Tuesday, Jun 15, 2010
A small step in the right direction
Telegraph: Bank of England to cap mortgages
Bring it on. 75% max LTV talked about as well as all the other changes. There is going to be a big long drought of houses that people can't afford to sell concurrent with a load of people who can only pay £x for a house. Answer - drop price or keep house.
Posted by growler @ 10:13 PM (3899 views) Add Comment
48 Comments
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1. dill said...
The time is fast approaching where pressure must be applied to policy in order to bring this lunacy to an end. It's no longer in an ailing economy's interest to be holding the welfare of an easily lead public to ransom, never mind the National interest. Either the Establishment takes this farce into hand, or someone else will have to do it. I, for one, am losing patience.
2. growler said...
All revolutionary stuff Dill ;-)
But if we can
1. set sensible limits on borrowing that cannot be exceeded
2. change the law to make it the lenders problem if a house sells for less than the mortgage
3. consequentially find valuers and estate agents negligent if houses are grossly overvalued
4. find conveyancers negligent if they do not act in the FINANCIAL interests of their client
5. tax gains on all property (LVT or CGT) - first residence or not
6. apply a flat VAT rate to house sales rather than stamp duty bands which distort the market
then we'll be on the way
3. mark wadsworth said...
Ho hum
There are two separate measures here: loan-to-value and loan-to-income. While 75% LTV seems a sensible upper limit, it's even more important for there to be a sensible upper limit on loan-to-income of about three. Or 2.5 in the case of a single earner and 3.5 in the case of a couple, or whatever.
4. quiet guy said...
I'm surprised at the subdues tone of the comments so far. This is definitely an improvement which should reign in some of the excesses we saw a few years ago which encouraged property speculation.
@growler
"2. change the law to make it the lenders problem if a house sells for less than the mortgage"
I suspect that American style non-recourse loans have had their day. Traditionally, there was a lot of stigma attached to defaulting on a mortgage that was held by the local bank (before CDOs) in the USA. That mindset has gone now and I expect the non-recourse mortgage to disappear in the long term.
5. inbreda said...
still requires sensible interest rates - otherwise the homeowners will choose to "hold"
6. dill said...
@2
All Evolutionary stuff. growler :-)
I'm prepared to wait until the Spending review in the autumn. Housing should not be exploited - period. It's an essential need. No , so called, developed; first world; supposedly wealthy democracy should be compromising any of it's citizens of that need. The fact that they do is a supreme failure of care and duty. Speculators, Exploiters, and Bankers be damned - Government, today, should know and do better.
7. Bearface said...
The government has spent £100s billions propping up house prices.
Do you really think they are now going to legislate, in effect, lower prices? Don't be daft!
8. d'oh said...
Quiet Guy @11.00pm
It is a pity, as non-recourse loans, together with the inability of banks to shift mortgage risk off their books would do a lot to stop credit excesses and bring the price of land down.
Non-recourse failed to control the excesses in the US because the mortgages could be packaged up and sold on, so underwriting standards disappeared.
9. simon68 said...
There is no shortage of housing supplies in UK. It is just properties being hoarding by speculators as trading stocks or some people have 2nd or 3rd home and other have no home.
We should separate the owner-occupiers market with properties investment market. In Singapore, Government builds properties enough to cater all citizens which is affordable but not glamorous (no facilities such as swimming pool, library, gym or club house etc) but there are private luxury properties available for the wealthy people.
Sellers of low end user-owner properties must be sold to eligible Singapore citizens whereas luxury properties are free to sell to anyone.
10. gone-to-colombia said...
I'll believe it when it happens, but it looks like a revolution in home loan finance.
Could be the latest in a long list of good news
11. Growler said...
My point on non-recourse loans is that whilst someone could buy, the fact that it's not just the borrow who carries the risk (putting the packaging of the mortgage aside)
If non recourse was legal, then it would follow that it would be illegal to sue the borrower for the shortfall. That might reduce the amount of money you're willing to lend and force a longer term view.
And Mark: Yes - the LTI is also something that I missed. 3x should be the max, and once again, the risks should mount on a lender so that if it all goes wrong and the borrower can't pay, going over the max opens you up to negligence.
12. growler said...
recaptcha caught me out... so excuses if a similar post comes up!
