Proposal for dealing with the present house-price crisis

 Estate Agents, House Price Valuation  No Responses »
May 292014
 

Many of us are glad that Mr Carney, The Governor of The BoE, has raised his concern that the price rises, both in London and more recently spreading across the UK, appear to be out-of-sync with our economic recovery.

Sales bottlenecks combined with frustrated vendors resulting from the new mortgage application processing delays, illustrate one thing and one thing only.  The housing market, or specifically the price levels being quoted in the market are way too dependent upon mortgage borrowing.

Borrowing needs to be more strictly measured to make sure that those actually needing mortgage finance are given the priority they deserve, always assuming that there is a limit to the amount of money available to be borrowed of course.

The market itself is, and always was, able to cope perfectly well with any such restrictions but as many will probably understand our housing market does have problems that need to be resolved concerning the way houses are marketed currently.  Here are four of the most important financial fundamentals that need to be understood before anyone can home-in on the real problem.

1. This is of paramount importance. In the 70’s most people borrowed up to three times their earnings.  Now, it’s five times average earnings or more. This may be the latest trend but one should ask, “Is this, necessarily, the way to go?”

In 2005, bank data shows that fewer than 5 per cent of mortgages in the UK were granted using more than 4.5 times income (and even in London it was only 6%).

By comparison today, using the Help-to-Buy schemes, those who can afford to do so can now borrow very large multiples of their current earnings (up to £600,000 each transaction) by raising mortgages - at staggeringly low rates of interest in market terms owing to the cost of the nation’s structural debt!  By doing this they are leveraging their individual levels of wealth severalfold, whilst at the same time causing house prices themselves to escalate!  This is a dangerous anomaly in the marketplace and it is abundantly clear that it needs to be carefully managed.

In the 70’s the top multiplier of 3.5 times a single income or 2.75 times a joint income used to be the norm.
The serious question is, can our coalition government rise to the challenge of bringing this fundamental back towards what used to be considered normal?

2. Secondly, back in the 70’s, loan-to value ratios were thought to be too high if they topped 80%.  What’s changed, were we wrong back then?

Over in Singapore,  Liew Mun Leong, the young but now retired president of CapitaLand recently said. “In Singapore, the size of any mortgage is limited to below 60% of the current value of the property.”  This helps to ensure that there isn’t a house-price bubble.
Whilst prices still increase, they do not ‘mushroom’ in the way we are currently seeing in the UK.
Maybe we have a lesson to be leaned from Singapore, for a change?

3. The third factor that helps to stabilise house prices in other countries is the more extensive use of long-term fixed interest rate mortgages.  Using these for a majority of home loans has been found to help smooth out price spikes, by smoothing out the cost of borrowing.  Perhaps most home loans ought to be made with lenders using these instead?

4. The fourth and more recent factor is the idea that mortgage lenders are now extending loan terms beyond 30 years, in order to lessen the monthly financial cost to borrowers and in doing so, increasing mortgage debt beyond the normal working life-cycle of a human.  This can only be described as lender-centric money-marketing and as such, is utterly crazy. The effect for some borrowers is that even their offspring will never be able to fully pay off the debt!

In the UK today and as a result of relaxation in financial restrictions in these four areas, combined with rich foreign investors buying into London, houses that used to be affordable have now become UNaffordable, except by those who don’t actually need to borrow large multiples of their annual earnings but still do.  How can this possibly be sensible from the viewpoint of the majority?

We need a new and innovative set of measures to keep house prices in-sync with the main economy. We have now formulated such measures.

One thing our British island economy historically does well in, is spawning new and innovative ideas for becoming more efficient and competitive. In this we can still punch above our weight when difficulties need to be overcome.  The latest innovative idea, as well as empowering The BOE to fully manage the above four fundamentals, is to change the way the housing market is serviced by all the estate agents.

In a nutshell the proposed urgently needed fix is not a monetary adjustment or another accountant-led fix at all.  The fix we need most is a housing market ‘imperfection’ fix.

Instead of the government being ‘forced’ into having to raise interest rates, or at least to threaten to in a desperate attempt to quell the latest bubble, this fix is much more lateral-thinking in terms of addressing the house-price rise crisis, in the short term.

The fix is to improve the way the housing market itself functions, since there are too many imperfections in the way it works currently. The very first task, however, is to correctly identify the imperfections involved.

If most of these were removed this would serve to attenuate the prices within the marketplace.  This, in conjunction with the above four points, would overcome the current crisis; at least while the housebuilding industry was able to get back up onto its feet and the construction of new housing in sufficient numbers was well under way.

Doing this would also have the effect of helping to make land prices stay more affordable as the cost of land is, (and always was), directly geared to the capital value of residential property itself.

Here are the proposals:
The proposals are that estate agents should work primarily for buyers but also deal with selling the houses which their buying clients want to move out of.

To implement them, would require a change in thinking amongst present-day estate agents and so I call on them to scrutinise, discuss and hopefully agree these proposals in full in order to improve the way the market currently works.

Taking no action will mean the continuance of the status quo with continuing price spikes, more aborted sales and continuing stress in the marketplace - including per se, lower net earnings by estate agents themselves.

