Tony Ward (pictured) is chief executive of Clayton Euro Risk
Regular readers of my blogs will see that I’ve been pretty consistent in views on the robustness of the housing market post-Brexit. In my opinion we were unlikely to suffer a dramatic decline in house prices because of two glaringly obvious reasons: demand continued to outstrip supply and we simply weren’t building enough houses to reduce that gap. I still fundamentally believe this.
Any yet, and yet…
This week, two government interventions have been announced that leave me feeling nervous. First, Chancellor Philip Hammond has confirmed he is to close the Help to Buy mortgage guarantee scheme, which offered state-backed mortgages to those who could afford only a 5% deposit. In a letter to Bank of England governor Mark Carney, Mr Hammond said the scheme had ‘achieved its purpose’ and its closure within the expected timeframe was “unlikely…to affect significantly the provision of finance” to mortgage hunters. Mark Carney responded that the scheme’s closure would not cause lending to dry up: “Given the decreasing usage of the scheme over time, the [Financial Policy] Committee judges that the closure of the scheme would be unlikely, in current market conditions, to affect significantly the provision of finance to prospective mortgagors, including high loan-to-value borrowers.” I’m not so sure.
Bigger housebuilders have confirmed that a considerable slice of their house sales were attributable to the Help to Buy scheme, which was used to buy as much as 50% of their homes last year. So where does that leave them? Will it incentivise them to build the extra 225,000 new homes a year analysts suggest are needed?
The announcement coincides with new figures from AM Trust Moneyfacts that show the number of 95% LTV mortgages has fallen by 16%. So what happens to those first-time buyers who depended so heavily on the scheme? These latest numbers tell us that 185,000 people bought homes with the scheme, 81% of whom (150,000) were first-time buyers. “Our research suggests that more than 5.5 million people think that they will never be able to own a home and while the Help to Buy scheme was not without its problems, its removal could push this figure higher,” said Simon McCulloch of comparison site Comparethemarket.com.
Second are the new regulations being loaded onto the buy-to-let market next year by the Prudential Regulation Authority. Landlords will face tougher stress tests from mortgage lenders. The Bank of England worried that the unregulated lending boom was a threat to the economy, arguing that a sudden sell-off of landlords’ properties in an economic downturn would have a drastic effect on the housing market. Under the changes, banks and specialist buy-to-let lenders will be required to make sure that a landlord could still afford to meet their mortgage repayments if interest rates rose to 5.5% over a minimum of five years. The Bank’s financial regulator will also ask lenders to assess whether a borrower’s monthly rental income from a property is enough to cover their mortgage payments, or whether the landlord has enough of their own money to be able to keep paying the mortgage. This ratio will be 125%. According to Paragon, there are currently some two million private landlords, renting five million properties between them.
I feel the beleaguered buy-to-let market is under fire and these requirements are a step too far. Landlords have already faced a tough year from regulators with the additional 3% surcharge introduced in April and reduced tax relief on mortgage payments from 2017. And where is the evidence that a downturn in the housing market would prompt a sell-off? The number of buy-to-let mortgages in arrears is proportionality a lot lower than residential mortgages. I agree with those brokers who have criticised the changes, arguing that they are an attack on small landlords who may struggle to pass the affordability tests. Simon Collins from John Charcol said: “This feels like the regulator is looking to, if not prosecute, then certainly rein in the buy-to-let market very, very hard.”
Hometrack’s Richard Donnell observed that the regulations would require some landlords to find an additional £35,000 of their own money to receive a mortgage. He said: “That’s a lot of money. If you take it alongside the extra stamp duty costs for buy-to-let and the tax relief changes, then buy-to-let has gone from being a no-brainer investment to forcing people to put more money in and minimise the risk. This may mean a slowdown in the buy-to-let market.”
Hopefully, you can see why I’m concerned. All in all, not a good week for the housing market.