Mortgage market need not be dismal

Research shows mortgages are not as difficult to obtain as the doom-mongers would have us believe and brokers remain a valued service. Much depends on repairing first-time buyers' confidence.

LONDON (Citywire) - Research shows mortgages are not as difficult to obtain as the doom-mongers would have us believe and brokers remain a valued service. Much depends on repairing first-time buyers' confidence.

Rising unemployment and inflation at 4.4 percent does not look good for homeowners, lenders or intermediaries. The number of people claiming unemployment benefit rose last month at its fastest pace since the recession of the early 1990s, when unemployment peaked at 3.5 million.

Figures from the Office for National Statistics show the number of people claiming unemployment benefit increased by 20,100 in July, the sixth monthly rise in a row. So there are potentially up to 20,000 more people joining the arrears queue, which already stands at 155,600, according to the latest figures from the Council of Mortgage Lenders (CML.L).

Although these numbers are almost irrelevant in terms of their effect on the numbers of homeowners needing to remortgage or move house, psychologically they are important to consumer confidence - probably the most important driver of the housing market. Stories of repossessions - even if they are only 0.16 percent and arrears 1.33 percent of all mortgages - will make people cautious about taking on new commitments.

Even homebuyers who are not anxious about losing their jobs face a reduction in disposable income as the Bank of England revealed that inflation has hit a 16-year high of 4.4 percent. Fuel and food costs have gone up by as much as 20 percent in some instances and this is putting a squeeze on families' finances, which are already under pressure from higher monthly mortgage repayments. Confidence is critical

So what will trigger the market into movement again? ‘Confidence is always a critical factor and depends on whether house prices are going up or down,' says Ray Boulger of mortgage broker John Charcol. ‘Prices need to stabilise to restore confidence.'

Interest rates are an important factor too, and the Bank of England's prediction that inflation could hit 5percent before the end of the year does not look good for any interest rate cuts. Boulger predicts rates will probably remain at 5percent until the end of this year. ‘But by the middle of next year they will be down to 4.5 percent and 4percent by the end of 2009. By then, prices will have stabilised too,' he says. So there are no expectations of a quick fix for the market.

However, there is some evidence that house prices may be stabilising now. If asking prices are more realistic, as the Royal Institution of Chartered Surveyor (Rics) reports, they are probably off 10percent and buyers are able to negotiate another 10 percent discount, so arguably prices are already down 20 percent.

Small corner in sight

The latest Rics survey suggests the housing market may be turning a corner. The number of surveyors reporting falling rather than rising prices fell from 86.9 percent to 83.9 percent, while new instructions have increased in London and the south east, according to the report. This is a small change but a step in the right direction.

‘In terms of the outlook, the July survey lends further support to the notion that activity may be beginning to stabilise, albeit at a low level,' says Ian Perry of Rics. He believes the shortage of mortgage funds is to blame for the massive decline in activity.‘The lack of mortgage finance has brought the housing market to a virtual standstill with first-time buyers rapidly becoming an endangered species,' he says.

‘There are signs that sales activity might pick up a little as sellers start to re-evaluate unrealistic asking prices. However, the current confused messages from the government regarding stamp duty risks are damaging any returning confidence and may discourage mobility,' says Perry.

Lower interest rates expected next year could be the kick-start the market needs but that might not happen until next spring. ‘Although there has been a big gap between Bank base rate and Libor keeping mortgage rates well above base rate, if interest rates come down, mortgage rates will come down in line,' says Boulger. ‘Bank base rate at 4percent will certainly bring buyers back.'

Richard Morea at mortgage broker London & Country agrees. ‘I don't think we are likely to see any cuts this year but rates could come down early next year. Homebuyers who are remortgaging now are confused and they don't know whether to go for a fixed rate or a tracker. Buyers believe mortgages are harder to come by than they really are,' he says. Perception versus reality

Even at today's average mortgage rate of around 6 percent, rates are historically low. Average rates between 1980 and 2000 were about 10percent. But it is a problem of public perception as much as reality.

