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It probably hasn’t escaped your notice that house prices are still rising.
UK property is overvalued by any conventional, and most unconventional, measures. But because the housing bubble has lasted for so long, and because people are so scared of missing out on what they see as easy money (buy-to-let investors) or are scared witless that they’ll never be able to get on the ladder (first-time buyers), there’s now only two things that matter – how much can I afford to pay a month; and how can I get the loan?
On the first point, people are now only too happy to throw every penny of disposable (and some indisposable) income at their property quest. And if they’re over-optimistic in their assumptions and find their outgoings creep up over their incomes, well, who cares – house prices and wages only go up, don‘t they?
And as for the second point – well, getting a bank to lend you money is getting easier and easier. Just ask Abbey…
High street bank Abbey, which is Britain’s second-largest mortgage provider, has now said it will allow homebuyers to borrow up to five times their annual salary to get on the housing ladder.
Said homebuyers need to be earning at least £50,000 a year, and must have ‘good credit ratings and low debt levels’, reported the BBC.
“Lending five times salary may sound high but really is something we have to do given what is happening with house prices,” the bank told the FT.
No, your eyes do not deceive you. The country’s second biggest mortgage lender is being forced to allow people to borrow frankly dangerous amounts of money because house prices are so high. But why are house prices so high in the first place? Because lenders are prepared to offer people more and more money to fund their purchases, of course.
The trouble is that banks and building societies are just as caught up in the housing hysteria as everyone else. They all need to attract more mortgage business, particularly now that their credit card lending arms have been hammered by bad debts. But the best way to do that is by having the slackest lending criteria possible.
Abbey isn’t the first to offer ludicrous salary multiples. Bank of Ireland Mortgages and Bristol and West raised its standard multiple from four to 4.5 last week, says the BBC. And on a case-by-case basis, hefty multiples have been available for some time from all the main lenders.
Of course, the industry tries to pitch the ball back into the consumer’s court, arguing that lending vast sums is reasonable as long as the borrower feels they can afford it. Ray Boulger of John Charcol mortgage brokers told the BBC: “There is a responsibility on the borrower. There will be some who feel perfectly comfortable borrowing that amount of money because they have a lifestyle which means they can afford it. However there are others who prefer to spend more on luxuries for whom it is not suitable.”
What luxuries would those be, Ray? Heating? Furniture? Food? A £250,000 repayment mortgage at an interest rate of 5% over 25 years, will set you back just under £1,500 a month. A couple on £50,000 would take home in the region of £3,000 a month – an individual even less, as they’d be a higher rate taxpayer. So that’s at least half of the household income going on mortgage repayments – and that’s before you factor in life insurance, buildings and contents insurance, maintenance costs and all those other little bills that go hand in hand with property ownership.
We believe firmly that people should take personal responsibility for their own financial situation. But the banks have a responsibility too – to their shareholders, if nothing else. The ill-considered credit card lending policies of a few years ago have already battered their business. They are now setting themselves up for another severe hit when all the people who they‘ve allowed to borrow too much money start to default on their loans.
Everything seems fine just now. Interest rates are low, house prices keep rising – it’s been that way for so long (oh, at least a few years now) that it’s hard to remember things ever being different. And humans being what we are, we tend to imagine that what’s happened in the recent past will continue forever.
But life has a way of throwing the unexpected at you. A shock redundancy; a surprise interest rate rise; an unplanned addition to the family. That’s why everyone needs some slack in the system. But gradually, housing is consuming every piece of slack there is, and the banks are happy to let this happen.
It’s no great consolation to realise that they will suffer along with everyone else when the unexpected happens and the day comes when house prices are not rising, but falling. But with that in mind, it’s a sector we’d avoid for the time being.
Turning to the stock markets…
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The FTSE 100 ended the day little changed, up just 2 points to 6,129. Life insurer Friends Provident made the biggest gains of the day, its share price climbing over 6% on news of better-than-expected sales in the last quarter and ambitious new targets. For a full markert report, see: London market close (/file/20803/london-close-little-change-for-blue-chip-index.html)
On the Continent, the Paris CAC-40 ended the day 13 points lower, at 5,348. The German DAX-30 was also lower, closing 10 points weaker at 6,268.
On Wall Street, the Dow Jones closed 5 points lower, at 12,080, but gained 3.4% over the whole month, its best performance since October 2003. The Nasdaq was 2 points higher at 2,366. And the S&P 500 closed at 1,377, just a fraction of a point higher.
In Asia, the Nikkei was hit by US weakness and closed 24 points lower, at 16,275.
Crude oil was lower this morning, at $58.35, whilst Brent spot had tumbled over 1%, last trading at $56.31 in London.
Spot gold was last quoted at $606/oz, boosted by buying from Japanese speculators.
And in London this morning, sugar and sweetener company Tate & Lyle announced a 27% increase in first-half profit. The company was also positive about the prospects of its North American sweetener business which it expects will boost second-half profit.
And our two recommended articles for today…
Who will profit from Arctic resources?
– You can’t have missed the debate surrounding the findings of the Stern report on global warming this week. But whilst everyone argues about how best to tackle the problem here, retreating Arctic ice is provoking a rather different dispute elsewhere. As the world heats up, so are the commercial possibilities of the polar region – and international tensions over who owns the area’s resources. For the MoneyWeek briefing on investment opportunities in the Arctic – just available to non-subscribers – read: Who will profit from Arctic resources?
Why Western workers are set to become poorer
– What do the world’s three largest economies have in common? The answer is that workers across the US, Japan and Europe are seeing barely any growth in wages, says Morgan Stanley’s Stephen Roach. The bad news is that falling real wages in richer economies are likely to continue – to find out what kind of effect this could have on global stability, click here: Why Western workers are set to become poorer