MortgagesMay 15 2013

A slow recovery as the malady lingers on

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It prompted a question in my mind: how healthy is the UK mortgage market? Has it healed itself? We are more than five years into the adjustments that were needed to respond to the initial closure of global funding markets and the subsequent credit crunch. Is the patient back on its feet, or does the mortgage market face a long ‘healing’ process that is only partially complete?

The government continues to support new stimulus measures to help the housing and mortgage markets – a definite sign of an ongoing sickness. Most recently the Bank of England announced an extension to the period and scope of the Funding for Lending scheme. This adds welcome short-term certainty for business planning purposes, and supplements the Budget announcements on a twin-track Help To Buy scheme (equity loans and a mortgage guarantee).

However in recent weeks a groundswell of opposition, including the influential Treasury select committee, has emerged against the proposed Help to Buy mortgage guarantee scheme. This is due to be introduced in January 2014.

Personally I agree and think that the financial support to the mortgage market in the scheme is a risk too far, as I suggested in last month’s article.

It may have been perceived, originally, as a political vote winner alongside the economic benefits that could come from it. It was certainly the first step in a long ‘hearts and minds’ campaign. However, in my judgement, Help to Buy is just as likely to lose votes if consumer aspirations, indeed now expectations, are not met and their access to homeownership remains thwarted.

If the government continues to implement the mortgage guarantee scheme it would speak volumes about its perception of the short and medium-term health of the mortgage market. Despite regular market surveys that suggested an increase in activity in 2013, the stimuli of cheap funding and other government financial support are disguising the fact that homeownership is difficult to achieve. The overall homeownership level has now fallen to 64 per cent from a high of 69 per cent 10 years ago.

Artificially supporting higher transaction numbers, and underpinning house prices, could store up a considerable potential liability for taxpayers (and downside risk for new borrowers once the artificial market stimuli are removed). As this financial risk is better understood, I suspect borrowers will be less willing to transact (and, anyway, many remain ‘mortgage prisoners’ in their current loans so have little or no choice to transact). The government might succeed in maintaining the funding supply for mortgages but that is not the same as stimulating new borrower demand to match mortgage funds’ availability.