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NEW YEAR’S DAY SPECIAL: Ray Boulger predicts

Mortgage Introducer

December 23, 2015

Few people have a better technical understanding of dynamics in the mortgage and housing markets than John Charcol’s Ray Boulger. He shares his predictions for the coming year.

Many things influence house prices but supply and demand is always the ultimate arbiter. The key to forecasting house prices is assessing what is likely to influence either supply and / or demand.

Because the supply chain, from land acquisition, through planning, construction and sales, is like an oil tanker in terms of changing direction, the supply side of the equation for 2016 is already largely predetermined, with the market now dominated by major developers as many smaller ones ceased trading following the 2009-11 mortgage famine.

The Starter Homes Initiative, offering first-time buyers under 40 new homes at 80% of market value, will have a negligible impact on supply in 2016.

The government’s claim that 200,000 of these homes will be built by 2020 is nonsense, not least because despite being initially announced nine months ago it still hasn’t finalised minor details including who will decide what the equivalent 100% price would be and whether its Help to Buy Equity Share second charge mortgage scheme will be available in conjunction with Starter Homes.

Even after 2016 supply constraints in the house building industry will mean new homes built under the Starter Homes initiative will often simply replace homes that would otherwise have been built.

The government’s incentivisation of custom build will, in percentage terms, be more successful as it will attract smaller builders back into the market.

Until 2007 the Bank of England’s main weapon for influencing house prices was interest rates, but it now has other tools.

The Chancellor has already given it power to impose income multiple and loan-to-value caps on residential mortgages and similar powers will be extended on buy-to-let early in 2016.

The Bank of England has already exercised the former power, which is reflected in frequent changes by lenders in their maximum income multiple as they struggle to stay within the cap.

However, an LTV cap looks unlikely. Some 40% of sales on many new developments, and 70% in a few cases, are made with the benefit of a

Help to Buy Equity Share mortgage and so any move to restrict LTVs would decimate the new build market.

The Bank has to take account of many competing issues when setting base rate but as a result of the new tools outlined above the governor

Mark Carney has made it clear it won’t increase BBR if the housing market is the only sector of the economy that might justify such an increase.

Global influences and the uncertainly caused by the EU referendum are all reasons to leave base rate unchanged throughout 2016, as well as inflation expectations.

Housing transactions have recovered from their 2009 trough but are still well below earlier levels. I expect the final figure for 2015 to be very similar to 2014’s 1.22m, with little change in 2016.

Supply and demand imbalances, coupled with low interest rates, will continue to result in house prices increasing faster than incomes and I expect an increase of 4.5% in 2016.

However the market will be distorted in the first half as a result of the 3% surcharge on buy-to-let purchases from 1 April.

A strong first quarter will be compensated by lower prices in Q2 and the price differential between London and the rest of the UK is now so large that I expect to see London underperform.


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