This has powered forward home lending; 2014 brought the best January for house purchase lending in seven years, according to e.surv’s latest Mortgage Monitor.
This lending revival has rubbed off positively on the property market. House prices rose 5.2% in the twelve months to January, reaching a new record of £241,101 according to the latest LSL House Price Index. And the number of first-time buyers has risen by a third compared to a year ago.
But while the new momentum has fuelled the appetite for homeownership, it has also revealed cracks in the market that still need to be filled.
Prices are rising artificially quickly, due to a severe lack of housing. And the volume of people moving has spurred problems of its own. The hangover left by the recession – when there was simply less demand – is a scarcity of resources. This includes a shortage of surveyors, which has led to some delays in the home-buying process.
The market has learnt some hard lessons over the last few years; now is the time to lay foundations for a stronger, safer future.
The new regulations
The first tranche of changes set to affect the market come in the form of MMR regulations. Outlined in the Mortgage Market Review, they are due to be introduced on the 26th April, and aim to tighten affordability checks for the market.
One major change is that lenders – rather than brokers – are to be responsible for putting in place stringent affordability checks to make sure borrowers can afford their repayments.
This has become doubly important as the market has moved out of recession. The increase in lending has been powered forward by a large pick-up in high loan-to-value lending, and a blossoming first-time buyer market. It’s vital to ensure this large chunk of the market can afford their loans – and repayments.
There will also be a clamp-down on interest-only mortgages, which were common place before the crash. Lenders will have to enforce compulsory reviews to ensure a repayment strategy is in place to pay back the loan at the end of the fixed term.
Brokers will also be affected. Their role as an advisor will be emphasised. Non-advised sales, where a customer is left to make their own mind up, are to be ruled out. Every seller will have to hold a relevant mortgage qualification, ensuring they are able to produce accurate, well-informed advice.
Second in line are the changes suggested by the recent RICS/McDonald valuation commission report, which outlines a strategy to help cope with the shortage of qualified surveyors.
Commissioned by RICS, the report looks at issues surrounding the valuation industry. It recommends twelve changes for surveying firms, lenders and other stakeholders to make the industry more sustainable in the long term.
The RICS report was released at the end of January, and was widely welcomed by the industry. Now industry professionals are making their adaptions.
What could the budget bring?
Of course, one can’t forget the budget either. It’s likely to suggest further legislative changes for the market.
The Chancellor is under increasing pressure to slim-line Help-to-Buy, which some critics believe is exacerbating the rise in property prices. There are also calls to reform the current stamp duty thresholds. House prices have doubled since the initial thresholds were introduced, and far more buyers are being penalised by the property tax.
And then there’s Governor Carney. He’s hinted at the “extensive toolkit” available to the Bank of England, should it become necessary for them to dampen lending. It could include strategies like increasing capital requirements for mortgage lending, or further increasing banks’ liquidity requirements.
Whether or not this toolkit will be used is hard to tell at this stage. But one thing’s for sure – regulation is becoming tighter.
Effect of the changes
The extra red-tape has been signalled for a long time. Long enough for most lenders and brokers to make the changes they need to adapt to the new process.
The second Mortgage Market Review ‘readiness survey’ by the FCA showed 85% of firms already have either complete plans – or partially complete plans – in place to ensure a seamless adoption of the proposals. All the firms said they would be ready in time to implement the changes.
In fact, the growth in lending volumes in the year-to-date may represent a desire by lenders try to make early progress against targets.
As a result, our latest Mortgage Monitor found that home loans increased between December and January for the first time since 2002. It was the strongest January for house purchase lending since 2007. The reason: lenders are building a pipe-line in advance of MMR, to ensure they can still meet lending targets.
It’s not that lenders are worried they’re not ready. It’s that they can’t control every step of the lending process, which they fear will get clogged up further down the chain.
There could be a momentary slow in lending after MMR is implicated. And volume may pump up again in the months that follow. Each lender has their own strategy to cope with the changes.
How will it end?
The new regulation will play a vital role in protecting the future market from further crises. It may take a short time to for lenders and brokers to adapt to the changes, but shouldn’t impact significantly on total lending over the course of the year.
What the market needs now is policy to encourage more house building. The shortage of new homes is the biggest obstacle in the recovery of the market, because it is creating intense competition between potential buyers, which is pushing up house prices. The regulatory changes will ripple through the market and change things for the better. But they won’t solve the heart of the problem.
We need a policy operation to encourage house-building, and the surgeon has to be the government.
