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

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