Smart buyers with sufficient deposits are beginning to look for bargains in the market. ‘Discounts of 10percent on asking prices just won't be available once the market starts to turn,' warns Boulger.

But convincing buyers that now is the time to buy and that there is finance available is difficult. This attitude flies in the face of research from HSBC that shows only 2 percent of people who are keen to buy a property have been unable to find mortgage finance, with 98percent having no difficulty at all.

The most common reason given (37 percent of buyers) for postponing buying a property is the expectation that prices will be cheaper in six months' time; 36 percent said they were worried about the rising cost of living.

‘There is a perception at present that banks are not offering mortgages,' says Martin van der Heijden, HSBC's UK head of mortgages. ‘In fact our latest study suggests access to finance is not a major issue. Instead, many buyers are taking a wait-and-see attitude. Naturally, some feel uncomfortable buying a home that may be worth less in six months' time.'

It is this gap between perception and reality that is delaying a revival. Almost one in four buyers think they might struggle to get a mortgage but only one in 50 has given up on their purchase because they could not raise the finance. First-time buyers in action

HSBC found there were few first-time buyers in the market. However, according to Spicerhaart Financial Services, first-time buyers are showing signs of returning to the property market as house price reductions begin to take effect and lenders look to reduce mortgage rates. First-time buyers made up more than a third of all purchasers in July.

‘With property prices falling by 15 percent in many areas already this year, there are growing opportunities for first-time buyers to get onto the property ladder,' says Steve Cox, operations director at Spicerhaart. ‘This group is vital for the overall economic recovery of the country.'

Boulger says there are some particularly good deals available from house builders. ‘Those where the buyer has to pay for just 75 percent of the price and has 10 years to pay the balance make home owning affordable for first-time buyers and others,' he says.

Richard Morea agrees. ‘The house builders are much better at promoting their deals that the government is in publicising its schemes for first-time buyers, like My Choice. The government should do more,' he says.

And if first-time buyers are returning to the market, it looks like being good news for mortgage intermediaries. The CML's Lending via Intermediaries survey shows the majority of first-time buyers obtain a mortgage through a broker: 79 percent in the fourth quarter of 2007, 83 percent in the first quarter of this year and 78percent in the second quarter.

Top-end deals freely available

The availability of finance is beginning to improve even for large loans of 500,000 pounds or more where lenders had cut back savagely.

According to mform.co.uk, more than one in three high street lenders still offer loans of 500,000 pounds and higher, and more than 40 mortgage firms are offering more than 200 two-year deals and 188 five-year deals direct to consumers, its research shows. Even above 1 million pound there are still 33 mortgage lenders competing for business direct from the public with 153 two-year mortgage products on offer.

‘The jumbo mortgage market is relatively cushioned from the credit crunch as borrowers are obviously wealthier and will generally have high levels of equity or big deposits,' says Francis Ghiloni, marketing and business development director at mform. ‘Lenders are still keen to attract their business because borrowers are seen as safe bets and that is why so many deals are available.'

Richard Roberts of Route Group, which deals almost exclusively with the top end of the mortgage market - loans of £1 million or more - does not entirely agree, saying: ‘The market for loans of 1 million pounds or more has been hit quite hard and there have been big cutbacks.

‘People have been suffering in terms of options. It is beginning to free up. But lenders who were climbing over each other to do large loans a year or so ago now deem them to be higher risk and they want to spread their money over a wider range of borrowers. They also see higher value properties as more difficult to sell,' says Roberts. Lenders are still wary

This flight to security by the lenders is confirmed by CML figures. The average home buyer put down a 22 percent deposit in June, up from 20 percent in May. The average first-time-buyer borrowed 3.33 times their income, down from 3.35 in May. The average home mover borrowed 2.94 times their income, down from 2.97 in May. The share of house purchase loans to first-time buyers and home movers remained stable at 38 percent and 62 percent respectively.

Bob Pannell, head of research at the CML, is not predicting a quick turnaround. ‘Mortgage lending activity remains relatively weak and will decline further in the coming months as a result of funding constraints and lower consumer demand,' he predicts.

(c) Citywire Financial Publishers Ltd 2008.