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RAY BOULGER: Up, up and away

Sam Cordon

November 7, 2013

The MPC’s no change announcement following its regular monthly meetings has now become little more than a ritual and this looks unlikely to change for many more months.

The only question today on central bank rates was whether the ECB would cut. The fact that it has done so, cutting its benchmark rate by 0.25% to a new all time low of 0.25% sooner than most economists expected, is no doubt partly because the Eurozone inflation has fallen to 0.7% but also suggests the ECB remains bearish about the zone’s economic outlook.

Unfortunately EU politicians have so much political capital invested in the euro the ECB is unlikely to recognise, at least publicly, the fundamental contradictions and economic illiteracy of a one size fits all policy for the 17 widely diverse countries in the Eurozone.

Turning back to the UK, there is plenty of activity in the housing market, with both gross lending and house prices moving consistently upwards for most of this year.

Furthermore, with Funding for Lending in place until January 2015, combined with the two very different Help to Buy schemes, all the signs are that this trend will continue.

Lenders have access to more than adequate funds and those borrowers who can afford the monthly payments but can only find a 5% deposit have increasing opportunities to buy a property.

After three years of negligible growth in gross mortgage lending up to 2012, with more than 100% of the increase during the period being attributed to Buy-to-let, residential lending has recovered strongly this year and the final CML gross lending figure for 2013 is likely to show an increase of at least 20%, to a little north of £170bn.

All the factors producing a sharp increase in lending this year will still be in place next year. Therefore I expect gross lending next year to increase further to £195 – £200bn.

The Nationwide and Halifax house price indices, based on the actual figures rather than the manipulated seasonally adjusted ones which get widely reported, are showing increases of 7% and 6.6% respectively for the first 10 months of this year.

What was until recently mainly a London centric factor is now rippling out well beyond the capital and as people become more confident that house price rises have further to go the increase will feed on itself. Indications are that the Nationwide and Halifax house price indices will end the year with an increase of about 9%, with a similar rise looking likely for next year.

One of the first impacts of the early start to Help to Buy 2, the mortgage insurance scheme, has been to stimulate several lenders which already offered 95% LTV mortgages to cut their rates and others to increase their maximum LTV.

The best 95% LTV rates are now offered by lenders buying mortgage insurance from the private sector rather than those buying it from the Government. As more lenders start offering Help to Buy rates in the new year, probably at 90% as well as 95% LTV, I also expect increased supply at these high LTVs from other lenders.

The signs are that Help to Buy 2 will be the catalyst that brings many lenders back into the 95% market, although the majority will probably buy their mortgage insurance from the private sector rather than the government, thus providing the government with an early answer to its exit strategy.

The increased competition will result in rates for high LTV mortgages falling further, although the massive marginal cost for the top 5% slice of a 95% LTV mortgage will probably remain.

This suggests inefficiency in the system somewhere, probably in the regulatory capital adequacy requirements for high LTV lending.

To demonstrate the marginal cost of the last 5% of a 95% LTV mortgage take the example of the best value 2 year fixed rates at 90% and 95% LTV.

At 90% the best is 3.54% from Furness B S, whereas at 95% it is 4.89% from Hanley Economic B S, a huge difference of 1.35% for products with similar fees.

This makes the marginal cost of the top 5% a massive 29.2%!


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