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The Incentives Disguising The Real State Of The Property Market

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The incentives disguising the real state of the property market

Memories must be short in the property business.

Three years after the credit crunch, Northern Rock, while shedding jobs with the one hand is offering 90% mortgages to first-time buyers with the other. The Government, while admitting that current house prices are unaffordable for first-time buyers, used the Budget to announce a year-long scheme to throw a little more State debt on top of FTBs’ ever-burgeoning student loans. Governments and developers will club together to lend first-time buyers their deposits, so they can buy expensive new builds at the top of a market that’s likely to still be falling in a year’s time. And – against a background of continuing investigation into the previous decade’s more questionable lending practices – a national lettings agency, Belvoir, warns in a message to landlords, this week, of the return of ‘No Money Down’ offers to buy-to-let investors.

It shouldn’t have taken hindsight to realize that NMDs would turn out to be the WMDs of the mortgage industry. They sprung up during the boom years of the last decade, offering investors the chance to invest without actually investing.

Property clubs took advantage of unscientific new-build valuations to offer flats at ‘below market value’ (BMV), when really they were just discounts on inflated valuations. Investors avoided having to pay deposits by arranging a temporary bridging loan, and then quickly re-mortgaged at the full valuation price… paying off the bridging loan and the clubs’ hefty fixers’ fee with the excess. The result was a spiv land-grab that sullied the reputation of small-scale property investment.

For a while, when lenders were clawing at each other’s throats for volume, and dodgy valuations combined with almost religious faith in property were enough to push prices ever upwards, it seemed that almost everyone won. (That is, until investors failed to secure tenants, missed mortgage repayments, attempted to remortgage in a post-2008 climate with little or no equity in their properties.)

Inflating the value of a property in order to gain a larger mortgage? It smells like mortgage fraud. But John Charcoal’s Ray Boulger agrees new clubs have recently been seen springing up and adopting similar, if less extreme, practices.

Recent rules, according to Boulger, formulated by the Council of Mortgage Lenders in co-operation with developers, stipulate that as long as a lender’s notified by both the buyer’s solicitor and the vendor that such an arrangement is in place, it’s not technically fraudulent, and it’s up to the lender whether to lend or not. Some will, but are unlikely to accept more than a 5% incentive, making the contemporary version more of a 'Less Money Down' deal.

It’s a far cry from the 25% difference between the official price and the price actually paid that characterised the bad old days. But even five percent has the potential to distort new build prices in the context of a slow market.

The more respectable Vendor Gifted Deposit – a popular way for developers to attract first-time buyers – raises similar issues. In order to help a buyer raise a deposit, the vendor gifts a lump sum. It’s a cash-back incentive on a larger scale and – of course - like the cash-back incentive it’s factored into the price of the property. It’s effectively a way of massaging the loan-to-value of a mortgage, and if property prices are inflated as a result, developers can live with that.

There are developers of all sizes currently offering 5% Vendor Gifted Deposits on new builds. One independent mortgage broker (Obligo) has launched a ‘5+5’ scheme and is encouraging estate agents to sign up and urge their clients to match a buyer’s 5% deposit and help get the market moving. A perusal of Halifax’s lending criteria page for intermediaries suggests they’ll lend on a property where up to 10% of the valuation is returned as a gifted deposit or other type of cash incentive.

John Mawdsley, chief executive of Omnii Intelligent Information (which helps lenders check customers against their lending criteria), warns that the effects of incentives can be over-played. He believes more Vendor Gifted Deposit schemes are advertised than are actually put into practice, and that lenders today are so busy having to worry about what responsible lending practices that they’re more likely to err on the side of caution. He does, however, ‘wonder whether a little more activity and increased competition in the next six months might drive lenders to accept more of these deals’.

Ultimately, the madness is in the message: that an affordability problem can be solved by lending at a more generous loan-to-value ratio than banks are prepared to admit, whether that’s disguised as a Government scheme or a vendor gift. In the long run, a fit and functioning property market’s in everyone’s interest, and it’s very hard to beat clarity.

Despite al their efforts to keep the ponzi scheme going, at least this article admits prices are still likely to be going down in a years time.

And with the rules forumultated by the CML and developers....no vested interest there then? :rolleyes:

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Despite al their efforts to keep the ponzi scheme going, at least this article admits prices are still likely to be going down in a years time.

And with the rules forumultated by the CML and developers....no vested interest there then? :rolleyes:

Moral Hazard still abounds.

I guess NR are offering these mortgages because the huge volume drop since their collapse means their organisation is too big for the amount of business they do. So it is either cut, or get the volume back again. All backed now by taxpayer money.

And others who are offering silly loans are doing that due to the moral hazard of the bailouts. If there was no deposit insurance and no bailouts, any banks lending with 25% down would find people taking their deposits out and shifting it somewhere safer.

Moral Hazard isnt a concept, it is real.

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