I'm suggesting non-recourse should be legal because I think it should be illegal to sue for any shortfall. This will make lenders more likely to reduce the amount they lent since the risk will fall on them for any loss. Right now, if you can get the sucker to take the money, you've a gold plated sythe with which to hack the lender down. Do your sums, and you won't lose the money you're lending.
And Mark: Yes - I missed LTI. This shoudl be set at a max of 3 times. Going over this once again transfers risk that borrowers can sue lenders for bad advice if the house does not sell for what it owes the lender.
13. phdinbubbles said...
Surely 75% maximum Loan to Make-Believe mortgages are meaningless (and isn't that what the banks are effectively doing at the moment anyway?). So a 2x salary mortgage wouldn't be offered to someone in their twenties with a secure job and good credit history at 90% LTV, but a pair of twits can borrow 5x their joint salary with a loan from their parents for the deposit.
14. mrflibble said...
The main problem I see with this is the BoE's involvement...
The Governor will have the power to impose specific restrictions on banks if he deems it necessary, though his main role will be to warn when he fears the economy is becoming overheated or at risk of collapse.
Looking back at their actions during the current crisis is is easy to see that they lag reality by at least 12 months. By the time old Merv pulls the restriction lever the economy will likely be in flames.
If we are to get hard and fast rules on loan-to-value, loan-to-income and deposit source then I'm all for it, but if Merv is going to be standing over the market trying to make sense of it and basing decisions on this then we'll likely be no better off. This guy can be outsmarted by a grasshopper.
Lets hope this is a step in the right direction and not some watered down farce, as like dill @1, I'm losing patience too.
15. a saver said...
I just don't understand why some HPCers are favouring CGT on principal residence. CGT is meant as a tax on profits and HPI is not a profit if you have to replace your sold house with another. We've already established that rampant HPI is a bad thing but there are lots of ways this could be moderated.
16. techieman said...
income multiples? Forget that. But LTV. Thats a different story.
As has been said before, the problem with the bubble was that on the way up as average affordability was stretched (indication of a bubble unless salaries lag and can inflate at the same extent), LTVs were not reduced - infact the opposite. What should happen to control the bubble is that the % LTV reduces based on an affordability formula. Eg 5% reduction in LTV for a 10% reduction in affordability.
It seems to me (assuming this goes through and surely 75% is too low) that the government WANT an HPC quickly, so that they can rebuild. The electorate have a short memory (which is why Labour weren't annihilated) , politically it must be better for them to get an HPC out of the way (which they can blame on a ww recession or Labour), clear the decks and start again.
Actually lets see if this becomes a reality. If so i would like to see what the bulls think : smugdog ? Bluebeach?
As for "2. change the law to make it the lenders problem if a house sells for less than the mortgage" - erm why? If i borrow for a car and dont keep up the repayments shouldnt the lender have the right to try to get back what he can by seizing the asset? I dont understand that reasoning. Having said that i do think that (if there were still) MIGs then they should benefit the lender to pay back the amount which is below the value of the mortgage, rather than the banker who thn subrogates the debt to the insurance company.
17. simon68 said...
It seems to me (assuming this goes through and surely 75% is too low) that the government WANT an HPC quickly, so that they can rebuild………………….
75% isn’t too low as BOE is expecting mortgage interest to rise, so 75% can soon becomes 85% or 90% if your monthly repayment can’t even meet the debt interest, then monthly interest will be piling up with the principal.
The fact is UK won’t have resources to weather 2nd Financial Crisis. How to find another trillion pounds to bail out banks if there is a 2nd wave of financial tsunami?
18. quiet guy said...
@a saver
"CGT is meant as a tax on profits and HPI is not a profit if you have to replace your sold house with another."
We have acquired a mindset of viewing houses as financial instruments rather than places to live. Yes, that's illogical if you only have one house but it seems to be the case anyway. Dampening speculation in property should push down prices as savers/investors look for more favourable investments elsewhere - ideally in productive investments.
Anyway, as long as the homeowner is in profit they should have sufficient money from selling theirs primary residence to buy another one so what's the problem?
19. techieman said...
simon you have misunderstood. The issue is the % loan to start with, and the inability to finance the deposit, for the prices now asked . Or put another way. If i have a 20K deposit with a 90% LTV - i can buy a 200k place. If its 75% i can only buy a £80k place, 80% = 100k etc. .
Its a demand side adjustment that will (all other things being equal - eg. no BOMAD and no other availaibilty to finance - which lets face it is not available to the general population) mean stagnation of the market at best and, since prices are determined at the margins, a potential crash. Thats why 75% is IMO too low.
