BoE needs to improve understanding of credit markets
The Bank of England (BoE) wants to improve the way it monitors UK credit conditions after admitting that the growing sophistication of the financial markets has made it more difficult to manage monetary policy.
The bank is struggling to determine the impact of the credit meltdown to the economy amid accusations that it failed to respond quickly enough to the crisis at Northern Rock.
Charles Bean, chief economist, said assessing conditions in the economy is ‘subject to considerable uncertainty’.
Writing in the bank’s quarterly bulletin, Bean said: ‘One important step in analysing monetary demand and supply stocks involves improving the bank’s information about credit conditions’.
Tracker and discount mortgages grow in popularity
With the Bank of England’s base rate fixed at 5.75% for a third consecutive month, Andrews Mortgage Services reported a 10% drop in clients opting for fixed rate products as discount and tracker mortgages take up its largest share of the market to date.
Chris Chapman, director of Andrews Financial Services, said: “While fixed rates remained popular during August, having peaked as the choice of product for 91% of our clients during July, this figure fell to 81% by the following month.
“With nearly one in five clients now opting for variable products, it would appear fixed rates are beginning to fall from favour. And as LIBOR is currently running at 6.75%, which is the highest in nine years, a number of lenders are finding it increasingly expensive to fund fixed rate products, so it’s fair to say more competitive tracker and discount mortgages may well be just around the corner.”
Prediction of house price rash unfounded, says Savills
According to Savills’ Research, weaker financial markets are already leading to a cooling in the performance of the prime Central London property market. Quarterly growth was recorded at 3.2% in the third quarter of this year, down from 9% in Q2 2007.
Lucian Cook, director of Savills’ research, says: “The tempering of growth is a direct reaction to uncertainty in the City with purchasers expressing more caution pending a clearer picture of future job security and bonus expectations.
“There have been some incidences where buyers, particularly those employed in the City, have withdrawn from the market in what is seen by Savills as a natural reaction to current uncertain circumstances. Even where deals have fallen through, pent up demand remains such that there is generally a competitive (although less frenetic) bidding environment and other buyers have been coming forward.”
Savills anticipates this increased caution to be a feature of the market for the remainder of 2007 and in the first part of 2008, with minimal growth in values likely in the last quarter of this year. In light of this, Savills has decreased its base rate scenario forecast in prime Central London for this year from 22% to 18%. This assumes that there are limited redundancies in the City and that the current crisis of confidence in the financial sector is short-lived.
Cook said: “Should the reduced confidence become deeper-rooted and redundancies more widespread, we would anticipate that there is a possibility of house price falls in the final quarter and much lower growth next year. Any prediction of a house price crash is definitely unfounded at this stage as the fundamentals of the market are sound and no serious economic commentator is predicting the recessionary environment that would precipitate one.”
Should DAR replace APR?
Grant Thornton’s Financial Services Group says the Annual Percentage Rate (APR) is an ineffective and confusing indicator of mortgage costs and should be replaced with a new measure known as the Dynamic Annual Rate (DAR).
DAR would include all relevant fees, interest and early repayment charges and can be calculated for any period within the mortgage term, unlike APR.
The APR arose from the need to have a standard measure of cost to allow comparisons on short-term credit agreements such as hire purchase and personal loans. It is also used as an indicator of mortgage costs, but the underlying assumption that the loan is held for the full-term is no longer valid, because increasing numbers of mortgages are terminated early.
The group believes DAR represents the average annual interest rate over any chosen period across the loan, rather than only at the full-term as in the APR, which makes it more relevant and easier to compare.
Paul Cook of Grant Thornton’s Financial Services Group said: “As many consumers now re-mortgage their houses between two and five years after taking their loan on, the DAR allows them to realistically compare the cost of mortgages across different lenders and products, including all charges and any early repayment penalties that may apply.
“Recently the FSA has expressed its concern at the increasing complexity of the mortgage market. Using a measure such as the DAR makes it far easier for consumers to understand exactly what they are comparing. In addition, it ensures loan providers and advisers meet their obligations under TCF (Treating Customers Fairly).”
Planning consent for brownfield site in London
Planning consultants Savills has teamed up with Hepher Dixon and secured planning consent for the redevelopment of 48-52 Thomas Road, London, which is a post-industrial brownfield site in the London Borough of Tower Hamlets, for Genesis Housing Group.
The mixed-use development will incorporate 182 residential units with a 50:50 private to social housing mix, plus business start-up units arranged across three buildings, ranging from five to 12 storeys. A large number of family units including four and five-bedroom duplexes are proposed.
Savills Hepher Dixon is continuing to discharge planning conditions for the scheme to enable the contractors, Durkan Ltd, to start on site as soon as possible. The scheme is anticipated to start on site shortly with completion for spring 2009.
