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Bank voices concern about higher mortgages and potential effect on UK economy
The Bank of England is concerned that home buyers are taking on bigger mortgages because house prices are rising too fast in the UK, but it is first time buyers who are not offered enough, experts warn. The Bank says that with prices rising faster than mortgages there could be rising debt levels and the economy could be at risk if interest rates rise and home owners struggle to keep up with their mortgage payments. The Bank's deputy governor, Sir Jon Cunliffe, said he is prepared to step in if the debt mountain gets out of hand in the bank’s latest financial stability report. 'Our concern is not so much about house prices, it is the chain between high house prices, prices growing faster than people's incomes, and people having to take out bigger and bigger mortgages and the debt that families then have relative to their income growth,’ he explained. Bank took action a year ago amid similar concerns and put a debt to income limit on mortgage lending. While the market cooled in the second half of the year it is now rising again on a steady basis. ‘Prices stopped growing as fast as they have been, mortgage approvals came down. There are now signs the market is coming back up again. We are not seeing the sort of growth in momentum we saw this time last year, but given the high level of debt to income we have in the UK anyway, and the ability of this market to move very fast, this is something we need to watch and that's why we have left that insurance policy in place,’ Cunliffe added. But his comments come at a time when mortgage lending is still low compared with historical averages and experts have voiced concerns about certain sectors in particular are seeing fewer loans available, for example first time buyers who are crucial to the health of the housing market. Indeed, a new analysis in the latest edition of the Genworth/Moneyfacts mortgage tracker report says that new product launches and falling interest rates are masking a growing crisis in high loan to value (LTV) mortgage lending. Despite more products being offered at record low prices, Genworth’s analysis of government and industry data suggests this part of the mortgage market is rapidly falling back into decline. It reveals that with total 95% LTV lending down by £147 million year on year in the first quarter of 2015, average lending per product has dropped by 38% over the same period. This has contributed to a 10% fall in first time buyer numbers which means that 10,400 fewer people have succeeded in buying their first home so far in 2015 than was the case last year. It also points out that new products come with extra price premium despite rates hitting record lows. The Tracker shows the number of products available to house buyers with a 5% deposit hit a… Continue reading
US farmland market has outperformed other real estate sectors, research shows
The US farmland market has outperformed other US real estate assets over the past 15 years recording an average total return of 13% for agricultural investment properties, a new analysis shows. This performance has been boosted over the last three years by high commodity prices, according to the analysis report form international real estate advisor Savills. It points out that while not immune to volatility, the farmland market has not been affected to the same degree as the residential and commercial property sectors. ‘Farmland and agriculture in the US can offer real opportunities for top investment performance but unlike the UK, where demand from non-farmers is a real driver of value, in the US commodity price fluctuations are likely to have a greater effect on values because of the closer relationship with farm profitability,’ the report explains. This differing weighting of the productive capacity on value is reflected in the income yields. In the US 3 to 6% is achievable in the key agricultural areas of the US, which contrasts with typical income yields of 1 to 3% in the UK. Where land is let in the US the average lease period tends to be shorter averaging from three to five years in order to avoid declining rental yields and to maximise investment returns. In the UK, farm tenancies let in the open market average between five and 10 years. Since 1950, average values across the US recorded an annualised increase of 6.6% with an increased rate of growth during the past 10 years of 8.1%. The corresponding figures for UK farmland are 7.5% and 13.7%. The report explains that these higher UK growth rates are largely explained by a reduced supply and the increased presence of non-farming/investor buyers. In the US, farmers represent 75% of buyers with investors accounting for the remainder while in the UK the proportion of farmers buying during 2014 was 45% with institutional/corporate and non-farmer buyers fairly evenly spread across the rest. ‘For investors looking for scale, high value niche markets and the opportunity for a reasonable income yield, the US is a realistic proposition particularly when combined with the medium to long term capital growth forecasts against a backdrop of a mature and transparent market,’ the report adds. It also points out that the US farmland market is not bound by one law with regard to Foreign Direct Investment (FDI) and some states and provinces restrict overseas ownership and subsidies are not available to overseas individuals and entities. ‘However, with some advance planning investment can be efficiently structured to preserve the UK tax advantages of investment in farmland while allowing investors access to the US market,’ it says. Currently, relatively little US farmland is held in direct overseas ownership accounting for just 1.15% in 2012 with the largest proportion of overseas ownership concentrated in Maine. The US has more arable land… Continue reading
Prime country house values in UK fall in second quarter of year
Average prime country house values in the UK increased by just 0.9% between April and June and annual growth is down to 2.3%, the lowest for two years, according to a new analysis report. It is an indication that any expectations of a post-election price jump in the prime market were unfounded, says the report from real estate firm Knight Frank. The report points out that one of the key reasons price growth remains subdued, despite the election of a majority government and the removal of the threat of a mansion tax, is the fact that the prime market is still absorbing the recent changes to stamp duty. The change, which came into effect in December, has resulted in higher purchase costs for properties worth more than £1.1 million. Knight Frank says there is anecdotal evidence to suggest that some buyers are factoring the increased cost into offers, resulting in some price adjustments. ‘Additionally, while there was a release of pent-up demand in the weeks immediately following the vote as buyers who had adopted a wait and see approach prior to the election returned to the market, rising stock levels, which peaked to their highest level all year in May, helped to mitigate any significant jump in property values,’ said Oliver Knight of the firm’s residential research team. He also pointed out that the greater political certainty afforded by the election result means there is a more positive outlook for the residential property market as a whole. ‘Interest rates remain at record low levels, economic growth is steady and mortgage rates are competitive,’ he added. Meanwhile, during the second quarter of the year prime city markets continued to outperform more rural locations, with notable price growth in Bath, Bristol and Winchester among others. Prime urban property markets are now, on average, 2% above their 2007 peak, while neighbouring village and rural locations remain 13.2% below peak levels. Continue reading
