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Mortgage Lending Not Out Of Control

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You have to read this discussion on between Mathew (VI) Vincent and Wrigglesworth, talk about comforting each other, my comments in bold :lol:

Mortgage lending not out of control

Matthew Vincent, editor, Investors Chronicle

Ah, Alex. Hilarious as ever. As you can see, I'm here today in the office of someone who's obviously a very big fan of this staple of the business pages. But more of my guest in a moment.

The reason I'm here is that of late, I've become increasingly aware that many of my fellow countrymen are women are now pinning all their hopes for a comfortable retirement on the ever-growing value of their properties. "And why not?" I hear you say. Haven't all those doom-mongers, who are predicting 20-30 per cent falls in house prices now been proven wrong. And hang on a second, wasn't Investors Chronicle one of those very doomsayers who made a very similar prediction? Well, yes, you're right about both of those things.

But I also have an elephantine memory which allows me to remember back to the early '90s when we saw a sharp correction (to use that horrible euphemism) in house prices and we also saw some voluntary and some not-so-voluntary repossessions. So the question is: "Could we see times like that again?"

Well, to find out I've come here to read the runes of all things mortgage-rated with housing guru John Wriglesworth.

John, we've all heard these doom-mongers predicting big falls in house prices, but so far they seem to have been proved wrong, and you seem to be have been proved right. Why is that?

John Wriglesworth, The Wriglesworth Consultancy

I think going back to the original arguments, which the doom-mongers were talking about, they were looking at a house price to income ratio, which is a fundamentally flawed analysis. It compares a stock, which is a house price, with a the flow, which is an income. Now, just because the house prices ratio to income have gone up does not mean to say there's going to be a doom and gloom bust, because interest rates have fallen so much – 15 per cent back in '92, 5 per cent now. It don't take a genius to realise that people can afford bigger mortgages if interest rates are 5 per cent and not 15.

So they just had flawed analysis. I was right because I used different analysis. I used mortgage repayments as a percentage of income - flow-on-flow, a far more logical measure of affordability. And that shows that people are not as stretched as some people might have thought.

:lol:Thats why there's a record number of bankruptcies

MV

You mentioned affordability and you mentioned interest rates. But what do think will happen, say, if we saw a sustained rise in interest rates? How would that affect house prices?

JW

A rise of a 0.25 per cent to 0.5 per cent, I don't think will be too damaging because in the scheme of things, it's not much in terms of a rise in repayments for mortgage. A 1 or 2 per cent rise, especially from such a low base, which means that the actual repayment mortgages will probably go up 25, 30 per cent in terms of in monthly outflow, that could have a real effect.

I'm still an optimist about, in the housing market, and if interest rates went up one or two per cent, we're going to talk about a major correction. And my optimism relies on interest rates remaining reasonably stable. Most economists are forecasting stable, or reasonably stable, interest rates at the moment, so I'm pretty confident that the housing market will remain healthy and steady for the foreseeable future.

:lol:If a quarter point isn't going to be too damaging then why are people making such a song a dance

MV

How sustainable is this sort of borrowing, when this week we've seen banks and building societies increasing their impairment charges for bad debts because people are getting overstretched?

JW

Lenders have been increasing the multiples by which they will lend mortgages. I think four years ago, if someone said four times income, people would be shocked, because it's three times traditionally. Five-times income, now, is normal. People are talking about six-times income. There was just a product launch by Morgan Stanley just earlier this week that talked about six times income for first-time buyers. Now this is a key reason why I believe the housing market can be sustained at these affordability levels, because as long as lenders keep on relaxing their policy in terms of lending ever more money, relative to income, obviously people can afford more and more expensive houses.

Now, the second part of your question, which is, "Is this sustainable, and will this all result in a collapse in bad debts?" – if interest rates remain stable, yes, there's absolutely no problem. Six-times income at 5 per cent is a darn sight more affordable and much more easy to repay than three-times income at 15 per cent, which all the lenders were doing back in the 1990s without anyone criticising them.

Here's a word of warning, though. I've just said, "if interest rates remain stable." If any first-time buyers are tempted by six times income offers, which are available through brokers at the moment, get long-term fixed, don't risk interest rate changes. Match your balance sheet. If any company didn't match their balance sheets, lending variable and borrowing fixed, they'll be shot out by the stock market, by the credit rating agencies. Yet all of the mortgage brokers of this land are pushing people into two-year variable rate deals where after two years they could see an interest rate hike of as much as four per cent, as they're forced to go back onto the SVR, the standard variable rate.

So whilst I think six times income is sustainable, I do say it should be accompanied by longer-term fixed-rate mortgages, not short-term fixed rate, or short-term variable rate, which leaves people vulnerable to the vagaries of the interest-rate environment.

:lol:Talk about cover your a*se boy

MV

So, assuming that all these factors you've mentioned remain the case, what's your outlook for the housing market in, let's say, six to 12 months?

JW

I have a stable view of interest rates over the coming months - maybe up a quarter, down a quarter, but stable. In that environment, with unemployment still fine - it's going up but it's still fine - and in an inflationary and growth environment, which again looks really good, I see absolutely no chance. There's more chance of crocuses on Mars than the housing market going into a crash. And interestingly, most of those doom-mongers that used to predict crashes, funnily enough they've all gone quiet recently. The egg on their faces is still there, and probably melting all over themselves at the moment. But it will be interesting to see how many of them will come back out and start predicting more doom and gloom later on this year, when the prices will prove to be about 10 per cent higher than they were at the beginning of the year.

MV

Well John, I'm delighted that I don't have to go out and buy a vase for those Martian crocuses. So thank you very much indeed.

JW

Thank you, Matthew.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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