20. Jpdoyle said...
Is there not a risk that a 75% LTV cap on mortgages would only make the market even more exclusive? The cost of residential property would fall, but only to a level at which it yields attractive rental returns.
Take Finchley in London as a random example. The average rental price for a 2-bed apartment is £283 per week (http://www.londonpropertywatch.co.uk/average_rental_prices.html). That means that for a gross yield of 6%, the price of a 2-bed flat should be about £245,000. To buy this property at an LTV of 75%, a potential owner will need to come up with £61,250. Unless you are living at home, trying to save £61,250 while at the same time renting a similar property at £1226 pcm is going to take years. If the price does go down, it will largely only favour those who wish to buy as an investment.
21. mark said...
wow this will kill the market, most people are on what £20k-£25k 4 times that is 100k then they have to find a deposit and extra cash to buy of at least 30k , this would kill the market to the average person and allow only the well off to even buy, not sure this is the best way to go or to bring prices down...
If i was in government a sharp shock of interest rate rises and severe cuts would be my way forward, for example why does someone running a local council have to earn 400k how are they worth this? even some of the much lower level staff are way overpaid for what they actually do or achieve, I know a guy in the council who spends most of his day sleeping in his car, he is supposed to be out checking the highways!!! he earns i suspect at least 35-40k
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23. simon68 said...
To: techieman
Loose credit policy would not make unaffordable housing become affordable, but it can only make everyone DEBT SLAVE.
The current house price is unrealistically high, that is not compatible with the long-term income multiples nor economic environments.
What about if the house price fall by 40%? With the same 75% lending rate; I am sure more people would be able to buy a home if the house price falls by 40% than 95% for the current house price.
24. growler said...
@techieman:
The thinking is not like a car. With a car you KNOW it is an asset that will be eventually worthless (unless it end up a classic in 30 years!). It's price at purchase is also known. So there is no doubt that if you can't pay, you knew what you were letting yourself in for.
With a mortgage, if the lender fudges the figures to give you more than you can afford or the house it actually worth, then the buyer will have been misled. Also, if the sale price falls below debt, the 1st tier lender must be liable at this point. This would (1) stop rot going up the chain (2) prevent overselling.
@ a saver:
My point is that all forms of investment income or money-earning is taxed. If you really sell your house because you've lived in it for yay years - then some sort of long term taper relief must come in. On the other side, if you're in the market just to flip first residences because you rent to buy, fix up, sell tax free, buy, fix up, sell tax free then you ought to pay full income tax. If you know that any gain less expenses will be taxed (CGT or LVT aside), then you're no worse off or better off investing in property that in anything else. And that's the point. We subsidise income generation in the property market. It's taxed I think everywhere else in Europe. So Europeans will also get the UK property gravy train. Now ask yourself why all those properties in London and the South West and in "english hotspots of beauty" are so expensive? It's a tax-free solution for them. So, lets tax it fairly - and help to take out inflationary dynamics
25. growler said...
And for all those people still thinking poor old Labour was a victim of the global recession and that's why we're so in debt...
http://www.telegraph.co.uk/finance/financetopics/budget/7473001/Budget-2010-the-economy-under-Labour.html
Torygraph or not - this chart makes sobering reading.
26. Thisgent said...
This 75% LTV proposition is sure to be the final nail in the coffin of the housing market....
1. No more HIPS making it easier to put a house on the market to sell
2. CGT on property investmentss going up
3. Max LTV of 75%.
House prices are sure to end the year at least 10% lower than where they started at.
27. Davidg said...
> We subsidise income generation in the property market. It's taxed I think everywhere else in Europe.
What do you mean by this? Certainly in France the first house is CGT free and there is taper relief for 2nd homes. Stamp duty in France is high, which is one reason why there is a highly immobile workforce who won't move to where jobs can be found. High stamp duty didn't stop house price inflation on similar levels to the UK over the last 10 years. Nor did a 75% LTV rule and other measures.
If you apply CGT to first homes you will render your workforce less mobile. People need to move to where work can be found and moving is an expensive enough business already without meaning that with every move you have to downtrade a bedroom on your house due to CGT.
28. Exiges said...
@growler
-"My point is that all forms of investment income or money-earning is taxed. If you really sell your house because you've lived in it for yay years - then some sort of long term taper relief must come in. On the other side, if you're in the market just to flip first residences because you rent to buy, fix up, sell tax free, buy, fix up, sell tax free then you ought to pay full income tax."
