The last week has been dominated by increasing house prices and increasing mortgage rates with pressure now coming to bear on the Government, the Bank of England and regulators to try to guard against a bubble bursting in London and the South East.
It was Sir Jon Cunliffe, deputy Governor of the Bank of England for financial stability who said that house prices were “the brightest (hazard) light”. The comments came after the most recent house price figures from Nationwide showed double-digit growth of 10.9% in April.
There are several tools available to try to limit further price rises including a further tightening of mortgage related activities, even down to imposing caps on loan-to-values or loan-to-income ratios. Although with the Mortgage Market Review looking like it may in part do this job, as well as the fact that more draconian measures are political dynamite, this is more likely to be a last resort.
A more realistic possibility is to ask lenders to increase their new stress test levels from around 7% or force them to put more capital aside against their mortgage lending, possibly even to regionalise it when lending on properties in high demand areas like London.
What is definitely sensible is an immediate limiting of the notorious Help to Buy 2 scheme which should have the £600,000 cap cut in half. Figures show that much of the scheme beneficiaries are out side of London & the South East so this seems like an easy win and something that should be done immediately.
There is no point having policies that overly encourage demand when supply is so badly lacking – there is only one outcome when this occurs; higher prices.
With the OECD now weighing in saying that house prices “significantly exceed long-term averages relative to rents and household incomes” this issue is set to run and run for a while yet.
The main problem of course is that bubbles are only really identified when they burst and whilst outside of London & the South East there is still some way to go, we can no longer ignore the danger signs that do provide a threat to future economic security.
It is the June meeting of the Bank of England’s Financial Policy Committee, (FPC) that everyone will be watching with interest.
All of this aside, the simple situation which successive Governments have not addressed with any vigour is that for a solid, sustainable housing market and arguably therefore sustained economic growth, more homes need to be built. A lot more.
Not just those that are attractive to foreign investors either, but affordable homes where key workers can live, where normal hard-working families can build their lives, where entrepreneurs can build their new businesses from.
Meanwhile, a report from Moneyfacts shows that 2 year fixed mortgage rates are now increasing at their fastest rate in over 2 years due to the MMR and SWAP rate volatility. We have already seen a sustained rise in longer term fixes, with most 5 year rates now back over 3%, but with 2 year fixes now following suit it looks as if the days of ultra-cheap funding of several months ago are now consigned to history.
As Moneyfacts.co.uk editor Sylvia Waycot pointed out, “Don’t make the mistake of thinking that we need a change to base rate to increase the cost of mortgages, as prices are creeping upwards now.”
Of course saying that, rates are still low, just not as low as they were, but with lenders still looking at hitting some pretty bullish targets this year they will be keen not to drop back, especially after issues with the implementation of the MMR are taken into account.
For borrowers it is still a case of taking action sooner rather than later if they want to lock in to the best fixed rates, especially given the fact that interventionist policies could further limit borrowing in the near future to try to calm house prices.
It will be interesting to see if this action is taken and its effect – what we all want is a healthy market, sensible prices, affordable borrowing, increased supply and a sustainable level of transactions. Is that too much to ask for?