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Maligned banking practice could help rebalance UK mortgage market, study suggests
Securitisation, where investors buy pools of debt from banks as secured assets, has enabled mortgage lenders in the UK to offer an increased number of lower risk, long term fixed rate mortgages, it is claimed. Securitisation was originally intended to free up funding for banks, allowing them to sell packages of mortgage loans and lend out the proceeds to more customers. Those loans could then be sold on, and the cycle could start again. The process was also intended to reduce risks for banks by spreading the ownership of mortgages and other loans among other investors but it came under scrutiny during the global economic downturn and used less frequently as a result. However, a new study of long term market trends by Dr Alla Koblyakova and Professor Michael White, of Nottingham Trent University’s Real Estate Economics and Investment Research Group, has found that 78% of mortgages sold as securities over a nine year period were held in longer term fixed rate contracts. ‘This is an important finding as it shows that securitisation not only increases liquidity in the market but has the potential to shift consumer mortgage choices toward long-term fixed rate mortgage debt,’ said Koblyakova. ‘In a market like the United Kingdom’s, where around 80% of residential mortgage debt is held in higher risk variable rate or short term fixed rate contracts, this is a very welcome finding,’ he claimed. ‘A high level of variable debt is seen as a source of economic instability. Policymakers may wish, therefore, to consider the potentially beneficial role that securitisation can play in helping balance the UK mortgage market,’ he added. According to the study variable rate and short term fixed rate mortgages are more risky for borrowers as they leave them more vulnerable to financial shocks, such as interest rate increases. By contrast, longer term fixed rate deals protect borrowers from such increases, but leave lenders more exposed to these risks. Koblyakova believes lenders may be more inclined to offer longer term fixed rate mortgages to borrowers when these mortgages are sold on as securities because this reduces the lenders’ exposure to risk. The study also found that variable rate mortgages were more profitable for lenders than long term fixed rate mortgages by as much as 1.6%. For every 1% of profit a mortgage lender makes from a variable rate mortgage, the market share of variable rate mortgages increases by 18%. This is despite the data also suggesting that consumers prefer to take out longer term fixed rate products. ‘According to this data, larger profit margins for variable rate mortgage products positively influences demand. These findings are very important, and should stand as a call for action for policymakers, as they show that UK households may be faced with greater payment shocks because of the strategies of lenders,’ Koblyakova concluded. White pointed out that the regulation… Continue reading
House prices increase more than average earnings in over 25% of UK districts
Average house prices have increased by more than the average employees net earnings in more than a quarter of local authority districts across the UK, according to new research. The number of areas where house prices are outpacing earnings over the last two years has increased significantly over the past 12 months from 73 or 19% out of 384 to 108 of 28% out of 380. The Halifax research also shows that the vast majority of these areas are in London, the south east, and east of England with these three regions representing 97 or 90% of the 108, with the biggest gap between rising property values and earnings in Three Rivers in Hertfordshire, where house prices increased by an average of £147,990 over the last two years, exceeding average take home earnings in the area by £97,992. Seven London boroughs appear in the top 10 districts while the top performers outside southern England were Warwick in the West Midlands and South Northamptonshire in the East Midlands, with house price gains in excess of earnings of £24,723 and £14,837 respectively during 2014 and 2015. ‘The housing market recovery over the last few years has led to substantial price rises in some areas of the country, particularly in London, the south east and the east of England. This has resulted in homes increasing in value by more than total take-home earnings for the average home owner in many areas of the country,’ said Martin Ellis, housing economist at the Halifax. ‘Clearly, this is good news for some home owners. However, it does make conditions tougher for those looking to buy their first home in such areas, with prices being pushed increasingly out of range for many young people,’ he added. Over the past five years, 35 local areas in the UK or 9% of the total have seen average house prices increase by more than total average pay, up from 23 districts or 6% in 2015. The biggest differential was in Hammersmith and Fulham, where average property prices have increased by £248,971, surpassing average take home pay during the period by £108,653. The top 10 performers are all in London. All 35 areas are in London, the South East and the East. Over the past decade, house prices have increased by more than total pay in four areas across the UK led by Brent up £11,760, Haringey up £8,255, Hammersmith and Fulham up £4,438 and Cambridge up £1,767. Continue reading
Cost of housing in UK means more young people still living with their parents
Affordability issues mean that more young adults aged 20 to 34 in the UK are more likely to be sharing a home with their parents than any time since 1996, new research shows. There were 618,000 more young adults living with their parents in 2015 than in 1996 at 3.3 million compared with 2.7 million, according to the data from the Office of National Statistics (ONS). Nearly half of 20 to 24 year olds lived with their parents in 2015, compared with a fifth of 25 to 29 year olds. For 30 to 34 year olds, this figure was less than one in 10. The research shows that the percentage of young adult householders owning their home decreased from 55% in 1996 to 30% in 2015 for 25 to 29 year olds and from 68% to 46% for 30 to 34 year olds. The percentage of 25 to 34 year old householders renting their home has surpassed those who own their homes over the last decade. There has been a noticeable increase in renting since the early 2000s and the ONS says that this may be due to increased demand for rented housing as house prices increase and an increased supply of privately rented housing from a growing number of buy to let investors. The increase in renting has been largest for householders who are aged 20 to 24. In 2015 some 91% of householders aged 20 to 24 were living in rented accommodation; this is higher than all other age groups. Only 9% of 20 to 24 year old householders owned their homes either outright or with a mortgage or loan in 2015, down from 30% in 1996. Saving for a deposit is often seen as one of the biggest hurdles to home ownership and the report says that first time buyers’ deposits have increased from around 10% of the purchase price in 1996, to a peak of 27% in 2009. This was the height of the economic downturn, when mortgage lenders placed greater restrictions on the mortgage lending criteria used to assess applicants’ ability to afford a home loan. In recent years the size of deposits paid has fallen slightly but remained above 20% of the purchase price on average. The size of deposits paid by first time buyers has risen more than deposits paid by existing home owners. This is because prospective first time buyers who have smaller deposits saved were less likely to be approved for a mortgage, and therefore less likely to buy a home. That left only those with larger deposits who did buy their first home, which in turn pushed up the average deposit paid. Between 1971 and 1999, the amount paid for a house by first time buyers with a mortgage fluctuated between two and three times their annual income. After 2000, this ratio increased rapidly, driven by increasing house prices , reaching a peak of more than 4.5 times their annual income in 2004 and… Continue reading
