Mortgages -- what the hell is going on?

Have we seen this kind of situation before? It is always worth looking back at history to learn the lessons for the future. 1989 Crash: The Government abolishing double MIRAS in 1988 led to prices rising rapidly prior to its withdrawal and then the subsequent crash that followed shortly thereafter. Add into the mix interest rates at 15% and the inevitable repossessions. 2007 Crunch: The availability of lending and the ability for people to borrow at levels previously unknown fuelled a new property boom. Lenders, in an attempt to keep pace with the market, loosened lending restrictions and so it went on until the bubble burst in 2007. The demise of Northern Rock and lenders effectively shutting up shop meant the market went into freefall. It has taken a number of years for the market to recover to pre-crash levels with interest rates being at record lows for such a long period of time. The consequence is that many borrowers will never have experienced an interest rate rise so any increase is going to be negatively felt. What is the new housing minister’s policy? Who knows? We have had 4 ministers since 2020 so keeping up with who the current minister is the real challenge. What does the broking world need ministers to do to help (ie more housing, better affordability)? Calming the mortgage market has got to be priority number one as stability in the market is desperately needed. After that, it's all about supply and demand. There's insufficient supply of property to the market in both the purchase and rental market and both need urgent attention. The BTL market seems to be in rapid decline as landlords look to exit the market and there is insufficient property being built. Are we in for a dip, a crash or a soft landing? We are now in an environment where there is a cost-of-living crisis caused by the war in Ukraine, Government backed housing initiatives have all but come to an end (for the time being at least), rampant inflation is embedding itself into the economy so inevitably interest rates are now rising at a much faster pace than was expected. Cost of living / Remortgage Crunch: Those people whose fixed rates are coming to an end now are finding that their next rate is significantly higher than the previous. After a period of time where borrowers were locking in early to hedge against rises, the rates available after the kamikaze are many times higher and so the average mortgage interest payment will be going up, too, by thousands of pounds per year. People looking to purchase a property are experiencing mortgage costs far higher than they were three months ago. Estate agents are reporting sales falling through as purchasers change their minds on whether now is the time to buy. The consequence is the rapid evaporation of confidence right across the market that inevitably will lead to a correction in the market. How severe only time will tell.

These are unprecedented times for the economy and mortgage market. I can't remember a set of circumstances as severe: war raging in Europe, political instability at home, a cost of living crisis, energy shortages, huge government and personal debt, sharply increasing interest rates, inflation running amok, and the Bank of England firefighting to prevent runaway gilt yields and a sterling crisis. Property is overvalued. It really is as simple as that. Prices have been pumped higher by the cheap availability of credit, and various government interventions like the stamp duty holiday and help to buy. We've now reached the ridiculous point where house prices in London are 13x an average woman's income. In the UK as a whole, they are almost at 8x average worker earnings, nearly double the historical average. My best guess is property prices will fall by at least 20% over the next 18 months to 2 years. No shortage of housing stock will prevent prices falling when people simply can't afford to borrow as much, or pay the new interest rate they are offered when remortgaging. Long term, we need a fundamental reset of attitudes to housing, so it's not seen as a speculative investment. The first thing I would do is stop the right to buy and incentivise local authorities to start building social housing at scale again. Modular housing built off-site could help ramp up production fast. I would also restrict overseas ownership of UK property and include house prices in the 2% inflation target, or at least have a target to control house price inflation to sensible levels.

Mortgage interest rates are now at the same level when I bought my first house in 2009. However, house prices now double what I paid for then. This can unfortunately mean only one thing: we are about to see turmoil in the housing market. House prices look likely to drop, as new mortgage application drop off in both buy to let and residential. Mainly this is due to the affordability of a mortgage in the current climate. That means landlords may sell, reducing the stock of rental properties further. This in turn will impact renters, at a time when everyone is aware of the cost of living issues we are facing. My advice is plan ahead, review your outgoings and ensure you are living within your means. The cost of credit will rise, so if you have credit cards, check the rates and make payments to reduce the balance if you can. Most importantly, find someone to talk to and support you with your financial planning. Having a second pair of eyes look over your financials can be quite daunting but also therapeutic. So strap in, this could be a rollercoaster ride you wont have to queue for but you can still get ready in advance.

The closest to the current situation we've come recently is the credit crunch of 2008. Lenders pulling out of the market, LTVs being slashed, and large-scale government intervention required. The big difference between now and then however is the sheer speed at which events have unfolded. While events seemed very dramatic 12 years ago, they unfolded over several months. The current crisis, however, started on a Friday morning and was in full swing by Monday lunchtime. The other big difference is the credit crisis was a global event, started by US sub-prime mortgages and spreading throughout Europe and beyond. Our current woes are UK focused and largely caused by politics rather than economics. Our advice to clients is to be prepared and move quickly to secure mortgage rates. Our job as advisers is to communicate, reassure and, above all, be prepared to move quickly.