Over the past year property prices have been soaring in the capital. Policymakers have been watching with concern as affordability becomes an issue and loan to income ratios increase. Predictions of housing bubbles and crashes at the start of the year dominated the headlines. Evidence suggests that these prophecies have substance.
The Chancellor has been fending off calls to reconsider the Help to Buy scheme, citing that the scheme was helping to build more homes and was supporting the economy. Statistics show that the majority of sales were to first time buyers, representing some 87% of completed purchases and of the 13,000 new homes bought in the first nine months only 6% of these were in London.
Despite the drop of 0.5% in the average asking price last month the capital is still showing an increase when compared with June 2013 of 14.5%, currently standing at £589,776. Across the rest of England and Wales Rightmove reported a virtual standstill with only a 0.1% increase on the previous month to £272,275. This hardly supports the claim that the scheme would add the injection of life into the market.
George Osborne’s announcement last week to allow the Bank of England powers to cap mortgages appears to be an admission that the capital is indeed in a housing bubble and that MP’s concerns for the economy as a whole are warranted. Stricter mortgage lending rules, more properties coming to market and the threat of interest rates rise culminate with rash interventions, but does it really help?
From April 2014, new rules mean that lenders have to question potential buyers in more detail on their spending habits to ensure their position and affordability of loans before issuing them. They are also asked to consider this, both at the time of application and any future potential interest rate increases.
The governor of the Bank of England indicated last month that interest rates could rise earlier than expected. Property owners that have been hanging on may now decide the time is right to sell. The decrease in asking prices seem to be a reflection of the apparently stricter mortgage lending criteria and uncertainty surrounding interest rates.
George Osborne’s latest move is to grant powers to the Bank of England to ‘direct’ limits to the amount of money people can borrow as a ratio of their salary or impose loan to value caps on the size of a mortgage as a proportion of a property purchase price. The proposal would, seemingly, have a bigger impact on those looking to re-mortgage as the think-tank estimates 38% of current mortgages have loans outstanding which amount to more than 3 times the household income. The cap proposal would cause them difficulty when trying to refinance.
The truth is that the Bank already has similar powers and it seems unlikely that they would intervene further. MP’s would be wary of imposing a cap as it would undermine the Bank of England and potentially cripple the London market were a cap of 3-3.5 times salary to be introduced.
These announcements appear to indicate that the Chancellor concedes rapid house price increases do indeed threaten to destabilise the entire UK economy and derail the recovery. There is, however, no quick fix for this and this policy could cause more damage to an already uncertain market.
Alex Hargreaves, Head of Property Sales, Makeurmove.co.uk.
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