Mortgages

For the last ten years, residential property in the UK and much of the rest of the World has been a one way bet; the ones who missed out were those who did not borrow as much as they possible could.  Those who felt uncomfortable with being in debt or who kept betting on a drop in price missed out.  The question for many is whether this is likely to be the story of the next ten years.

If the doomsayers are right and we find ourselves replaying the ‘crash’ of the early nineties, what will this mean to the average home owner?  Officially, prices fell then by about ten per cent, stalled for a couple of years and rocketed off in about 1996.  Of course, the pain of a fall in values will not be evenly distributed.  Those who have to sell will find themselves disadvantaged, although we are much more accustomed to the idea of letting our property now than we were back then.

For anyone who bought, say, a couple of years ago or who does not need or want to sell, will they really notice?  So long as they can afford their mortgage and, with rates looking more likely to fall than rise, affordability is hardly an issue compared with ten years ago, owners can sit tight and let things blow over.  The real losers back in the early nineties were those who sold even though they expected to be homeowners in future.  They found themselves buying into a rising market having lost ground.

Homes also provide shelter, it is not as if we can do without one.  People will not all sell out to hold cash and this provides some underpinning for the market.  As with most assets, it is not market timing but time in the market that delivers the return.  For every ‘clever’ investor who sells out at the top and picks up a bargain, there may be many tales of heartbreak. 

In another example of shutting the stable door once the horse has bolted, the US House of Representatives has voted to regulate mortgage brokers and lenders.  Although this Bill is unlikely to find its way past the Senate and the Presidential veto, it gives an insight to those of us in the UK into how the sub-prime crisis came about.  Some Members of Congress are seeking to force a degree of responsibility upon mortgage brokers, requiring them to select a suitable mortgage rather than the one paying the most commission, and upon lenders to take some steps to confirm affordabilty of the loan.

This commonsense proposal would impose some rather belated order, preventing America's poorest being stitched up with truly dreadful loans, which all but guarantee default in many cases after the 'teaser' introductory rate finishes and higher interest payments kick in.  By this time, however, from the lenders point of view, the loan has been securitised and parcelled off by an investment bank to some 'unsuspecting' hedge fund, insulating the lender from the consequences of its actions.

If there is a crumb of comfort for us over here, it is that these lending practices did not cross the pond to any significant degree, at least for mortgages, and the impact on the UK property market may be different.  Also, residential mortgages have been regulated since 2004 in the UK.  None of this inures us from the effects of the global fallout, however, as the international capital markets struggle to quantify the problems and regain stability.

It has not been a good year for the Bank of England or its governor, Mervyn King.  Firstly, they missed their inflation target and were stung into an ill-judged rate rise and recently they have overseen in part a run on a British bank for the first time sine the 19th century.

The current credit crisis has crept up on them whilst they were looking in the other direction and the fallout threatens to undo all of the good work they have done to their reputation in the ten years since independence.  Inflation (as measured by retail prices) has been slain, or, at least, seriously wounded, but a huge surge in asset prices propelled by easy credit may take years to unwind.

Some asset and commodity price increases are rooted in shortage of supply being outstripped by genuine increases in demand but many (probably some US house prices, for example) are simply a result of access to cheap money enabling people to bid prices up and up.  Get it right, sell your property, downsize and re-enter the world of ordinary RPI much the richer, and you're laughing.  Get it wrong, be born to poor parents too late, and you may never got to enter the market, which, every year pulls further away.

Where is the Bank (or, more accurately, the rate setting Monetary Policy Committee)looking now?  Is it still smarting over earlier mistakes, a collective state of mind which makes further errors more likely, or is it trying to predict where the credit crunch could take us and, therefore, where the greater potential problems may lie?

Having felt the need to react instantaneously on missing their inflation target, it is likely that the MPC will dither over reducing rates. The world has suddenly become a good deal more complicated for central bankers and the next few months will see whether the battered Bank of England can do something to restore its credibility amongst them.

Will our house prices go the way of those in the US, i.e., downward?  Well,  our American friends were until recently busy building houses at the rate of 2million a year, which is a pretty astonishing rate of activity compared to us in the UK, where we build about 200,000.  Given that their population is about five times ours, that means they are building twice as many new homes per head of population than we are.  It would seem, therefore, that their supply of property is better than ours.  Here, it is difficult for young professionals with good jobs to buy a home, let alone the much discussed sub-prime sector.  In the parts of the UK were people most want to live, the South East, mainly, there just are not the numbers of homes being built.  Other places, such as Liverpool and Manchester may find the market in a slightly weaker state over the coming couple of years but there seems to be no reason for too much gloom amongst those who have a home.

Here, there seems to have been much less of the sub-prime lending that is causing so many ructions in the markets at the moment, so, perhaps we shall avoid most of the dislocating problems associated with widespread repossessions.

Of course, if you do not have a home, a crash is exactly what you may need to be able to afford a place.  The trouble with property is that people do not flood the market with cheaper places when prices are under pressure, for the mos part, they stay put until they can sell it at a price with which they are happy.  Developers, also, may just sit tight and wait for better times, except for those who have over built.   

Things may get sluggish here but a crash in the places were some need it most seems highly unlikely.  Even in the early nineties, prices did not fall except were there was a distressed borrower and back then we had a recession and very much higher interest rates to spice things up.

Certainly, parts of the States are seeing some more 'realistic' pricing and some borrowers will struggle with affording their mortgage but interest rates have come down a fair bit over there and this may ward off the worst that could have happened.

Still, expect to see many more headlines of the scary sort in months to come even if there is no good news for would be first time buyers.