19-07-2016

Fox Davidson Housing & Mortgage report, Quarter 2 2016.

This was ‘The Brexit Quarter’. Whether you voted to remain or to leave the EU I do believe most people were shocked that the UK as a whole voted to leave the European Union. In this Brexit special quarterly housing & Mortgage report we will look at the effect Brexit has had and will continue to have on the housing and mortgage market.

The Brexit effect on Mortgages.

Lenders want to lend and they have the funds to do so. Post Brexit the general mortgage market is no different to how it was before June 23rd 2016. The banks are in a much better position than they were before the last financial crisis in 2008 because the amount of money held by Britain’s largest banks is now ten times higher than before the financial crisis. In addition, the Bank of England has stress tested the banks against scenarios more severe than the country currently faces. So, as a result, UK banks have raised over £130billion of capital and now have more than £600billion of high quality liquid assets.

The Bank of England Governor Mark Carney said: ‘This substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households, even during challenging times.’

There are areas of lending that Brexit has affected. As mentioned in our June Blog, central London prime property has been affected by the vote to leave. The market in prime London areas such as Kensington and Chelsea where single value units fetch Tens of Millions of pounds have seen a decline in Lenders wishing to fund these types of property on a short term basis of 12 – 24 months indicating that the expectation is that they will fall in value in the short term.

At Fox Davidson we secure funding for developments and refurbishments and having spoken to a wide range of lenders we can confirm that very few lenders are now in the market for single high value units.  Lending on developments has dropped from highs of 70% of Gross development value to around 40 – 50% or in some cases no lending is possible at any loan to value. One underwriter at a bridging lender told us that post Brexit they have, for lending purposes, wiped 25% off of the value of any central London investment before factoring in their loan to value for lending.

It is expected that many of the privately funded bridging lenders will now pull out of funding as their financiers pull back on lending and we will for a temporary while at least be left with only the deposit funded banks’ lending short term money.

Outside of prime central London the market for Lending remains strong. As previously mentioned, mortgage lenders have plenty of funds to lend.  Cheap residential mortgage money is in full flow.

Buy to let.

Post Brexit, Buy to let funding remains constrained following the Bank of England Prudential Regulation Authority (PRA) report in March which set out proposals for changes to the way lenders assess eligibility for buy to let lending.

The main changes will be:

  • An income affordability test, where firms take account of the borrower’s personal income to support the mortgage payment.
  • A stress test on interest rates

The PRA is proposing that firms, among other things, give consideration to:

  • All costs associated with renting out the property where the landlord is responsible for payment;
  • Any tax liability associated with the property; and
  • Where personal income is being used to support the rent, the borrower’s income tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs

Portfolio landlords will be classed as such should they hold 4 or more investment properties and lenders will be expected to look at the overall portfolio rather than just assessing the loan being applied for and the rent that the subject property will achieve.

You can read the full consultation paper here:

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp1116.pdf

The consultation ended in June and the final report and its changes are expected at the end of 2016. Until then some lenders continue to lend using low pay rate calculations far below the guide of 5.5% in the consultation paper.

This is a further blow to property investors following the changes to stamp duty for those with more than one residential property. You can work out your stamp duty using our handy calculators:

The Brexit effect on House Prices

We expect to see a cooling in property inflation as people are less bullish with their offers and confidence in the market drops but ultimately there is a lack of stock in the UK as house builders continue to fail to meet demand and so property price inflation may fall but UK property price inflation as a whole will not fall into negative figures anytime soon.

The stance taken by mortgage lenders willingness to lend short term money on high value units in London is a clear sign that they expect a fall in the value of these properties and that the central London market is the most fragile. We don’t expect the weak pound to entice more foreign buyers to buy in London, not until property prices have fallen first anyway.

Outside of prime central London we continue to see clients buying property and clients selling property and in the right areas properties are still going above asking price.

Granted, there has been some uncertainty due to Brexit. 1 client of ours did indeed pull out of buying as they were employed by a European company and were unsure of their job security. But, they are in a minority and customer sentiment seems positive with all other transactions progressing in the 4 weeks since Brexit.

Home track comments: ‘At present we don’t expect widespread house price falls. It’s unlikely that we’ll see a significant upsurge in people who have to sell – which tends to be triggered by higher mortgage rates or a deterioration in the economic outlook. But we do expect a rapid deceleration in house price growth from almost 9% nationally – and 13% in London – down to lower single digits by the year end.’

Rightmove data on the housing market is labelled as ‘steady’ post referendum. Their July summary is as follows:

  • Price of property coming to market falls 0.9% (-£2,647) this month, within usual expectations for the run-up to the summer holiday season
  • Buyer demand in the two weeks since the surprise referendum result is consistent with 2014 although down on 2015:
  • Same period in 2015 benefited substantially from post-election boost so enquiries this year are down 16% compared to that period
  • 2014 was not distorted by the election so is a better basis for comparison, and buyer enquiries are at the same level as the like-for-like two weeks in 2014
  • Most agents report market momentum continuing due to shortage of suitable property for sale, buyers fearful of missing out on scarce choice, and affordability and availability of low mortgage rates
  • Sellers seem undeterred – compared to the same period last year, the two weeks pre-referendum saw the number of new properties coming to market down by 8%, and the two weeks post-referendum saw them up by 6%

The Brexit effect on Interest Rates

Some commentators before the vote on the 23rd June 2016 stated that Brexit would result in higher mortgage costs and an increase in interest rates, this was pure speculation. Interest rates are adjusted monthly by the Bank of England and are done so to help control inflation and therefore the UK economy.

At present there is talk of a cut to interest rates although this month the Bank of England voted 8-1 in favour of keeping rates on hold in what was clearly a case of wait and see rather than any hasty movements. The next Bank of England meeting is in August and it is expected that rates will be cut by 0.25% to 0.25%, although nothing is for certain.

The markets have predicted that interest rates will now not rise until around 2019 or 2020. The chart below shows the expected timescale of a rate rise according to swap rates.

What does this mean for mortgage rates?

With rates at an all-time low and sentiment in the market leaning towards a rate cut we have seen swap rates falling and consequently lenders have been able to stack the mortgage supermarket shelves with super cheap fixed rates. HSBC brought out a 2 year fixed rate at 0.99%, this was the first sub 1% fixed rate and subsequently more have followed.

There can be no doubt that rates are not going to get much if any lower (they physically can’t) and so if you are due to remortgage or move home and want the security of fixed repayments then you should probably choose a fixed rate. Speak to your broker to determine how long that fixed rate should be but with some 10 year fixed rates below 2.5% we have already seen clients locking into cheap money for the long term.

For quality mortgage advice in Bristol or London contact Fox davidson Mortgage Brokers. enquiry@foxdavidosn.co.uk