House Prices vs Mortgage Lending
No, this isn’t the most dull wrestling match up of all time, but instead a look at the rather complex relationship between house prices and how they affect mortgage lending. With house prices shooting up, surely that is a good thing? As ever in the mortgage world, the answer is yes and no.
House prices and mortgage lending inextricably linked
The best way to think of this relationship is much like that of siblings. They are inextricably linked, while being completely independent of each other, sometimes they get on, sometimes they really do not. But come what may, they are linked together whether they like it or not.
In very simple terms, for every pound a mortgage provider lends out, they need to keep a certain amount of cash in reserve if the loan goes bad. That is very heavily weighted on the LTV (Loan To Value = % of a properties value which is mortgaged, so a £750k loan on a £1m property is 75% and so on). Meaning, the higher the LTV, the more money need to be kept in reserve. This is driven by something called Basel III requirements. Metro Bank very famously got this wrong last year so read here for a more detailed account of what that all means.
Increased house prices should loosen purse strings
In ‘normal’ times, house prices going up as much as they are will lead lenders to loosen the purse strings. Last week alone we saw data from HMRC that said house sales increased by 21% in September and the Office for National Statistics (ONS) said that house prices were up 0.7% in August alone. Taking the year on year growth up to 2.5%. If house prices keep rising at August’s rate, that would mean house prices would be 8.4% higher next August. This is also quite conservative as some house prices indexes like Halifax’s, say house prices were up 7.3% year on year in September. So there is a clear upward curve at present. So why are we seeing lenders tighten policy and reduce product choices not increase them?
Covid hampering banks’ ability to process loans
As if house prices go up, less money needs to be kept in reserve which can then be lent back out? As touched on above, we are in far from normal times.
Mortgage lenders biggest issue right now is capacity. Covid has severely hampered banks’ ability to process loans as they previously relied on processing centres abroad. And their UK centres are mainly in the North. So with both of those set ups experiencing huge issues with localised/national lockdown and not being geared up to work from home, they are as far as 30-50% off their previous capacity.
Couple that with previously automated applications now having to be manually underwritten due to the complexity we are seeing in the economy. It is a recipe for the disaster we are currently experiencing with some lenders taking MONTHS to issue mortgage offers.
House prices next year?
If that wasn’t enough, there is a lot of nervousness about the impact on house prices next year when the stamp duty holiday comes to an end and various furlough schemes have unwound. As we see above, even with the very large gains we have seen in house prices in the last few months, that is only largely reversing losses that happened during lockdown. So the Million Dollar question is – will we still see a buoyant market next year when various stimulus packages are withdrawn?
Personally, I think it is impossible to answer that question right now as there are so many variables between now and March. It feels very ‘Game of Thrones’-esque but, Winter is coming, and who knows what impact that will have. The Science is murky at best on what may happen, but if recent events in Manchester prove anything, it isn’t going to be plain sailing.
However, I would sound a cautious note of optimism. There used to be a rule of thumb in the house price world that prices in London doubled every 10 years. That didn’t happen in the last 10 years which is interesting. The Credit Crunch put paid to that, but was it just that issue? Recent events would back up that is was a very large factor, as when credit conditions ease it does push up prices.
So my cautious optimism is that even if things do go ‘badly’ from March onwards, there does seem scope for prices to move on and at least not fall. (See above in that if house prices go down, more money needs to be kept aside without money being lent out, which seriously hampers the amount of money available for new lending).
So my hunch, for what it is worth, is that we will see house prices go up until March, but then flatten off thereafter until the economy picks up. With the risk being – if we see a big recession next year that could well push prices down. There are no simple answers as house prices are linked generally to GDP (and wages which is a whole other topic), and mortgage lending is also linked to house prices which affects the availability of money, this complex web is hard to call!
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