Full details of these proposals and how they should be implemented may already be read on:

Posted by:
Earlier article produced and updated: Full details of these proposals.

The Over-heating Housing Market

 Estate Agents, House Price Valuation  No Responses »
May 162014
 

In the 70’s most people borrowed up to three times their earnings. Now, it’s five times average earnings. This may be the latest trend but one should ask the question is it necessarily right? Back in the 70’s, loan-to value ratios were thought to be too high if they topped 80%. Were we wrong?

Over in Singapore today, Liew Mun Leong, the young but now retired president of CapitaLand recently said. “in Singapore, the size of any mortgage is limited to below 60% of the current value of the property.” This helps to ensure that there isn’t a house-price bubble.
Whilst prices still increase, they do not ‘mushroom’ in the way we are currently seeing in the UK. So, maybe we have a lesson to be leaned from them for a change?

The other main factor that helps to stabilise house prices outside the UK is the more extensive use of fixed interest rate mortgages. Using these for a majority of home loans tends to help smooth out price spikes by smoothing out the cost of borrowing.

By comparison in the UK, houses that used to be affordable have become practically UNaffordable now, except by the Über rich, who don’t even need to borrow large multiples of their annual earnings. How can this be? The answer is, it’s mostly down to the available methods of raising the finance.

Here, whilst they don’t actually need to, richer people can, under either of the Help-To-Buy schemes, borrow several multiples of their current earnings (up to £600,000 per owner-ocupier) by raising mortgages - at staggeringly low current rates of interest. The repayments will be guaranteed by the government. By doing this they are able to leverage their wealth severalfold whilst at the same time helping to cause house prices themselves to escalate! This anomaly is now clearly evident and needs to be fixed. The question is, will the government deal with this problem before considerable damage is done to the chances of the less well off getting onto the first rung of the housing market?

One escape route used by relatively ordinary folk, to try and mitigate the effects of this problem, from the 70’s onwards, has been to relocate further from their work locations to find cheaper housing but have to commute in to work each day instead.
Many have tried to swap high house prices by travelling perhaps four or more hours a day, commuting to and from their work and this is in addition to the extended hours of work which are expected of them. This hasn’t worked unfortunately because they are now facing the highest rail fares ever!

With the cost of train fares, electricity, oil etc., all having gone up as well as food prices, there’s yet more pressure on normal family’s budgets at just the time when they are least able to cope with this.

Also, salaries for the majority of the employed have simply not kept pace, meaning food and house-price inflation has been noticeably higher than the officially published annual rates of inflation.

On the other side of the coin, the top 1% of income earners have more than doubled their incomes between 1970 and 2005 and, as explained above, these people continue to be free to borrow very substantial amounts on mortgage, adding a further lever to their buying potential.

Some people have expressed their sense of hopelessness about such policies. For example, following the banking crisis and as a demonstration against this, a small group tried to ‘Occupy The London Stock Exchange’, as a form of protest.

It appears that not much notice is being taken of such protests really, so where exactly should we be going from here?

The answer has to be to find solutions to the now blatantly obvious anomalies, especially those besetting the housing market. The housing market is arguably the most fundament market of ‘need’ of modern society. The idea of letting it sort itself out is no longer a viable one, since the evidence is clear that doing so hasn’t worked in the past and isn’t working now.

A new initiative is clearly needed.
We would argue that there is clearly a need for changing the way houses are marketed up and down this country and this is the key to resolving the house-price problem - not simply relying on building more housing which is only a long term goal.

Posted by:
Earlier article on our blog site: Full details of our current proposals.

The housing market is a threat to our economic stability

 Estate Agents, House Price Valuation  No Responses »
May 012014
 

History clearly shows us that there are issues and that they are yet to be resolved. The FT has today published an interesting article about this.

It highlights the fact that there is little point in trying to react to curtail house-price increases after they have escalated, each time. The goal posts need to be moved so that prices self-adjust all the time. These particular goal posts come in the form of estate agents’ methods.

There are simple ways of achieving improvement, thus saving all the chaos of cyclical booms, which generally run out of kilter with the rest of the nation’s economy.
The government of the day is well aware of this but so far, isn’t prepared to put the necessary measures into practice owing to its political objectives.

The BBC, as one organisation among several, have spent significant amounts of money (and time recently), trying to investigate the shortcomings of UK estate agency. Clearly it believes there is a genuine need for such investigation. Equally clearly, those working in estate agency don’t see the need for any changes.

Surely, if our real economy is to pick up, sooner rather than later, something should actually be done to correct the substantial issues being discovered by these investigations.

My question is who (or what body or institution), is going to step up to the plate and determine exactly how to improve the workings of the UK housing market? If anyone can properly answer this question I, for one, should be very grateful.

In the meantime, my own proposals for making the UK housing economy self-correcting have already been given an initial airing on this blog and they appear to be capable of correcting all of the anomalies discovered by the recent investigative journalism.

For more on this please visit:

We want a functional, stable housing market.

Posted by: Peter Hendry, Consultant in Housing Valuation at Property Match (UK)