Should all house price indices be rejigged following Halifax's admission that it has been overestimating the number of houses with garages, which pushed up its figure on house price growth last year?
Bolton: How each house price index is structured is entirely down to who operates it. Halifax took the decision to restructure its house price index simply to take into account the changing trends in homeownership and building, for example, the increasing number of £1m-plus properties, to provide a more accurate picture.
Dudgeon: House price indices are not 100 per cent accurate and merely reflect averages within geographical regions and therefore should only be used as a general guide. There will always be hotspots within regions where price increases are above the average for that region according to the various published indices. Equally, certain areas may be experiencing falls while nationally and region-ally prices are increasing. Where inaccuracies are uncovered they should obviously be corrected, which Halifax has done. It has also included properties over £1m to reflect the increase in the number of properties in this price bracket.
Mowbray: Confusion reigns at the moment with regard to what exactly is happening with UK house prices. There have always been differences between the Halifax and Nationwide house price indices and we have seen new indices launched from the likes of Hometrack. With all this in mind, which one should we believe in? I would suggest that the best way forward is a survey independent of commercial interests. I believe that such an index is being worked on at the moment by the ONS, which is to be welcomed.
Do you agree with the Treasury's proposal included in its Green Paper that the entire equity-release market should be regulated, including reversionary plans, rather than just mortgage products?
Bolton: The Treasury and the FSA are in a difficult position, as home-reversion schemes do not meet the definition of a regulated mortgage contract and so cannot be included within the proposed mortgage regulation due to come in 2004. This market will continue to grow, with the CML predicting that it will grow to £4bn-£5bn a year for at least the next 10 years. As such, we are keen that customers are offered comparable protection in this market.
Dudgeon: Yes, equity release is a growth area and the products are being marketed at potentially vulnerable consumers who are cash-poor and asset-rich. These people are unlocking the value of their properties in order to provide a lump sum or a regular income. Mortgage products and reversionary schemes are both designed to allow people to unlock the value of their homes and therefore should be regulated to ensure that they are correctly sold.
Mowbray: The entire equity-release market, including home-reversionary plans, should come under the auspices of the FSA and should be part of the wider mortgage regulatory framework. This is essential in order to protect consumers and give them confidence in the market. Equity release is going to be a growing area of importance in UK financial services – those aged 50-plus are forecast to increase by over six million over the next few years.
We welcome the Government's proposal in the Pensions Green Paper to consult on reversionary plans, which have so far been left out of FSA mortgage regulation. But they need to act swiftly. We would expect a consultation paper to be published by the end of this year!
Will British Gas be able to make a mark on the equity-release market with its planned launch of a product this month or does it lack the technical expertise to make a success of it?
Bolton: The equity-release market is a difficult and often complex market to negotiate. Consequently, many lenders have steered away from the market precisely for this reason. Therefore, this is a brave move by British Gas.
This is a growing market and we are likely to see a number of new entrants. The most important points in any growing market are consumer education and establishing the parameters for consumer protection – both of which we would like to see addressed.
Dudgeon: I do not know the details of the new product from British Gas, although, as an offering from a household name, I am sure that the product will attract attention. I cannot comment on the technical expertise within British Gas or any product provider but would advise anyone considering equity release to seek expert legal and financial advice and discuss their plans with their family.
Mowbray: This is an interesting move by British Gas but I am not sure that this utilities brand can make a successful leap into such a complex area. They are clearly attempting to diversify into other markets and they have noted that equity release is going to become very big business with an ageing population and the failure of the UK pension system. It seems like a strange decision based on Centrica's ownership of existing financial service brands such as AA financial services and Goldfish Bank. These are known financial services companies that could potentially harvest British Gas's 22 million customer base. They will no doubt launch with the required expertise, the issue will be in the perception of their competence by consumers.
Do you think the Bank of England is right to have kept the base rate at 4 per cent for the 14th consecutive month?
Bolton: Yes. The Treasury is walking a tightrope, having to balance price rises in the housing market with a struggling manufacturing sector. Base rates are widely predicated to increase to 4.5 per cent by the end of the year as the UK economy gathers momentum.
Dudgeon: Leaving rates unchanged clearly does not please all sectors of the economy. Manufacturers continue to lobby for lower rates and savers take an opposite stance. I would not advocate the use of higher interest rates to take the heat out of the mortgage market as there are many other factors to consider.