Nope. Say for example you buy a house.. you're made redundant, then offered a job elsewhere .. and in the mean time house prices have gone up 10%.. The house you move to has gone up by 10% so you need the full 100% of the sale of your house. Having to pay a 10% tax on a notional gain isn't just. Do you get a rebate if your house goes down in value 10% ?
Tax on the primary residence is lunacy.
29. uncle tom said...
Look at the agenda here - there's 101 financial topics that Georgie boy could talk about in this keynote speech, yet he's majoring on restrictions to mortgage lending..
..fits in with what I've surmised before - the govt agenda is to stress test the property market, so that if it's going to crash, it crashes now and not just before the next election.
Tighten all the screws now, so that one or two can be slackened in 2014..
30. mark wadsworth said...
Growler 10, thanks.
Techie: "What should happen to control the bubble is that the % LTV reduces based on an affordability formula. Eg 5% reduction in LTV for a 10% reduction in affordability."
Exactly, but that's a bit scientific and open to 'political interference'. How about we cap mortgages at 75% (or whatever) of the replacement cost/value of the bricks and mortar? Of course, people would be free to take out an unsecured loan to buy the 'land' element, but at least that would show up in the banks' books as 'unsecured'? HM Land Reg are perfectly aware of all the facts they need to split mortgages into B&M and land elements, and they could just refuse to register a charge above and beyond B&M.
As to this whole "CGT on main residence" debate (a lousy substitute for LVT, but let's go with it), an optimistic view is that if people thought there was the slightest chance they would move home in future, they would always tuck money away to cover the potential CGT liability, so if the tax rate is 50% and your house goes up by £12,000 in a year (and you think you might sell and buy house costing a similar amount elsewhere), you ought to be putting an extra £500 into the bank; and if house prices are falling people will at least say "Great, I can take some of that money and spend it or pay off my mortgage a bit quicker". Thus homeowners would be in the same boat as potential FTBs trying to save up a deposit who have been running to keep still for the past ten years.
But again, in cash flow terms, this would be much the same as LVT (depending on assumptions) but a bit haphazard.
31. mark said...
wonder what bovis will do with their underwritten 90% deals..lol
32. tyrellcorporation said...
The absurd extension of the bubble fuelled by NL at taxpayers expense was primarily driven by Brown's comments that he'd abolished boom & bust - he'd become a hostage to fortune. For the current administration that simply isn't an issue and all the policy flagging so far has signalled they are prepared to pop this bubble and get house prices onto a more sustainable footing. The proof is of course in the pudding though and the emergency budget and the spending review will be crucial in finally delivering HPC.
33. tpbeta said...
If I had to guess, I'd say Mr Osborne is counting on a house price drop. He's going to switch the BoE inflation target to RPI, thus givin him extra wriggle room on inflation, thus allowing Sterling to devalue further, thus allowing a poor man's stimulus package to offset his tax rises.
If that's right, expect to see a delayed increase in capital gains tax in the budget.
34. techieman said...
Simon @ 19, although what you say is not (IMO) arguable, it still misses the point.
"What about if the house price fall by 40%? With the same 75% lending rate; I am sure more people would be able to buy a home if the house price falls by 40% than 95% for the current house price." - YES - because then ONLY a cheaper house will be available for the same deposit. You are in effect supporting the point.
Growler - if i lend you £100 and i secure it on your house, and the next day the house gets hit by a plane and you are not insured, would you still owe me the £100? Isnt that why the cost of a loan is higher the less deposit you have? - i.e. its based on your ability to pay (the fact its secured just means you are unlikely to do a runner).
Why should someone be able to leave scot free? I dont get it.
Mark - i think we both know that the horse has bolted and is basking in the dordogne. This is unlikely to become law (in whatever guise) when its needed - i.e. if there is another bubble. Indeed on past form this, if it does come in, it will probably be repealed just when its needed!
35. growler said...
@davidg
I did say I'm not sure that it's taxed everywhere... but...
Is it not the case that France has suffered some form of HPC at the present time? I am not 100% in the know on these topics, but I think I recall seeing this. Germany on the other had has lending and taxing policies in place - and inspite of high average debt figures does NOT have HPI or a HPC to deal with.
