Investing in property

From lender to borrower - the industry survey

July 2006

In a matter of months the interest rates debate has come full circle and any affirmative action will impact across the lending market. With signs of strength in the housing market and rising energy costs, is it a case of if or when the Monetary Policy Committee makes an increase in the base rate? With a sense of uncertainty over the direction of the base rate, the panel is split on many of the issues raised in this quarter’s survey.

What will happen to the base rate during the next quarter?

After some time debating when the reduction in the base rate will come, the tables have turned. There is now intense speculation about when the increase will come, but some commentators feel that this would be a premature decision.

Our panel reflects the views in the market, with one half predicting an increase during the summer, while the other believes the status quo will be maintained. As we embark on the third quarter consumer spending levels and house prices are not rising at the same pace of 2004, which was when we saw the last upward trend in interest rates. Those members of the panel predicting an increase in the next quarter are in agreement that it is most likely to come in August.

With many sectors of the market still hoping for a reduction, we can only hope that the Monetary Policy Committee maintains its cautious approach and that action doesn’t come too early.

What will happen to house prices over the next quarter?

The housing market has definitely rebounded from a more subdued period in 2005. The latest data from the Royal Institution of Chartered Surveyors reveals a healthy picture, with 15 per cent more chartered surveyors reporting a rise in house prices than a fall. The average house price now stands at £184,924 according the Land Registry, which represents an increase of 5.43 per cent year-on-year.

The panel, however, is once again split on the fortunes for the housing market, with half anticipating the upward trend to continue and the other half predicting a more stable quarter with no change in prices.

Is the number of first-time buyers entering the market increasing, decreasing or remaining static?

The last Budget did introduce a number of measures to address the affordability issues facing first-time buyers. The increase in the stamp duty threshold to £125,000 was welcomed, but perhaps did not go as far as some had anticipated. Along with this was the introduction of shared ownership schemes. The Chancellor’s plans appear to have brought an increased sense of optimism to some members of the panel with half anticipating an increase in the number of first-time buyers during the next three months, while the other half predict no change.

Will equity release be a strong trend during the next quarter?

The majority of the panel (3/4) is predicting a positive quarter for equity release levels, with one panelist observing how the difficulties facing first-time-buyers are encouraging parents to unlock equity from their own homes to help their children get a foot on the housing ladder. The entrance of major brands into the equity release market – such as HSBC – along with continuing product innovation have also been highlighted as factors that will support growth in this area.

Will remortgaging be a strong trend during the next quarter?

For a variety of reasons the majority of the panel is anticipating the strong trend in remortgaging to continue. One panelist observed that many people are beginning to consolidate debt through remortgaging as they realise the extent of their credit commitments. However, another commented on the fact that some use remortgaging as a way of funding a certain standard of living.

What will happen to repossession levels over the next quarter?

The first quarter of 2006 saw the highest level of personal insolvencies in a three month period, with 23,351 people entering into an Individual Voluntary Agreement or becoming bankrupt across England and Wales. Experts at PricewaterhouseCoopers expect this record level of personal insolvency to continue during 2006.

These high levels of consumer debt are perhaps an influencing factor for two of the panel members anticipating an increase in repossession levels during the next quarter. The other half of the panel expects levels to remain static during the immediate term.

Is the market ready for new products?

The majority of the panel believes there is scope within the market for new products. With the difficulties facing first-time-buyers that have already been discussed and new measures to help people enter the housing market, one panelist observed the opportunity for innovation in first-time-buyer products. A ‘loyalty mortgage’ was once again highlighted as an opportunity within a price-conscious market.

What are the hot topics for the industry during the next quarter?

It is set to be an active quarter for the lending market, given the wide range of topical issues highlighted by the panel. As the countdown to Home Information Packs gathers pace, one panelist asks will they be implemented and, if so, can they add any value to the home buying process?

Regulation within the industry is at also the forefront of the panel’s mind. In April this year, the FSA published a detailed consultation paper on draft rules for home reversion schemes and home purchase plans. The industry will no doubt be busy preparing their consultation replies in time for the 21 July deadline.

In addition, the Consumer Credit Act is in the process of being implemented, which will of course impact on the provision of some mortgage products.

This month’s expert panel is:

Ray Hugill, Bradford & Bingley

Jon King, Julian Hodge Bank

Rajeev Sharma, Britannia Building Society

Simon Lloyd, Group Secretary, Alliance & Leicester