. “The rebound in housing demand is creating more ‘transaction bias than normal as we see a big shift in the price and type of homes that are selling as a result of the lockdown,” he said. But the stamp duty holiday and low interest rates are not helping all buyers, keen on a new place to buy and live. Those wanting large mortgages worth 90 per cent or more of a property’s price are having to pay higher interest rates on average even though the Bank of England’s official rate has plunged from 0.75 per cent to 0.1 per cent since the pandemic struck.

Andrew Bailey, the BoE Governor, told a Parliamentary Committee on Wednesday that this change in the average cost of a mortgage for buyers with relatively small deposits was due to lenders withdrawing some of the cheaper deals from the market. “All the evidence is that the cuts we made [in the BoE’s base rate] have been broadly passed through,” he said. Central bank data show that at the end of July, the average quoted interest rate on a two-year fixed rate mortgage with a 90 per cent loan was 2.66 per cent, 0.51 percentage points higher than a year earlier, while those with much larger deposits were benefiting from lower mortgage rates. Neal Hudson, Director of Residential Analysts, a consultancy, said that those who could not access a large deposit were clear losers in the current housing market, but were not affecting the prices of the properties in high demand at present because there were many other cash buyers and those with significant home equity fuelling the recovery. “It appears the economic fallout [of coronavirus] has been mostly felt by the young and low earners — those least able to buy a home,” Mr Hudson said.

Many property market experts warned that the jump in house prices could be short lived when unemployment rises after the furlough scheme tapers out this autumn and the stamp duty regime changes next spring. Tobi Mancuso, Director of property investment company Track Capital, said: “The danger is that this frenzy could create a bubble in house prices that will be quickly deflated when stamp duty returns.” Howard Archer, Chief Economic Adviser to the EY Item Club, said: “We suspect that the housing market is likely to come under pressure over the final months of 2020 when there is likely to be a significant rise in unemployment as the furlough scheme draws to a close in October.” Overall “the recovery in the house market has so far been V-shaped”, said Hansen Lu, Property Economist at Capital Economics, a consultancy. But he warned: “We expect the recent frenzy in housing demand to cool over the next few months.”