Saturday 26 April 2014

Osborne's Housing Bubble and the New Mortgage Rules

Who could reasonably object to mortgage lenders stress-testing their potential customers' ability to withstand an interest-rate hike ?  The amazing thing is that this wasn't required back in 2008, after the last bubble burst.

The answer, of course, might be "the Coalition", who seem to have fallen back on a housing boom to boost their chances in 2015.  Because it seems to me there is a good chance that almost any tightening of the current set-up will bring mortgage lending to a near-standstill.

A younger family member has recently (and sucessfully) been through the 'old' system - but only just, and a chaotic process it was, too.   Objectively speaking, the 'complexities' in her case were minor, but the bank's in-house 'mortgage adviser' was deeply unprofessional and betrayed a striking ignorance of the bank's own rules.  (And it wasn't some kid-out-of-college either: he claimed years of experience.) 

Stew in the kind of additional hurdles being introduced, and it looks like a very messy few months ahead.  At very least, the approval process will stretch out significantly: but of course it is nigh-on guaranteed to result in fewer and lower mortgage offers, too.  Cash buyers will correspondingly benefit; but the bubble could be peaking in summer 2014 rather than summer 2015.  Which isn't quite what 'Genius' Osborne has in mind.



DJK said...

Surely housing boom = feelgood factor is old politics. Right now there seems to be a big and growing narrative about house price unaffordability. Plenty of people --- here too --- who will be cheering on the bursting of the bubble.

Demetrius said...

There is another fine mess brewing here. The figures do not work and neither does the market at the moment. In the USA there is a late 2005 scene again when their market began to seize up. Remember when two and a half was the limit in an era with rather less consumer spending and no credit cards?

andrew said...

no I don't remember...
but my dad had to speak to the building soc manager personally and explain why he could afford 3x his wage in 1963 (mum earned about as much as him as a hairdresser)

Two things from that
1 - actually having to explain yourself to a third party is probably a good way of filtering out the doubtful cases - but expensive
2 - in modern terms, the cap was about 1.5-2x household income.

What I do remember was being a fresh graduate in '87 and having an interview as an actuarial trainee in Luton (don't remember the company). The interviewer was another trainee with 2 years experience. She spent half the interview being happy that the flat she bought had gone up in value by 17k over the last year and was looking forward to the same that year. I asked how she thought that was sustainable.
Didn't get the job.

The point I made back then - and others are making now - was correct then, but that does not mean it is correct now.

Since the '80s buy to let has moved from the rather obscure to the mainstream.
In an office of 60 (all income ranges and ages), I know 2 people who are doing btl, and there may be more.
When there is a persistent low interest rate environment, there are excess savings looking for a home and there is access to financial markets at a retail level, it is likely that if one person cannot afford to buy a home, another will be able to buy on a buy to let basis.

...Getting to the end of a long winded thought ...

I don't think the bubble will burst until interest rates have risen to a point where the rent an average new btl landlord can charge does not cover the loan interest + expenses.

My geuss that level is ~5%
That is not the boe base rate, but the rate real btl landlords with ~30% cash are offered.

I dont think we will get to that point any time soon.

Other people have pointed out the massive rise in inequality this is triggering - between those who have money/assets already and thos e who dont. This is the true cost of QE - not inflation or deflation.

Blue Eyes said...

I'm not convinced that the current boom is led by loose lending practices, and therefore I suspect that overall lending levels will not be trashed by these new rules.

I admit that I don't properly understand the housing and mortgage markets.

Nobody, it seems, will lend me money to remortgage my flat, even though I now have quite a healthy chunk of equity in it and a steady income. And yet I keep being harassed by a local estate agent to sell my place to cash buyers.

Steven_L said...

She spent half the interview being happy that the flat she bought had gone up in value by 17k over the last year

I had a series of strange sales job interviews in 2001 like this.

"And we're advising all of our employees to buy city centre flats, what do you think?"

"If we gave you the job how quickly would you buy property here?"

Saying I planned to relocate quickly and rent somewhere to start with never went down well. They just kind of screwed their faces up and made out I was crazy.

I don't sense we're back to that yet, I reckon the top of the next bubble will be 2022-2025. and yes, it be characterised by a levered BTL sector on very, very thin margins.

Electro-Kevin said...

@ Andrew - "5% interest being bubble-bursting-point because that is as much as landlords can bear."

(To that effect. My apologies if I have it wrong)

Prices are determined at the margins of the housing stock where the sales are taking place.

If, say, the 15% of high loan-to-value householders in London all become distressed sellers at the same time then the whole market tanks.

(Who would want to buy into a rapidly falling market ? Wouldn't cash buyers who might stop it wait for it to bottom ?)

Let's hope that many of them are on long fixed loans (or not depending on your viewpoint.)

I doubt landlords will have much say in it. In fact they may have to drop their rents.

andrew said...

@ek, if either of us could really call the top and the time of the top, we would not be here.

I have always enjoyed watching the sea and the waves crash.

They never go at precisely the moment I think they should.

The major issue with property is also that you can't tell what anything is really worth and what is going on and how much the other guy needs to sell.

HowManyNamesMustIHave said...

read this from 2003 -

then this -

then this -


there is nothing in the UK except people selling houses to each other. This MUST be kept going coming hell or high water.

