How can the mortgage market recovery be helped?
Record-low rates and a wider range of mortgages are stoking the flames of the mortgage market, writes Richard Sexton, business development director of e.surv chartered surveyors. House purchase lending has begun to increase steadily. But it should – and could – be higher.
Data from the Council of Mortgage Lenders shows first-time buyer lending is on the increase. There were 20% more in March than in February. But lending to first-time buyers is 42% lower than the pre-recession levels seen in 2007. So there is plenty of room for improvement, and still a long way to go.
So what is keeping a lid on lending levels? Put simply, it is overbearing regulation and requirements that lenders restructure their balance sheets and the way their businesses operate. The Funding for Lending Scheme has injected cheaper funds into the system, but the effect isn’t as powerful as it could be thanks to regulation and restructuring. It’s like filling a car full a petrol then puncturing one of the tyres.
Undoubtedly regulation was not strict enough in the lead up to the financial crisis. But new regulations should be introduced slowly. While the economy is limping along, banks need to be left to do what they do best: lend. Once growth returns, the focus should then be on pushing on with regulatory reforms.
Strict regulation is preventing banks from passing on all of the savings from FLS to customers. By 2018, banks must have a core tier one capital ratio of 7% to meet regulation, with larger banks needing as much as 9.5%. As banks are building these buffers, the amount of money they have available to lend is reduced.
Liquidity requirements also hinder banks from granting loans. Starting in 2016, liquidity rates for banks will increase by 10% each year until they reach 100% in 2019. This translates to even less money available for loans to first-time buyers, as banks must put in place costly re-structuring processes.
Consequently, banks are reluctant to significantly loosen the strings on their high LTV mortgages. This is keeping a big block of first-time buyers frozen out of the housing market. Lending to high LTV borrowers is still subdued, despite a 14% increase in high LTV lending in the past twelve months.
Rising house prices are also making life harder for first-time buyers and other High LTV buyers. First-time buyers paid £134,616 on average for a home in December of 2012, representing 83.9% of their salary – almost a 3% increase from the year before. With little salary growth in the past few years, potential purchasers are stretched thin and unlikely to buy rather than rent when the chances of getting a loan are slim, and deposit requirements are asking for larger chunks of their salary.
To improve the supply of affordable housing, and to cater for demand, more homes need to be built. As things stand, the UK has a critical shortfall in housing construction. We need 270,000 new homes a year in England to meet demand, yet in 2012 there were just 105,090 housing starts. The government needs to encourage local councils to build, and land owners to develop banked land. And brown-field sites are a resource that can’t be ignored. There is enough brown-field land to accommodate almost 300,000 homes. But the developing process is complex. It needs to be simplified.
This lack of house building, the on-going difficulties facing the economy, and the overbearing regulatory burden placed on banks is stymieing the recovery and keeping a lid on the momentum the mortgage market has built up over the last six months. More needs to be done to help the market – otherwise the recovery in mortgage lending will be slower and more painful than it needs to be.
This is a guest post by Richard Sexton is business development director of e.surv chartered surveyorsmortgage
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