On holiday recently, I noticed an article in the New York Times.  The average rate on 30-year fixed-rate home loans rose to 4.05 percent. The rate stood at 3.57 percent a year ago, the lowest level since1971.  It seems that the long slide in mortgage rates in the US is over now, and people will need to react to the “new normal”.

The financial disaster of 2007-8 in the US left more scars than here, with many people, who would never have passed any affordability stress tests, either losing their homes or facing financial hardship.   This has tended to make them more cautious and fearful of their economic futures.   The Trump presidential campaign benefitted from their votes.

Homeowners are moving less and this has in turn created a supply shortage, affecting the first-time buyers’ market.  The renovation and extension industry has benefitted.  Interest rates have gone up and, the likelihood is that they will go up further. This has put pressure on rentals.

How does this compare to the UK?  Firstly, here the high cost of moving, including not least the hike in LDST, has inhibited many people from downsizing  particularly now that the gap between higher and lower price properties has narrowed, leaving them with much less of a cash injection.  This in turn has reduced the availability of homes for those wishing to upsize.

There is no doubt that, despite the fact that rising interest rates are politically toxic, they will need to rise soon.   Inflation is gathering pace and Brexit negotiations and political uncertainty are having an effect on the exchange rate between Sterling and the Euro.   There seems recently to have been something of a revival in the fortunes of the major EU countries, which has steadied the Euro.   This will in turn increase the price of EU imports into the UK, especially if consumer confidence returns on the Continent.

 

What’s also clear is that, despite stress-testing, many mortgagees are not in a good position to deal with higher payments.   The other issue is that, rather than a generalised increase in housing, what is really the issue is the unaffordability of housing for many.   This is despite the fact that, outside London and South-East England, the ratio of average house price to average income has remained in a ratio of three to four times for many years while London’s is seven or more times income.

Mortgage costs as a percentage of income is at record lows outside the capital.   The problem in many cases is how to raise a deposit, when the Bank of Mom and Dad can’t come to the rescue.

We need to accept that, for many people, ownership of a home is just an impossible dream and private rentals are simply unaffordable.   The state cannot afford to continue paying higher and higher housing benefits.  According to an article by David Stephenson in Money Week, in 2003 social-rent new starts totalled 24,670 (a very low figure).   Affordable housing for more “intermediate” citizens amounted to 18,430.   In 2015/16, the comparable figures were only 6,550 and 3,430.   If you include the fact that much of the lower-end housing stock is in poor conditions, it’s clear where the real housing problem is.

What about the rest of the population?   Well, they are simply going to have to deal with the situation and adjust to higher borrowing costs.  Bridging finance will play a role in ensuring that home-owners are able to pay for improvements before seeking maximum long-term funding.  It will also continue to assist small builders to get projects up and running sooner rather than later.  

As Bob Dylan sang “For the times they are a-changin’”.   The mortgage industry needs to change with them.

Benson Hersch, CEO of the ASTL

 

A version of this article appeared in the June 2017 edition of Bridging Introducer