This is what you are reduced to as a nation, an economy, a society. At least the Germans still build stuff.
We can lampoon them as anal engineers eager to please the fussy chinese/russian customer.

But the english..?
Well, they're just estate agents. 21 year olds with big gobs, coke habits and brylcreme'd hair.

Well done england, well done.
Look at Cameron. You used to elect people like Lloyd George, Chruchill and Bevan. Now you elect Cameron who looks like a fuckign snooker player.
You are a crappy race, hoist on your own petard. Profit from it while you can. The real joy will be in watching your young people rise up and smash your rentier teeth in.

Electro-Kevin said...

Andrew - No one can call bottom and that is why crashes tend to over shoot spectacularly.

How long could the banks hold out with a new wave of zombie loans on their books ?

Electro-Kevin said...

PS, a good way to tell what a property is worth in terms of local wages is its rental value.

The REAL money in the economy. Not the froth created by commercial banks and dole-to-landlord spivvery.

Work out a property's yearly rent and divide it into the asking price.

Anything over 16 is overpriced. 20 and above is bubble territory. We're well into that now.

Blue Eyes said...

Isaac Newton apparently cashed out of the South Sea company doubling his investment, then regretted it and bought back in three weeks before it crashed.

Steven_L said...

Anything over 16 is overpriced. 20 and above is bubble territory. We're well into that now.

Really? I'm not so sure. I think people are starting to see property in nice parts like a kind of hands-on index-linked government bond with a few management costs.

If you can get a BTL mortgage for 4% for 70% of the property you're paying 2.8%. Frenzied investors could well bid property in the nice parts of the UK down to 3% gross yields, or 33 or your scale.

People are starting to see it as a government-backed, inflation-proof investment. Like an index linked gilt. The coupons on these instruments give a negative yield!

This cycle will be characterised by BTL on tight margins. The only way to keep it going will be to pin short term interest rates to the floor with ZIRP and longer term rates with QE etc.

When the crunch comes in about 10 years time, I wouldn't be surprised if there are loads of folk with multiple properties that can't cope with IR rises of just a few basis points.

Blue Eyes said...

So many premises, so little time!

Who is to say that the private rental market is dominated by highly-leveraged small-time investors?

Who is to say that there is a right yield or wrong yield? Was the crash a return to reality or a temporary blip in a much bigger trend? Was there even a "bubble" in UK property or was the price boom an entirely rational reaction to lower inflation, cheaper money, the planning regime, the end of mass council house building, and so on?

So much has changed in the last 30 years that we cannot possibly compare cycles.

andrew said...

So much has changed in the last 30 years that we cannot possibly compare cycles.


Death, Taxes, House Price Crashes

It used to be you couldn't avoid them.
I have the feeling that quite soon the truly rich will be able to dodge all 3 - though maybe not soon enough for the other BE.

Steven_L said...

Who is to say that the private rental market is dominated by highly-leveraged small-time investors?

It's not, and it probably never will be, but things happen at the margin. Slashing IR's in 2008 bailed out a lot of speculators. It sent out a message - BTL is a one-way bet, get involved at any price and enjoy the ride or stay in the rat race until you are 69.

Only it will be harder to bail out the over-leveraged and Johnny-come-latelys next time around as short term rates will still be near zero and long term rates will still be manipulated.

Blue Eyes said...

Sorry, I think I obscured my point which is that UK buyers, sellers, renters and bank lending criteria are not the only factors determining house prices. Since the last big boom-bust cycle in the late 80s, early 90s the world economy has changed out of all recognition. Who on Earth knows at what stage UK property becomes less desirable for Chinese or Malaysian investors? China didn't even *exist* as an economy in the 1970s when some commenters were deeming 2.5 x household income to be a universal law.

If UK property goes out of fashion it might not even take a rate rise to trash the market!

Electro-Kevin said...

Who - working here - can afford to live here unless rents are at 'discounted' rates in relation to sale price ? So out of kilter.

Ergo a significant number of these places are being bought with 'money' brought into existence by commercial banks who have (yet again) lent at high loan-to-wage rates. Enough to cause it to go *pop* if those borrowers become distressed sellers.

Who - earning here - can afford to upsize to buy the downsizing retiree's 'investment' property ?

The graduate-loan-payer who is taxed at 40% the minute she hits her graduate salary ?

This is when the problems occur - when pensioners need to realise equity to cover for their destroyed pensions.

Of government intervensionism. Margaret Thatcher said that we can't buck markets.

Their idiotic HTB scheme has already buggered the next wave of buyers with a new bubble so what did that achieve ? Banks are starting to go Capt Mainwairing on mortgage applicants so what tricks are the Govt going to deploy next to stop a crash ?

Negative interest rates ?

Steven_L said...

Negative interest rates ?

Possibly. They could also go for regulated minimum rents. But probably just lots more immigration and overcrowding.

Steven_L said...

Or local government forced to act as a free lettings and management agent for poor widows with mansions.

Anonymous said...

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Jeremy Olm said...

Every current and future property owners are and will be affected by the interest rates bubble whether we like it or not. There isn’t much we can do but that is just how the market and economy really work. I am not entirely good with figures, so I just leave the math to my credible estate agent to help me work out whether or not it is a good time to buy or to sell.

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