House Price Bubble & Irresponsible Lending

Following on from my property market overview I was very interested to read comments by Antonio Horta-Osorio, the Chief Executive of Lloyds TSB, advising that in his opinion there would not be another house price bubble.  He shrugged off suggestions that the Help to Buy Scheme, which allows purchasers to put down a deposit of just 5% of a property’s value, was inflating another house price bubble similar to the one before the market collapse in 2008.  He added “Help to Buy is the right thing to do at this time.  It is harder to get mortgages above 75% loan to value.  I think, given that this market anomaly is just a temporary problem, it makes sense to have a temporary scheme.”  As readers of previous blogs will know I agree with this view but do think that the Government needs to be aware of the issues and put in place mechanisms to act as a dampener on the housing market.  I also think they need to do more to curtail irresponsible lending and by this I do not mean 95% loan to value mortgages.  To give two recent examples, the details of which have been slightly amended to protect confidentiality: –

1. A client was recently looking to purchase a very expensive property, he was putting down a large deposit and only required a small mortgage.  He was in secure employment and (because of the quality of his solicitor!) purchased the property for considerably less than the asking price and valuation.  His initial lender, after considering matters for some time, eventually turned down his mortgage application.  On further investigation we were told that the reason the application was turned down was because the purchased price of the property was considerably less than the valuation.  Even after explaining to the lender that the property had been on the market for some time,  that the seller was distressed and that the value of the property had been confirmed 3 times  via the Home Report, a refresh of the Home Report and the lenders own survey, they still refused to lend because of the difference between price and valuation.  (another example of why the Home Report doesn’t work!!)

2. A young couple who jointly earned approx £35k  were looking to buy their first property. They approached a lender who without hesitation offered to lend them £150k – on a monthly figure that the young couple could not actually afford (never mind if interest rates start to increase). Thankfully they purchased with a mortgage of half that amount. They are now on the housing ladder and are repaying their mortgage, knowing that they have got  extra income to cover a reasonable increase in interest rates.

The above are examples of silly decision making and irresponsible lending.

There needs to be legislation to ensure that affordability is taken into account in relation to every mortgage application.  I would perhaps go further and suggest that there should be an automatic mortgage indemnity guarantee premium included with all mortgages above 90%  – almost  like a tenants deposit – which would be returned to the purchaser on repayment of their mortgage or within 5 years of the original drawdown, whichever point happened sooner.

As readers of previous blogs will know I advocate amendments to the capital gains tax rules meaning that should you sell a property even if it was your sole or main residence within 5 years of purchasing, a certain percentage (based on a sliding scale) of the gain would be taxable.  I think this would prevent property speculation and the flipping of residential properties.  I would say that all monies raised through this tax should be ring-fenced and used to create a property fund to assist either first time buyers or developers.  I also think it is important that central government give the maximum possible encouragement to all developers in relation to new build residential developments.  I would also welcome the abolition of the Home Report in Scotland which I see as a barrier to people putting their property on the market.  All these measures would actively help the property market and minimise the risk of another property bubble.

Lindsay Darroch
Partner – Head of Property

Property Market Overview

Over the last few days I have been asked for my opinion on how I see the property market moving in the next 6 to 12 months.  I thought it would be interesting to put these thoughts in to my blog,  although I do highlight that these are generalisations and even within Scotland there are a number of geographical differences to consider, east to west, Aberdeen etc.

Before we look to the future we need to look back over 2013.   I think in general terms the market activity i.e. number of properties bought and sold, has increased by about 20% to 25% .  Although we have seen an increase in the number of closing dates,  prices have stabilised not increased. Sellers are now more realistic about their price expectations and this has contributed to improving the Scottish housing market. This realism has been driven by an appreciation that if they are moving up in the property market the price paid or received is not as important as the cost of change.

We have seen an increase in the number of first time buyers, although this figure is still well below historic levels and below levels required to have a free-flowing property market.  In relation to mortgage funding, whilst more mortgage funds are available (I will do a blog about this shortly), the vast majority are at a 90% loan to value level.  Looking at the pattern of the property market I would say that the increased activity has been focused on the middle band which has been very happily trading amongst itself – downsizers trading with upsizers.  Some big national developers are starting to come back into the market and actively push their properties however the small to medium developers are still finding it difficult to find funding and because of this there is still a shortage of new properties coming into the market.  I have not seen any significant pick up in the number of second hand properties  – perhaps 1% or 2% – compare this to the sales increase of 20% to 25% and bearing in mind that the volume of properties in the market is probably still at half the number of 2007,  there is a real danger of the market trading itself out of stock.

So what of the future?  I believe the help to buy scheme part 2, which will launch in January 2014, will be more important than ever; allowing first time buyers to get onto the property ladder and increase the number of purchasers able to make the second step from their first property to the next level.

This will increase confidence, further improve the economy and encourage more people to put their properties on the market with a view to moving up the ladder.  I would hope that price stabilisation will give the banks confidence to start lending to developers and we will see an increase in the number of new properties being built – a supply of new properties will keep the property market moving and increase activity levels.  There has been recent criticism of the governments housing policy with some dire warnings of a property bubble being created and whilst I can see the dangers, I think that the strategy is correct subject to central government introducing mechanisms to control prices. This is more apparent down in the south of England but I think readers of previous blogs will know that I think there is a real requirement for government to introduce capital gains tax rules in relation to property and also for the Governor of the Bank of England to monitor the housing market – blog to follow.

To summarise – I think we will continue to see an improving housing market with activity levels rising. From the summer of 2014 I would expect to see a rise in property prices as the number of first time buyers increases.  The consequence of this will be a greater willingness from lenders to fund developers which will have a positive impact not only in the housing market but on the economy as a whole.

We will start seeing sustained recovery by Summer 2015.

As we have seen over the last few years anything can happen and I will continue to report on trends.

Lindsay Darroch
Partner – Head of Property