The London house price madness continues.
Last week I was in holiday in France. I returned on Saturday evening to a pile of post. Among the mail, there were no less than three letters inviting my landlords to sell their house.
While they have no intention of doing so, this isn’t uncommon. I’ve even seen local estate agents advertise discounts to prospective sellers, something they’ve never done in the past.
The fevered market is partly driven by a genuine shortage of homes (though some experts dispute this).
But more important is the demand stoked by schemes like Help-to-Buy, low interest rates and above all, a readily available supply of credit.
The bad news for sellers – and good news for buyers – is that things could be about to change.
The fuel for the London bubble is being cut off
Most of the UK isn’t suffering a housing bubble – yet. But London prices are a different case. However, the London bubble could be about to meet its pin.
It looks as though lenders are turning off the easy-credit taps that have been inflating prices. Two months ago, the regulator, the Financial Conduct Authority, introduced new rules (under the mortgage market review), designed to stop what it sees as reckless lending banks.
The rules were left deliberately vague so that banks couldn’t get away with just ticking a few boxes. Instead, they have to consider a wide range of criteria, including the potential impact of future rate rises and the stability of an applicant’s income.
It’s easy to be cynical about this. Rather than tighten mortgage lending criteria, it might have been easier to just drop the large subsidies, available through the second part of Help to Buy, which have pushed down the cost of loans.
However, the new rules already seem to be having a real impact on the availability of loans. According to the Bank of England (BoE), the value of mortgage lending for new purchases is at its lowest level since last August – and is 20% below the peak in January.
Conditions are set to get even tighter. Nationwide and Lloyds (who account for about a third of total lending) have recently been phasing out tracker mortgages, which follow the Bank of England base rate. Instead they are pushing people into fixed-rate loans.
It’s clear they’re worried that people could end up taking on cheap mortgages only to have trouble repaying when rates rise (as the BoE heavily implied it would do next spring).
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
A crackdown on mortgage lending
These measures are important. But the most radical move is the decision by both Lloyds and RBS to heavily restrict high-value mortgages. Both have put in place a new rule that means that those seeking mortgages of more than £500,000 are limited to no more than four times their earnings.
Of course, this will have a minimal effect on the wider UK market. After all, the average housing price in the UK is somewhere between £172,000 (Land Registry), £184,000 (Halifax) and £186,000 (Nationwide).
Even in Brighton and Hove, one of the most expensive markets outside London, the average price is only £356,682.
Overall, UK prices are running at around 4.7 times the average income of first-time buyers.
However, in London the average price is £362,000 (according to Nationwide). And in no less than nine boroughs (counting both Kensington & Chelsea and the City of London), average prices are above £500,000.
Across London, the average price is a staggering eight times the average first-time buyer’s annual earnings.
To put this into perspective, to get a mortgage on an average house in Wandsworth under the new rules, a family would need a joint income that was roughly the same as David Cameron’s salary of £146,000. Even the best-paid couples might struggle to get a mortgage for a house in Hammersmith & Fulham (£705,695) or even Islington (£643,784).
London’s long-overdue correction is coming
The government and the BoE are under pressure to do even more to deflate the bubble. The International Monetary Fund (IMF) has chipped in with its two-pence worth as well now.
The IMF has warned that the housing bubble is one of the biggest risks to the UK economy. It has urged the government to adopt formal limits on lending and to consider scrapping the second part of the Help to Buy scheme (which guarantees mortgages).
The scheme is too politically important to be scrapped, of course. And both the BoE and government seem reluctant to act, each insisting that it is the responsibility of the other. It’s clear that neither wants to be blamed for a large drop in prices just before an election.
However, it looks like the BoE will take some action before the end of the year. The Financial Policy Committee starts a review of the mortgage market and Help to Buy in the next few weeks.
So what does this mean? Outside the capital, at least some property remains decent value, with prices close to (or slightly above) where they were at the peak of the crisis (which means they’re still much lower after inflation is taken into account).
However, it’s clear that London is overdue for a correction. This could come sooner, and be bigger, than many people think. Indeed, to get back to historical price/earnings ratios – prices would have to fall by a third.
Our recommended articles for today
Switzerland can no longer claim to be the home of the world’s mega-rich, says Lars Henriksson. The big bucks are heading east.
China’s middle class is driving a huge demand for physical gold. A supply squeeze is inevitable, says Simon Popple.