ROOF Blog

Britain’s leading economists are almost unanimous in their view that house prices are still too high. Of the 70 who answered the question, 13 believed residential property prices were now fairly valued, while 55 said they were not and two did not express a view. The judgment that the housing market remains overinflated sits uncomfortably alongside extensive evidence that prices are rising rapidly. But the general view is that the recent surge in prices reflects low interest rates and low levels of supply - a situation that cannot last for long. House prices are also likely to be hit by weak income growth and still weak bank lending, economists argue.

Evidence is growing that the worst is over in the recession-hit property market following a string of cautiously optimistic assessments from the UK’s leading housebuilders.

Persimmon set the tone this month when it predicted a moderate recovery. Barratt, the UK’s largest housebuilder, and Bovis Homes echoed that sentiment with similarly upbeat forecasts.

The number of new homes being built rose to its highest level for over a year in the three months to October, with work starting on 25,000 new properties, an increase of 27 per cent compared with the same period last year.

However, housebuilders are reluctant to be too bold over the prospects of a sustained recovery because of the fragility of the market and the uncertainty over the continuing availability of mortgages.

‘We are way ahead of where we were this time last year, but we’re not out of the woods yet and there could still be plenty of problems for the industry were the banks to pull back lending,’ said Bovis’ chief executive David Ritchie.

Banks were today accused of profiteering from homeowners during the recession, as it emerged that the average interest charged on variable-rate mortgages is 4.2 per cent higher than the Bank of England’s base rate.

The average Standard Variable Rate mortgage now charges interest rates of 4.7 per cent, down only one per cent over the past year – when the base rate fell by 2.5 per cent. Vera Cottrell from consumer watchdog Which? said the variable rate market was ‘raising serious concerns’.

She said: ‘Lenders are getting away with charging very high mortgage rates right now, many have an incredibly high margin between base rate and the interest being charged. That’s offering consumers a poor deal.’

Northern Rock has had its busiest quarter as a mortgage lender since the credit crunch two years ago, lending £1bn in the three months to the end of September.

But the nationalised lender, which is to be split into a ‘good’ and ‘bad’ bank before being sold off, is continuing to suffer a rise in the number of customers falling behind on their mortgage payments.

In the third quarter 4.11 per cent of its mortgage customers were three months or more late on their repayments compared with an industry average, compiled by the Council of Mortgage Lenders, of 2.42 per cent.

The lender blames its problems with arrears on the Together product sold by the previous management which allowed customers to borrow up to 125 per cent of their value of their home.

Northern Rock chief executive Gary Hoffman stressed that the bank was trying to avoid repossessing the homes of customers facing payment difficulties:

‘We continue to invest a lot of effort in our approach to debt management and to providing the best possible support we can in all circumstances’, he said.

Abbey has announced a sharp increase in its share of the mortgage market in the past three months.

The group lifted pre-tax profits by more than 30 per cent to £1.16bn in the third quarter of 2009.

Although mortgage approvals and house prices have been recovering in recent months, they remain well off the highs of the housing boom that ended two years ago.

And think-tank Oxford Economics reports that there is a significant risk of renewed falls in house prices next year and in 2011.

Neil Blake, director of economic analysis, said that the rises in house prices since 2001 can only be explained by an explosion in the availability of credit rather than any fundamentals of supply and demand. Now that credit is hard to come by, house prices risk a ‘double dip’.

He added, ‘Our research suggests that had we not experienced the massive expansion in credit after 2001 there would have been barely any growth in house prices in real terms.

‘Credit conditions are key to the housing market, but even a strong recovery in credit will not be sufficient to prevent house prices dipping again next year.’

The Governor of the Bank of England, Mervyn King has called for big banks to be broken up, in a speech to business leaders in Edinburgh. He suggested that ministers’ refusal to hive off the ‘casino’ investment arms from High Street banks could lead to a crisis ‘even worse than the one we have experienced’. And he warned that rapid increases in the national debt meant Britons would be paying to clear up the mess ‘for a generation’. His intervention came as official figures revealed public borrowing soared to a record £77.3 billion in the first six months of the financial year - the highest half-yearly figure since the Second World War.

Reckless lending to first-time buyers remains endemic in the financial services industry. An investigation by ROOF into the practices of leading banks and a mortgage broker found a worker with an income of £28,000 could borrow more than £153,000 from one high street bank. The repayments would have put an impossible financial squeeze on the buyer, bringing a serious risk of repossession. The amount the banks were prepared to lend in relation to the value of the property was also huge. Many offered an 85 per cent loan and one went up to 95 per cent. Kay Boycott of Shelter said, ‘With latest figures showing over 270,000 mortgages in arrears, it’s shocking to see banks continuing to lend to new borrowers based on such basic checks on their ability to pay. People are being encouraged into home ownership that may not be sustainable and potentially unmanageable debt. There is absolutely no point in giving a mortgage to someone who cannot afford it - every day we see the human fall-out from the repossessions that often follow.’

Self-certified mortgages are to be banned and homebuyers applying for mortgages will have to undergo rigorous credit checks, under new rules unveiled by the UK’s financial regulator today. Hector Sants, chief executive of the Financial Services Authority (FSA), said the watchdog was seeking to ‘get rid of the irresponsible practices that put banks and consumers at risk.’ Lord Myners, the City minister, said the core of the problem was ‘irresponsible lending’ and stressed, ‘The FSA has some very strong sanctions and enforcement resources available if banks contravene the regulations.’ Setting out major reforms of the mortgage market, the FSA said this morning that it will make banks and other lenders liable for loans that cannot be repaid. It is forcing lenders to carry out thorough checks on people’s incomes before granting a mortgage, such as examining their spending habits and existing loans.

Banks and building societies are under pressure to cut their mortgage rates, after the Libor rate fell to its lowest level in more than 20 years. Conversely the average two-year tracker rate mortgage increased from 3.73 per cent a month ago to 3.77 per cent this week, and lenders have also pushed up the price of fixed-rate mortgages to their highest level for at least 20 years. Critics have accused lenders of being ‘unfair’ to homeowners and threatening the recovery in the housing market. Libor is the rate at which lenders lend to one another.

Redrow and Barratt Developments accused the banks of downgrading valuations on new properties to restrict lending. Redrow said the practice of down valuation by surveyors representing mortgage lenders was ‘widespread’ and posed a ‘major obstacle’ in the recovery of the housing market. It blamed the gap in valuation for about two-thirds of its current cancellation rate of 20 per cent. A spokesperson for Barratt said the policy was creating a ‘two-scheme mortgage sector’ and added that house builders were asking for new builds to be valued ‘appropriately’.