Britain’s housing market is on fire.
Prices are soaring and are expected to keep increasing for at least five to 10 years.
However, Family Building Society CEO Mark Bogard told Business Insider in an interview that Britain’s housing market is living dangerously “on the edge” for a variety of reasons.
“There’s been an awful lot of talk for years about capital requirements for deposit taking institutions [to buffer themselves against a crisis],” said Bogard to Business Insider.
“But my point is that it’s a bit like the NHS treating the disease and not doing things that are preventative. All banking crises happen when institutions lend money to people who don’t give it back. It should not be about falling back on capital. Surely we should be looking to avoid the problem.”
Property prices are rocketing across the country. This month, Halifax’s house price index showed that house prices rose 9.7% in January on an annual basis to £212,430. This is in line with the government’s Office for National Statistics data published this month which also showed London house prices hitting £536,000.
It’s due to a housing shortage. There are too few properties on the market for the amount of people looking for a house. This month, a study published by Santander showed average house prices will more than double to around £500,000 over the next 15 years.
In tandem, average wages are still around the £27,000 mark and haven’t increased as quickly as house prices. It’s surprising anyone can afford a house at the moment.
All of this points to some serious concerns for the mortgage market and Family Building Society’s CEO Mark Bogard told us exactly why some homeowners are living dangerously.
Business Insider: You said that people are focusing more on how to deal with a market collapse rather than preventing one. Where are you seeing these risky mortgage lending practices?
Mark Bogard: After the credit crisis, which was caused by lending money to people who couldn’t pay it back, there was a significant retrenchment in the underwriting criteria and credit quality of the borrowers. All the 100% to 125% LTV mortgages from pre-crisis didn’t exist and it was almost impossible to get a 90% mortgage after the crash.
But what’s happened now is that the big banks are back in the market and battling for market share and we’re returning to pre-crisis levels (lending and products available.)
If you’re in the mortgage market you can do more business by cutting prices for mortgages or increasing the percentage you lend. At the moment there are some really good deals on the market.
However, there has been an increase in the decline of people’s underwriting criteria. One of the ways to measure this is by looking at how many, what we call, “high high mortgages” — mortgages with a LTV of 90%+ which people borrow at a level of at least 4 times loan to income.
BI: Surely though there are systems in place to see if people can make those mortgage payments anyway though, right?
MB: When the Mortgage Market Review (MMR) came in two years ago, it was said that firms should look at affordability, not income levels, when getting a mortgage. But now there are 90%+ mortgages out there and while they are expensive, they are available.
The Bank of England put a cap on high loan to income multiples but those 90%+ mortgage products are still available.
It only takes a small fall housing prices or something to happen in the economy that could become a problem for homeowners.
BI: But those on 90% to 95% mortgages are in a better position than those that would have 100% mortgages right?
MB: If you have a 95% mortgage after stamp duty and legal fees you’re almost at 100% already. Then if you’re selling, wrapping in the estate agents fees, you’re near 100% as well.
Only a tiny movement across the world markets, like interest rate rises, or decline in asset prices can cause a disruption. It’s living on the edge.
BI: So what else are you seeing exacerbate the situation?
MB: Another point worth nothing is about challenger banks.
The government welcomes challenger banks because it brings competition to the market. However, although challenger banks were well capitalised when they were set up, they have aggressive growth targets and ambitious development plans.
They have to push the envelop for their shareholders and grow quickly. All this looks like a focus on credit capital.
BI: House prices are soaring and looks like they will continue to increase across the country for many years to come. On top of that interest rates are at a record low still at 0.5% and it doesn’t look like they will rise in a while — do you think we are all too complacent about the housing market and borrowing needs which is why lending criteria is “looser” than before.
MB: People forget very quickly. For example, it took Iceland three years to borrow in the international money markets again [referring to collapse of Iceland’s economy]. There are quite a few people in society starting in senior, decision making levels in the economy that have never seen a rate rise before.
I was talking to a lady at the Treasury about what levels to stress test borrowers’ affordability when it comes to rate rises and mortgages. She was originally thinking of just stress testing a 1% rise.
To put this into perspective, when I bought my first property around 1988, I had a 100% mortgage when interest rates were at 7.25%. 18 months later interest rates rose to around 15%.
Everyone then was talking about a “goldilocks economy” — an economy that borrows an analogy to the fairy tale where the economy is “not so hot” that it causes inflation but “not so cold” that it causes a recession.
Then look what happened. When everyone thinks the same thing, they’re generally wrong.
BI: So do you think we are in for a house price fall or a rate rise soon?
MB: I don’t know what the housing market will do but it can go down as well as up.
There are an awful lot of foreign buyers and there is a supply issue, which explains house prices rising. But if UK Chancellor George Osborne did something on supply issue and made a material impact to this, it could change the market a lot.
BI: What’s the Family Building Society’s view on this. What’s the lending criteria for members?
MB: We take a cautious view in lending. We have very little lending over 70% LTV. Our members are cautious and sensible.
The bank and borrower should be able to survive the ups and downs. If you’re someone who has a 95% LTV mortgage and anything goes wrong, your circumstances can deteriorate very quickly.
Going back to when I first bought my flat in 1988, after years of nagging from my father to get a place, within those 18 months of buying it, the property’s value decreased by £20,000 and my mortgage payments soared (because rates went up to 15%).
To give an idea of how much £20,000 meant to me at the time — I was earning £6,250 a year. My father, who felt a responsibility for making me buy a place, gave me money each month just to eat because the mortgage was more than I earned.
Luckily it turned out OK and I sold the property in 1999 for double the prices but had I not survived that period, I’d been completely screwed and my financial situation for life.
BI: So what kind of steps would you like regulators to take to make sure that we prevent another credit crisis rather than be better equipped for one?
MB: It’s not our job to tell what the regulators to do but the only point I would make is that the debate on capital is secondary in the debate and the focus should be on credit quality. Credit quality is the key to have a flourishing, survivable and helping economy.
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