@ exiges
Nope. Say for example you buy a house.. you're made redundant, then offered a job elsewhere .. and in the mean time house prices have gone up 10%.. The house you move to has gone up by 10% so you need the full 100% of the sale of your house. Having to pay a 10% tax on a notional gain isn't just. Do you get a rebate if your house goes down in value 10% ?
The point is that profit margins multiply through house chains to inflate the value. If you have to pay tax, so will the person up the chain. And if you haven't the money to buy the "next house" then buy another. Once this feeds through the system, the sellers will eventually have to drop prices or they won't be able to sell. Similarly, if your buyer drops out due to tax, then you also have the choice for holding out, or accepting a lower price.
@ Techieman: It's easy - I agree with you. Essentially I'm looking for a way to punish lenders that overlend. Sure, buyers that over-buy are also a problem. But if a lender over-lends, they get commission, package up the debt and move on to the next client. They don't really give a stuff about the client since their security is the borrowers equity and other cash and assets. I think there must be some way to stop lenders seeing no downside.
36. growler said...
sorry techie - i meant it's not easy.
Re the "downside" - as reported above this blog, the FSA has banned another 3 brokers. Set this threshold much lower and brokers will not be tempted to overlend or they will also be banned
37. stillthinking said...
Probably the market is going to be frozen. There isn't anything backing mortgage debt apart from either stable or rising prices, because the purchasers cannot make up the short fall, as they are in the main debt-financed i.e. they can't sell at a loss without bankruptcy.
Reducing mortgage funding will reduce the number of transactions, and reducing the number of transactions will maintain prices right up to when it doesn't. The problem isn't just housing affordability, but existing debts that can only be carried if prices are maintained. What is the point of a housing crash leading to bank losses that are then transferred to the taxpayer. You gain on houses but lose on subsequent taxation.
How exactly are UK banks expected to resolve the funding gap coming up in a couple of years, and repay the 300 billion emergency loan, if the assets their existing debts are secured on collapse in value? Basically they can't, and if they can't, that means they can't resolve the funding gap, and the 300 billion goes onto the government books as debt. The problem, in essence, is too much debt, and house prices are a symptom not the disease. Curing a symptom doesn't help.
One way or another, if you are in the UK, you are going to overpay because of housing.
38. Bobbybogstandard said...
"even some of the much lower level staff are way overpaid for what they actually do or achieve, I know a guy in the council who spends most of his day sleeping in his car, he is supposed to be out checking the highways!!! he earns I suspect at least 35-40k"
A strong statement backed up by a weak suspicion.
39. techieman said...
np Growler. I see what you are saying. I think we are discussing 2 points.
One the extent to which banks and their agents extended credit based on the greater fool theory, and people readily accepting this proposition, i.e. who is to blame for that. Answer no-one when everything is rosy and the bubble gets more and more extended (because even if people get stretched they can sell on for a profit), but when everything goes t1ts up, then you have a point.
Two: Should (excluding the proposition in one) the creditor be able and do all he can to secure repayment.
Essentially the argument revolves around responsibility. Often it will be a case of the lender wanting the property / car / holiday etc even though he doesnt have the funds to support it. I can see your argument but err against the consumer.. however perhaps its because we dont instil financial education in our kids. Sensible people can say "it will all end in tears" but those sensible people dont know WHEN it will end in tears and look like mugs until it does. And are probably even told so by the folks that end up being repo'd.
40. p. doff said...
The dodgy brokers will simply step up the tricks of the trade to get the property overvalued. Round 2 of 'con the valuer' will commence.
recaptcha - 'stooges and'. (how appropriate)
41. Notyethomeless said...
Smart thinking from StillThinking @37.
42. Davidg said...
@growler
> Germany on the other had has lending and taxing policies in place - and inspite of high average debt figures does NOT have HPI or a HPC to deal with.
Yes house prices seem to have been relatively flat over the same period as our boom. But they started from a high level. I remember in Munich you would pay half a million for a family house 20 years ago. Now that doesn't look bad value (given the much better quality of the housing stock) compared to the UK.
I think most people on this board, even home owners like me, agree that a house price correction in line with wages would be a good thing and I'm sure some changes to the tax regime could encourage that.
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46. Henry Thomas said...
All indications believe there will be trouble coming up soon - if not a double dip, then certainly slow market, first time buyers need not to hurry at all. There are a lot of properties on the market and supply is exceeding demand. I therefore not thinking of buying at the moment, properties will not go up in value for the next 8 years.
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