Roger Hepher of Savills Hepher Dixon said: “From the outset, this was a challenging brief, requiring a mix of planning and design skills to achieve the right balance for the local authority and the immediate community. In particular, significant negotiation was undertaken in respect of the Section 106 requirements.”
54% of investors not put off by credit crunch
According to the Association of Residential Letting Agents (ARLA) Review and Index for Q3 2007, more than half of all buy-to-let investors (54%) expect to increase their portfolios over the coming 12 months.
However, if mortgage interest ceased to be an allowable business expense, more than four out of ten investors (42%) said they were uncertain what they would do.
A significant minority, 28%, said they would certainly sell some property, while 10% said they would sell out of the private rented sector altogether.
Ian Potter, ARLA operations managers, said: “With the institutions less interested in the private rented sector and private equity companies not filling the gap, the loss of any private individual investors would seriously affect the rental market and severely curtail choice in housing. Buy-to-let investors have refinanced the private rented sector and restored social acceptability to renting.”
In addition, the average Loan to Value (LTV) ratio for buy-to-let investors in the last quarter was 59%, marginally less than in the previous quarter. The proportion with LTV ratios between 51% and 75% has dropped marginally, with a corresponding rise for those with ratios between 25% and 59%. Just over a quarter of all buy-to-let investors have loan to value ratios of between 76% and 90%.
CML encouraged by BoE’s credit conditions survey
The Council of Mortgage Lenders (CML) is encouraged by the results of the Bank of England’s (BoE) credit conditions survey.
Positive findings include defaults on secured loans over the past three months were lower than lenders had anticipated they would be and lenders broadly expect the availability of secured credit to remain about the same and the demand for it to increase over the next three months.
Lenders are anticipating the demand for house purchase lending to strengthen in the prime sector, but a small proportion of lenders anticipate demand reducing in the buy-to-let sector, and a more substantial proportion expect demand for ‘other’ house purchase lending to reduce.
Michael Coogan, CML director general, said: “Although the survey was undertaken before the Northern Rock situation emerged, the funding constraints arising from the slowdown in the interbank lending market were already apparent. Against this backdrop, it is encouraging to see that the lenders contributing to the bank’s survey largely expect the supply of mortgage lending to hold up.”
AHIPP wants HIPs on all homes now
The Association of Home Information Pack Providers (AHIPP) urges the Housing Minister, Yvette Cooper, to extend the rollout to all remaining properties as Home Information Packs (HIPs) are currently only implemented for all properties in England and Wales with three bedrooms or more.
Mike Ockenden, director general of AHIPP, said: “I call upon the Government to extend the rollout to the remainder of the housing stock. There are now over 5,000 fully accredited Domestic Energy Assessors (DEAs) ready to provide Energy Performance Certificates (EPCs), which is a substantially higher number than the Government’s target of 3,000 for the full national roll out of HIPs.
“Presently anyone selling a home with three or more bedrooms and buying a one or two bedroom home is penalised by having to pay for the information in a HIP on the sale and also on the purchase. Clearly this situation should be rectified as soon as possible.”
UK house price growth slows amid crunch
According to Nationwide, house prices defied gloomy expectations and showed another gain in September, but the trend growth of house prices is now the lowest since July 2006.
Credit conditions are now clearly tightening for leveraged borrowers. The interest rate outlook has shifted from hawkish to dovish, which could provide some welcome relief to homeowners next year.
Fionnuala Earley, Nationwide’s chief economist, said: “House prices recorded a reasonably strong gain of 0.7% between August and September, seemingly shrugging off the unsettled events of the past month. Despite this increase, the 12-month rate of house price inflation came down from 9.6% in August to 9.0%, as we are now entering a period during which house prices gains were particularly strong in 2006. This brought the average price of a typical UK property to £184,723.
“The 3-month on 3-month rate of price growth – often the smoothest indicator of underlying momentum – slowed from 2.0% to 1.6%, the lowest level since July 2006. Overall, house prices defied the gloomy predictions of some recent headlines, but their underlying growth is still on a decelerating trend.”
FSA’ review of PPI selling standards a success
The Council of Mortgage Lenders (CML) welcomed the Financial Services Authority (FSA) findings of its review of Payment Protection Insurance (PPI) selling standards.
The FSA found that sales of regular premium prime mortgage PPI were more likely to meet required standards, and to have been based on a proper assessment of the customer’s need for insurance.
The FSA said: ‘Our latest work has confirmed that sales of regular premium prime mortgage PPI, on an advised basis, are most likely to meet our requirements. We found that the processes and controls around the selling of this specific product are likely to result in a more thorough assessment of the customer’s demands and needs when arranging protection insurance.’
Commenting on the FSA’s findings, Michael Coogan, the CML’s director general, said: “We have said consistently that PPI sold with prime mortgages is more appropriately targeted at customers than some other insurance products. With market conditions becoming more challenging, mortgage payment protection insurance still has an important role to play as part of the safety net providing support for home-owners.”
