As advisers we are often expected to be adviser, marriage guidance counsellor and priest. But perhaps the most fearsome aspect of our craft is the requirement to be clairvoyant.
Clients somehow expect us to be able to predict the most appropriate asset class and, within that class, the most appropriate fund. While I strive to convince them that I am not a magician and cannot accurately predict the future –regardless of the fee – there are rare occasions when the planets are in alignment and the likelihood of a given outcome rises from 50/50 to 90/100.
This brings me to the present housing market. Exceptional forces have been at work to bring about an explosion in property values unprecedented since the last century. What makes this eruption different and unsustainable is the set of circumstances that have caused the boom and the natural economic forces opposing its continuation.
Consider what has created the spurt. In many areas property prices fell back during 2007-2011 and amid the economic uncertainty many would-be borrowers were loath to enter the market or to upsize. Then, within a brief period, we experienced an emergence from the economic gloom, the introduction of Help to Buy schemes and an increasing inflow of foreign money into the London market.
These factors, added to historically low borrowing rates, boosted demand, and prices have soared to the extent that 43 is now the average age of a first-time buyer in London.
So, why the darkening clouds? Let’s start with the imminent interest rate rise. How many current borrowers were in the market when base rates were above 5 per cent? Many of those who recall pre-2007 rates will be vulnerable to modest rises because they are on 2.5 per cent floating rates or lower. For interest-only borrowers in this situation a 1 per cent rate rise will represent a 40 per cent increase.
Help to Buy schemes have introduced many to home ownership, accelerating a process that might have seen them not entering the market until 2015/16. It is a similar story with home movers who have upgraded a year or two early with help from the schemes. This situation is not too dissimilar to former chancellor Nigel Lawson removing tax relief for unmarried couples and giving them five months’ notice, creating a rush and establishing a false market. To this, add the Mortgage Market Review, which is making it impossible for some borrowers to move sideways, let alone upgrade, because they find they are offered lower mortgage amounts than they currently have.
Many interest-only borrowers have become mortgage prisoners, with lenders ignoring or reinterpreting FCA rules. Many are forced to switch to repayment loans when negotiating a new rate or looking to remortgage or move. Those not on fixed rates will be the hardest pressed when rates rise.
Jump ahead to autumn 2015 and I can see house prices down 10 per cent owing to a mix of forced sales and downsizing, allied to a lack of demand. Repossessions will naturally rise, which also affects property prices, creating a spiral.
Gloomy? Maybe. True? Probably.
Alan Lakey is partner at Highclere Financial Services