The overall pressure being placed on the Government, the Bank of England, the Financial Policy Committee et al to intervene meaningfully in the mortgage and property market appears to grow by the day.
It’s common knowledge that June presents something of a watershed moment for the FPC as it seeks to address what the BoE widely considers to be the biggest risk to the financial stability of the UK economy – namely the potential for a house price bubble. Answering the question of how to cool an overheating property market – or more likely stave off the threat of it getting considerably warmer – is exercising many minds at the powers that be and therefore by the end of the month we will probably have a better idea of the direction of travel the Bank/FPC is willing to take.
Of course, as Governor Mark Carney has repeatedly pointed out, the Bank can do little about one of the main systemic problems in the UK market, that being the low levels of housing supply. Figures are often bandied about in terms of what new housing stock is needed each year and the consensus seems to be in the region of 200-220k. House builders have also been quick to say that reaching those sorts of levels in a decade would be a tall ask let alone conjuring up the stock within a much shorter timescale. While Help to Buy 1 (HTB1) has certainly helped increase the number of houses being built we are nowhere near the levels required and therefore it’s realistic to assume that a lack of supply will continue to be a major problem for UK plc for the foreseeable future.
At the same time, demand for home-ownership, and subsequently mortgages, is going to remain high. However, the ability to secure a mortgage post-MMR could work as something of a drag on house prices as fewer people are able to secure the finance they need. The latest figures from Nationwide Building Society continue to show national house price growth both month-on-month and annually but given that mortgage approvals have been falling the society is also suggesting we may be at the start of a cooler market (ironically) taking hold in the British summer. Therefore, the Bank might be willing to give the market more time to cool itself through mechanisms such as MMR rather than use any explicit tools to intervene.
Of course, when we talk of a house price bubble in the UK we are predominantly referring to London, which many will know is fuelled significantly by cash buyers and foreign money. Indeed, it has been pointed out that if the Bank is looking to ‘kill’ a London-centric house price bubble, it needs to instigate a far more nuanced approach rather than rely on the macro-prudential tools available to the FPC such as increasing Base Rate or increasing lenders’ capital requirements. Not only might these measures (if introduced) have little discernable impact on the London market but they may actually impede the other regional housing markets which can in no way be said to be emulating the increases we have seen in London.
The continued focus on HTB2, certainly in terms of London, also seems widely misplaced – which is not to say the Scheme might not benefit from some tweaks. Given that, as the recent figures show, very few HTB2 loans have been taken out in the Capital, the Scheme appears to be doing what it set out to do – helping first-time buyers with small deposits across the country get onto the housing ladder. Average loan sizes within HTB2 are relatively low – certainly lower than average prices – and the take-up is far more pronounced in areas like East Anglia or the North West, rather than Central London. In our view, HTB2 plays a marginal role when considered in the context of the overall housing market.
Which leaves the regulators with something of a conundrum to solve and one, as has been pointed out, which is not likely to be solved with a ‘sledgehammer to crack a nut’ approach. What they might like to consider is lenders’ use of the HTB scheme which has predominantly been in the 90-95% LTV segments – the rest of their high LTV production (above 75% LTV) appears unprotected by any guarantee and this certainly exposes those lenders operating in this sector particularly in the event of a minor market downturn. This would not be the case in a policy provided by a private mortgage insurer and therefore the Bank might like to look at the risk uninsured lenders are taking and act accordingly. One thing is probably certain – we are likely to see a far more interventionist Bank over the course of the months and years ahead.
