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A fine balance for property

Sally Laker
Sally Laker

Annual house price inflation was at 9.8 per cent in May, according to Nationwide, while the Land Registry calculated it as 8.5 per cent in April.

While I am happy to see prices creep up, I will be concerned if this trend continues much longer and property becomes overpriced while supported by ultra-low interest rates and the after-effects of quantitative easing.

I expect to see prices stagnate later this year for around three years then climb upwards for the next 10 to 15 years until we hit another boom and bust situation. A potential future issue is that with the change in Government, priorities have shifted from recovery to deficit reduction. For better or worse, we will soon find out.

Since the turn of the year, the Royal Institution of Chartered Surveyors has reported a steady rise in properties being put on the market, helped by the removal of home information packs. Reports suggest this is not transferring into lower prices at present but more homes for sale should eventually push down prices.

On the flipside, mortgage rates for those with a 25 per cent deposit look good and are improving for those with 15 and 10 per cent deposits. This could entice more buyers who think property looks affordable, although if prices continue to rise this would soon dent demand.

The property market is precariously balanced. On a fundamental level prices should not be rising, or at least not fast, with the problems that remain in the economy. In light of this, the Chancellor recently announced he will hand a host of new controls over to the Bank of England to prevent another financial crisis.

The powers mean that, for the first time in the modern era, the bank could restrict lending. It seems the Bank and its governor, Mervyn King, would be able to prevent banks from lending too much or to over-extended customers if they judge this would destabilise the economy.

The measures will be detailed fully at a later date. They are likely to include restrictions on the loan-to-value ratios offered to customers. It is hoped the restrictions will curb house price booms stimulated by excessive lending. The controls, which could be applied either to specific institutions or to the entire mortgage industry, will vary over time as the economy changes.

Critics suggest this marks a significant shift from free-market policies towards 1970s-style controls on financial institutions. Under Mr Osborne’s scheme, the bank will become a significantly more powerful body than it was under Gordon Brown. The governor will have the authority to impose restrictions on banks if deemed necessary, though his main role will be to warn when he fears the economy is overheating or at risk of collapse.

Whereas previously, the only power at the bank’s disposal was to move interest rates, the new tools will provide an extra level of control over the financial system.

The mortgage sector is experiencing a period of change that is set to continue. The big issue will be how lenders and brokers deal with the transition and adapt accordingly. On a positive note, with change comes opportunity.

Sally Laker is managing director of Mortgage Intelligence and Mortgage Next

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  1. How true and how encouraging the Bank of England is going to stop banks lending irresponsibly to borrowers.
    As a valuer, excluding central London where foreign money plays a large part together with bankers Bonuses, there is no way we could have had the levels of house price rises we saw before the bust without two factors; the first, and main, being the banks preparedness to lend ever increasing multipliers on salary or to accept ever higher LTV’s on a self-cert basis (liar loans as they were nicknamed) The second was inherited property wealth from the 1st generation of home owners, but I feel that played a much smaller part. The market is already showing signs of slowing and with increasing competition for buyers price falls are inevitable. Outside the capital there isn’t a market for some units at present without dropping to a level vendors can’t afford to sell at. An increase in interest rates could tip many borrowers over the edge and now lenders are probably not being told to back off repossessions because there is an election coming we could find even more property coming onto the market. It is worrying to hear how rapidly manufacturing shrank under the last government (faster than in the Thatcher years) an economy based on house price inflation is a peculiarly British syndrome. If we are almost totally reliant on Financial services we begin to sound like Iceland.

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