When will we see the next house price boom?

When will house prices start to rise again?

It is not just speculative purchasers of property and those with little or no equity in their own family home that want the answer. Britons have a love affair with property ownership and the prospect of increasing house values is a hot topic.

If you are looking at lenders making life easier before property prices increase, then I believe you are looking in the wrong direction. There is no doubt that easy borrowing was a huge factor in fuelling the last property boom. But in each of the UK’s historical property booms, the key ingredients that caused the catalyst have been different, or at least in different measure. That being said, I am certainly not of the same opinion as many experts who claim that mortgage lender criteria will never become more relaxed. It will, given time. But again the mix of ingredients that will drive house prices in the future will be  different.

No matter what market you study, supply and demand is a simple equasion. And the UK housing market is subject to the same laws of supply and demand as any other sector. An aging population combined with an increasing number of immigrants will be the next key ingredient to drive house prices upwards.

Hard to believe? Professor David Miles (who sits on the BoE monetary policy committee) has released a paper whereby he predicted a trend of rising real incomes and the likelihood of rising population density which will in turn show a rise in real house prices. There are currently 62.2 million people living in Britain. That is set to increase to 67.2 million over the next 7 years (fig from Office for National Statistics) and to 71.4 million by 2030.

Of course, this does not mean that every person coming into the UK, or UK residents coming of age to buy, will be able to buy. In 1986 the average cost of a home in a UK city was £35,209 and it now stands at around £170,000. Also, the average person these days spends more money on gadgets and less is put away on savings than any other generation. So saving a deposit for a home is a lower priority. Combine that with the issues around being able to prove to a lender that you can repay a considerable loan and one faces an up hill struggle. This will prove to be a restriction for a few years to come. But there is light at the end of the tunnel.

If Professor Miles is correct and we experience rising real income, then property prices will become more affordable again. This will close at least some of the gap experienced by many ‘want-to-be’ homeowners in the current climate. Add this to a growing population and we are likely to see house prices rise. We are also seeing more inward investment with activity from foreigners increasing, particuarly in areas such as London and Dorset.

Other minor ingredients will also play their part. The ‘New Buy’ scheme for example launched by the government and lenders recently has been well received thus far and allows a home buyer to purchase with just a 5% deposit. In August 2012 the government announced an £80 billion cash injection to encourage lending and the results evident within a month. Sadly lenders have not yet made it easier for more people to get mortgages, which appeared to be the fundamental reason for the influx of funds, but they have made deals a little cheaper for those who can obtain a mortgage. This view is current and evident in October 2012, but of course rates can go up or down according to market forces.

When is momentum going to build? Not just yet! But if you can’t see house prices going down in the short term, then this could be a very good time to buy. There is no doubt that the market will remain subdued for the next couple of years at least. However, the rules of supply and demand are, in the oppinion of experts, going to force house prices slightly upward. Five years from now, we should see that gather more momentum. In a recent report issued by Legal & General, they predicted that the average house price in the UK would be £254,000. That is 11.9% higher than the 2007 peak and 17% higher than the average in 2012. The report continued to predict that house prices will increase  by £12,000 a year from 2017 to 2027.

This article contains the personal views of Howard Bowes and does not constitute as mortgage advice. I’d be delighted to talk to anyone interested in the article or property/mortgage matters, please contact me on 02921 156918.

The New Buy Scheme – common questions answered

There have been a number of initiatives designed to boost the housing market and assist in financing a home over the past four or five years. In August 2012 £80 Billion of funds from governement was passed to Banks to increase lending. The impact has been hard to detect.

However, we have seen clear evidence that the New Buy Scheme, offering new build houses with just a 5% deposit has certainly had some impact. It is a good approach and I am quite sure the take-up would be greater, certainly from First Time Buyers if they knew a little about how it works.

At Harvey Bowes mortgages we are being asked a wide range of questions about the government New Buy Scheme. Here are the most common along with my response:

Is this really a new idea?