The Bank of England has used interest rates successfully to control inflation within the target levels set by the Government since 1997 and, on that basis, it is difficult to criticise their decision to leave the base rate at 4 per cent.
Mowbray: The Bank of England has a tricky balancing act at the moment. On the one hand, you have the weak retail sales over the Christmas period, a manufacturing sector that is running hard to stand still and, on the other, concerns over the mountain of debt that consumers are building on the back of low rates and house price inflation.
With all these considerations, the decision to maintain interest rates at 4 per cent was probably the right one for the moment at least. I would expect interest rates to move around August 2003 time – with an increase of 25 basis points.
Is the housing boom over and is the market set to fall following unsustainable price rises last year as Capital Economics consultant Roger Bootle has warned?
Bolton: We think house price inflation will slow to 9 per cent this year with a narrowing in the North/South divide as prices rise more quickly outside Southern England. The difficulties that increasing numbers of first-time buyers are facing in getting a foot on the housing ladder will cause house price growth to slow.
The continuation of low interest rates, low unemployment and the low proportion of earnings taken up by mortgage payments for a new borrower – which currently stands at 15 per cent – provides a good, solid foundation for housing demand. As a result, we expect there to be a gradual slowdown in house price inflation rather than anything more dramatic.
Dudgeon: Roger Bootle believes that momentum in the market will mean that prices will continue to increase this year but that they will then fall by 20 per cent in 2004 to mid-2001 levels.
Halifax is predicting that growth rates will slow to 9 per cent and Nationwide 10 per cent, with the Council of Mortgage Lenders predicting 7 per cent growth.
The economy is expected to strengthen in 2003 and there is the prospect of only a modest increase in unemployment. Interest rates look set to rise slightly and this could act as a brake on house prices but levels of affordability remain attractive and there is a structural shortage of housing stock in the UK, particularly in certain areas.
Therefore, the boom may be over but, with low inflation looking like it is here to stay, property appears to remain a good investment over the longer term.
Mowbray: Well I certainly do not believe there will be a housing crash – as we saw some 12 years ago – as some commentators seem to be predicting. There are a few fundamental differences between market conditions now and then. The level of interest rates being one such factor. There will, however, be regional corrections and this will be felt in London in particular and the South generally where we have seen house price inflation race ahead of income growth to unsustainable levels.
Could mortgage lenders and brokers face future accusations of misselling for advising employed borrowers to over-extend themselves by taking out a self-cert loan, as Capital Home Loans is warning?
Bolton: Intermediaries have a responsibility to give their clients best advice. If a mortgage has been sold on the basis that it extends the applicant's borrowing ability without taking into account affordability, clearly this is against the spirit of best advice.
When selling a self-certification mortgage, an intermediary should be explaining that the borrower's home is at risk if, at any time, they cannot afford to meet their monthly repayments.
This is where we will see the real benefit of end-to-end mortgage regulation. It is crucial that the advice element of any mortgage transaction is regulated to ensure the necessary safety nets are in place – for the lender, the broker and the borrower alike. In addition, the expert underwriting service provided by lender established in this area will help to check the validity of the information provided by the borrower and sound any alarm bells over affordability.
From a lender's point of view, it is clearly not in our best interests to lend to an individual who we do not believe will be able to meet their monthly repayments.
Dudgeon: Mortgage Lenders and brokers could and should face accusations of misselling if they have advised employed borrowers to use self certification of income schemes in order to achieve an income stretch on their main income.
Salaried or employed self-cert schemes are designed for borrowers who have income from a variety of sources, such as a part time job in addition to their main employment. The Mortgage Business has been active in this market since 1989 and we have not experienced any higher levels of delinquency on this type of product which would indicate that brokers are adopting a responsible attitude in this area.
Mowbray: This is, of course, a possibility and this is one area where intermediaries can really earn their money and provide a level of advice that protects eager borrowers from the temptation to over play their earnings. They are simply storing trouble for the future and a thorough fact-find should enable appropriate advice. This should, in turn, be fully documented in the normal way – drawing the customers attention to the risks – in order to protect both customer and intermediary.
Michael Bolton, director of mortgages,BM Solutions
Bill Dudgeon, managing director, The Mortgage Business
Scott Mowbray, marketing manager, The One Account