January 7, 2013

 Bob Hunt is Chief Executive of Paradigm Mortgage Services



The great house price debate – beloved of mortgage market commentators and dinner party guests alike – is one that never seems to go away, regardless of whether the economy is peaking or in a trough.


Many borrowers look to their financial advisers or the broader financial media hoping for guidance in predicting whether prices will rise or fall in the coming year, by how much and even what values are likely to do in their local area.


What is harder to ascertain – and is subsequently less often discussed – is whether house prices are at the ‘right’ level.


While this can often degenerate into a ‘how long is a piece of string’ type argument with a dash of ‘property is worth what people are willing to pay for it’ style cliché, a recent canvassing of economists on the subject in the Financial Times caught my eye.


Of the 70 economists questioned, 44 felt house prices were still too high despite how far they have plummeted since the top of the market was reached in 2007/8.


Much of this reasoning is based on the fact that affordability is still worse than average despite the Bank Base Rate being at a historic low. This is evidenced by average prices still being around 4.5 times average earnings, whereas multiples have traditionally sat at around 3.5 times.


To this end, while house prices could theoretically continue to fall, many first-time buyers would get no nearer to realising their ownership aspirations unless their salaries radically improved or lenders started offering higher loan-to-value mortgages again.


It is this that is the real issue for first-time buyers and in many regards unless they are extreme, movements in property prices are almost academic. The difficulties in establishing a foothold on the property ladder are exacerbated by the shortage in housing supply, another factor which may be keeping house prices above their ‘natural’ level.


Household formation is currently thought to be running at about twice the pace of supply of new housing, which means that existing stock is artificially inflated due to the number of buyers bidding to get their hands on it.


A number of headlines towards the end of last year trumpeted how first-time buyer activity levels were at a five-year high, but this isn’t really something to shout about given the anaemic levels previously witnessed.


It is certainly encouraging that things are heading in the right direction, but until the supply of housing and first-time buyer friendly mortgages is properly addressed, then the vital new lifeblood that the mortgage industry requires to prosper won’t be flowing at any great rate.


Many eyes will be trained on whether the Funding for Lending scheme starts to make a difference in the next few months, but if the State subsidies aren’t making their way through to borrowers, then the Government may have to rethink its strategy to get things moving again.


House prices will continue to be a favourite topic of discussion, but unless deposit requirements are eased, first-time buyers will feel that they are being left out of the conversation.




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