The continued reality is of a subdued housing market with a real national price fall of somewhere between 25 and 35%, depending on which index is used, recently bottoming out and transactions and mortgage advances way below normal levels. The recovery, outside of London, looks fragile and weak.
These features have been pointed out by a number of informed commentators. Looking at such numbers and past experience suggests that a national boom in the near future looks highly unlikely. But committee MPs, the Financial Times and many others still beg to differ.
What’s missing from their critique is recognition that what is being put in place is not some sort of helicopter loaded with free mortgage deeds for all and sundry, or even a UK version of Fannie Mae. Fannie in its worst days sold mortgage-backed securities in the run-up to the US downturn on the basis of guaranteeing all billions of dollars of mortgage loans that it had not originated; with, as it turned out, scant due diligence and a bellyful of misplaced optimism and bonuses for those in the mortgage supply chain.
Instead, here a far more pedestrian programme is now being introduced in which the top-slices of higher LTV loans are to be guaranteed for first-time buyers. Attached are lots of strings, fees to pay, extensive scrutiny and oversight, and much lender liability and costs if things go wrong. Similar schemes have been in existence in other countries for some time. Defaults in them tend to be low, though cyclical in nature.
It is also advisable not to get too excited about the London ‘bubble’. The London boom may not ripple out to the rest of the country but rather cool down of its own accord. Do not be fooled that all overseas money is a cash purchase. Much may instead be being fuelled by a surge of easy credit on offer to the better-off in emerging economies and elsewhere in recent years. So, the price growth in the London prime market may well subdue in the aftermath of the withdrawal of Quantitative Easing, which the IMF has recently noted is likely to cause financial and economic turbulence in emerging economies.
In addition, the private rented sector did not have much effect in previous UK housing market cycles because it was so small. But now it is large, particularly in London. One of the things going on at present, therefore, is a shift of people out of the private rented sector into homeownership. Rising London rents, improved mortgage affordability and the sight of rocketing prices in combination are encouraging many renting thirty-somethings to buy. Once this shift between renting and owning has worked its way through, as it will in the coming months, the London market itself may slow down to a more moderate pace of growth.
That brings me onto a final point about the growth in first-time buyer numbers and mortgage guarantees. First-time buyers are mainly moving out of the private rented sector. One more home owner means one less tenant, so the net effect on housing demand may be rather modest. Even so, the costs savings and additional benefits gained by these new homeowners may be substantial. That should be applauded.
Mortgage guarantee - bring it on.
- Michael Ball is professor of urban and property economics at Henley Business School, University of Reading