Our view is it is quite far-fetched to call a rise of just over 3% in house prices a boom. You could certainly make the case there are elements of a bubble in central London but this phenomenon is partly due to the significant number of overseas investors using the London property market as a way of keeping their money “safe”.
Capital appreciation is a mere by-product of the investment rather than an end in itself. As for the notion that we have a housing bubble in the provinces, we believe there is little evidence to support this view.
Supply, however, does remain an issue. The first part of the Help to Buy scheme was designed in part to boost house building in the UK as it only applies to individuals buying new-build homes. In itself though, the scheme is not enough to overcome two of the biggest obstacles to supply: the power of the planning authorities to block new builds and stricter financial discipline on the part of house builders over the last five years has left the UK’s housing stock wanting.
This situation might change as house prices go up but we still remain a long way away from the recommendations put forward by the 2004 Barker review on housing supply. The call, meanwhile, from the Royal Institute for Chartered Surveyors for a cap on house prices has little merit for the simple reason that it is unworkable in practice.
The FPC has been given several new macro-prudential tools to combat an overheating housing market. Over the course of the next two or three years, there may come a time when they have to use them but the temptation, in our view, will be to use them at the earliest possible opportunity rather than when appropriate.
We believe the FPC is most likely to consider a cap on loan-to-value (LTV) ratios. Nobody wants to go back to the days of 110% LTV mortgages that were being issued by providers like Northern Rock before the financial crisis. Perhaps we will see an explicit ban on LTV mortgages of 95% or more.
A rise in house prices though is a positive for lenders. It effectively provides a subsidy to banks. All mortgages have a risk weighting attached to them. A key determinant in that weighting is the LTV ratio. A mortgage rate with a loan to value of 90% is clearly a riskier proposition than a loan with a 50% loan to value. If the loan stays the same but house prices are rising, the LTV rate falls and risk ratings come down – all good news for the banks.