I hate to sit on the fence, but the answer really is both ‘yes’ and ‘no’. To fall on one side and say ‘no’ would be to look at this as a very good evolution of facilities from past mortgage lending. Years ago, for those looking to buy at a high LTV (Loan To Value) there was a MIG (Mortgage Indemnity Guarantee). This MIG was taken out by the lender but paid for by the Customer/Borrower. MIG itself still exists and used by lenders, however whereas the cost was mostly directly charged to the borrower in the past, it is now often absorbed into the overall mortgage package and therefore it is less well know by the current generation of home buyers). What it does is insure the lender against repossession – so if repo happened, the lender could recover any losses from the insurance policy. As time went on in the mid and late 90’s, some lenders worked out they could charge a MIG but not actually take an insurance policy and thereby effectively back it themselves. This saved some costs. But as the boom in property values went on, it offered the security that if a lender completed on a mortgage but then repossessed several months or years down the line, the property’s capital appreciation covered any expenses and potential losses. In other words property price increases reduced the need for an insurance policy in a booming market.

These days a MIG of some sort or another is very much an integral part of higher loan to value mortgages. The government has factored a MIG into the New Buy scheme, making mortgage lending at 95% LTV viable again. This is a significant step in the right direction and a great idea.

It is not just re-hashed old concepts though. There is a genuine evolution that makes this a good idea. The government and the developer pay for the MIG. The lender therefore gets an insurance against losses upon potential repossession, the borrower gets a mortgage with 5% deposit but without having to cover costs of the MIG, the developer gets to sell property (albeit with a little discount to cover their proportion of the MIG) and the government picks up the rest. That is how it works in very simple terms. And it is this key feature of the New Buy scheme that is a new and innovative idea that works.

Is the scheme only available to First Time Buyers?

By far the biggest misconception so far. The New Buy Scheme is potentially available to anyone looking to buy a property from a new home developer/builder who is a partner/operator of the scheme. You do not have to be a first time buyer to qualify

Why are some mortgage brokers negative about the New Buy Scheme?

When we first issued out article about the New Buy Scheme, too many mortgage brokers were quick to slate the scheme because they did not understand it and had not been permitted to access the products available from lenders. Finally, some are catching up and there is finally more acceptance that it is genuinely good option to consider. For those who remain negative, this attitude is not good for the market and it is not good for those seeking advice on whether the New Buy scheme is good for them, so please be sure to get sound advice from a professional broker.

If I have a small deposit is there an alternative?

Yes. If you buy a new home from a developer, you may be able to negotiate a 5% Builder Gifted Deposit, this means that you come up with at least 5% and the vendor gift provides another 5%. Think of it as a builder offering you a voucher of 5% off the price. The lender then counts this ‘voucher’ towards your deposit. This way you benefit from a deal at 5% deposit but get a mortgage product based on a 10% deposit which may be at a better rate than the New Buy Scheme deals. The developer/builder may be able to offer other incentives as they will save the partial cost of the MIG from the New Buy Scheme. This is not a definite, but a rule of thumb and individual advise would be needed. It may also be a lot harder to negotiate on a new build flat and please be aware that many lenders to not currently allow 90% lending on new build flats even if they do on houses.

We have many years experience in these schemes and can talk to you in plain English about the best way forward.

Do I have to buy a new home for the Net Buy Scheme?

The New Buy Scheme is partially funded by the developer of new homes. You can only qualify for the scheme if you are buying a property from a qualifying new home developer. Not all developers will be able to sell homes via the scheme, but most if not all of the major developers are already on board.

Can I get a New Buy mortgage with bad credit?

These deals are available at a high loan to value. Lenders have little appetite for adverse credit in the current climate; this is especially more the case if you are looking for a high loan to value. From my experience, lenders will be looking for those without Defaults and CCJ’s – certainly within the last 4-6 years. There will be other qualifying criteria.

If you have a low or fair/medium credit score, this may also count against you. Late payments on mobile phone contracts, credit cards and loans would show a lender poor management of funds and will have a detrimental effect on how they score an application. Be sure to maintain accounts and pay ontime. If you currently do have a low or medium score you can contact us to get advice on building your score. We find that many people are not aware that mobile phone contracts show on one’s credit rating – so if you have a phone on contract be sure to pay the bill on time. If you do not have a phone on contract obtaining one may help build your credit score and show potential lenders that you can manage the monthly committment correctly

.

Think carefully before securing other debts against your home. Your home may be
repossessed if you do not keep up repayments on your mortgage

If you want more information, please contact me on 029 2115 6918. Howard Bowes – Harvey Bowes Mortgages, happy to help!