Tony Evans 25/10/09- Perpetual Progress

I wrote last week that it has now been proved beyond reasonable doubt that a sick housing market is the bellweather sign of a sick economy.

 

In 2006/7/8 Mervyn The Swerve King talked about irrational exuberances and over heating in the housing market.

 

Perversely though both sets of inflation figures took only a small note of the cost of housing and the policy of the Bank of England was not to target house prices, as interest rates were meant to control inflation… which ignored the cost of housing.

 

Only a flaming idiot would draw up such a scheme as the cost of housing in the UK is as expensive as almost any other country on earth.

 

Clearly as the man at the tiller Merv the Swerve lives on another planet.

 

However, no sooner had the financial world melted then we saw house prices fall off a cliff… or did they?

 

A loss is only a loss when it is realised and even if the worst of prices fell to 2003 levels, who said they were that bad.

 

For example, this recent article form The Daily Telegraph sets the way forward as Gordon Brown and his mob see it going to June 2010.

 

   In February, the Prime Minister asked the FSA to consider a veto on zero-deposit mortgages as he called for a return to traditional banking values. But the regulator has decided against setting caps on loan-to-value or loan-to-income ratios. Instead, it wants lenders to ensure clients are more rigorously credit checked so they are not extended debt they cannot afford.

The FSA’s Mortgage Market Review, published tomorrow, will focus on the third of the market considered “higher risk”. At the market peak, higher risk loans accounted for 45pc of all mortgage lending, according to the FSA. One source described the proposed reforms, which will be put out for industry consultation, as “more evolution than revolution”.

Among the report’s proposals, the financial regulator is expected to call for an end to self-certification mortgages and rule that responsibility for income verification be transferred from mortgage brokers to lenders. The moves are an effort to crack down on mortgage fraud, which has already cost lenders about £400bn due to borrowers lying about their earnings to secure a home loan.

“It would be a mistake to effectively ban self-certification,” said Ray Boulger, senior technical manager at mortgage broker John Charcol. “There would be real consumer detriment.” He argued that certain self-certification mortgages – for example for those self-employed people who would struggle to obtain a mainstream mortgage but have sufficient earnings – were a perfectly valid part of the market, “providing they are appropriately priced”.

Specialist non-bank lenders, which account for 17pc – or £200bn – of the UK’s £1.2 trillion of mortgage debt and tend to be subsidiaries of investment banks, also face tougher regulations. Firms such as GMAC originated mortgages and sold them to banks and building societies. Those portfolios have been responsible for the worst of the industry’s bad debts, with average arrears rate of more than 5pc.

The FSA is expected to propose new rules to force such non-bank lenders, which are lightly regulated because they don’t take deposits, to hold on to 5pc-10pc of the loans they originate.

Second charge and buy-to-let mortgages, neither of which are regulated by the FSA, are expected to be brought under its supervision. In addition, sub-prime, interest-only, and 125pc mortgages will all be subjected to closer scrutiny and higher capital requirements.

There is some nervousness within the industry that the review will go too far: “We don’t want to see over-regulation on products…a reduction in the flexibility of products, which would not be helpful to consumers,” a spokesman from the Home Builders Federation said.

Major reform will be limited to the riskier end of the mortgage market because the regulator does not want to damage the vital first-time buyers’ market. The average age of a first time buyer has already jumped from 25 to 34 in the past 12 years due to the near-trebling of house prices in the decade to 2007.

One Treasury official, commenting on the huge slowdown in the mortgage market, said: “We want to get business back into some sort of normality, this is about making sure it is done on safe terms.”

On average, according to the FSA, borrowers are taking out loans 3.2 times larger than their annual income to buy a house, compared with 2.5 times a decade ago and 1.6 times in 1978. Mortgage interest payments are eating up 18.5pc of monthly paycheques, against 11.5pc in 2002.

Despite the UK housing market collapse, some lenders are still lending to people on a five times income basis.

The review is expected to reiterate how vital the housing market is to the country’s economic health. Net housing equity – the value of people’s homes after mortgage debt – amounts to £2.4 trillion, even after a 20pc fall in prices. Mortgage debt, at £1.2 trillion, amounts to 85pc of the country’s entire GDP, compared with 35pc in 1987.

At its peak the mortgage market was growing at breakneck speed. Net new lending hit £110bn in 2006 alone. Net lending is expected to be negative this year.

The number of mortgage products available has collapsed from 15,000 to 1,500 in just two years, according to Fathom Consulting, and mortgage approvals are sharply down. However, new players, including Tesco Bank, are emerging.

Despite a 16pc fall in house prices last year, according to Nationwide, prices have started rising again in recent months. Some, however, fear this will be a false dawn.

The IMF estimates that UK lenders will have to write off £29bn from their £1 trillion mortgage books between 2007 and 2010 due to poor lending and the recession.

As you will see from the above, the size of the UK mortgage market is vast.

Surprise surprise, the Treasurey, FSA and other idiots who are paid too much of our money, need to undertake resarch, for what we already know ie. “the health of the housing market is vital to the country’s ecnomic health”.

You do not need a review of the mortgage market to realise the consequences of a buggered housing market.

Too much regulation is restricting products, lending percentages etc. etc only prevents the self employed getting a home.

Gordon wants to encourage men and women to go into business, banks then, will ot lend them money until they have, 3 years of good accounts and profits, so how are these aspiring, ‘get-off-your-arse’ individuals going to get a roof over their head? They aren’t, are they?

Instead, the rental market will boom, but the FSA wants to curb buy to let loans.

Personally, I am delighted because the 10% increase in house prices ahead of us, will be overtaken by 20% increase in rents.

Currently, many of my properties achieve 85% of the rents they were achieving in 2007/08… fortunately my interst is down over 77%.

For example, I have several apartments in one building. Total rent was in 2007/08 £26,940.

My interest at the peak was £43,875, a defecit of £16,935.

So my tenants were being subsidised by me at £4233 or £81.40 per week to rent one of my nice flats.

How long do you think I could sustain that position…? Answers on a postcard.

If you have never expereinced sleepless nights, become a landlord.

Today those same properties yield rent of £24,600, down 10% currently, after voids of 3 months to 1 month… though as I gasp for breath, my total interest bill is only £9750, a reduction of £34,125. so I am clearing, before management charges and tax, £14,850 per year or a 2.28% net return on my money invested.

Consequently, the way ahead is not in buying property to rent but to live in… that is why the residential market will improve and reflate the UK economy.

Any sensible landlord will sell into a rising market and buy a business to service the buoyant housing market, where people buy to live!

Tony

 https://perpetualprogress.wordpress.com

PERPETUAL PUBLICATIONS Ltd

283 Speedwell Road

Speedwell

Bristol

BS5 7SY

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