The number of new loans may be low, but recent interest rate cuts by lenders show that competition is back in the mortgage market.
After cutting rates early in August, most big lenders came back for a second round of cuts at the end of the month, including Halifax (average cut 0.4%) and Woolwich/Barclays (average cut 0.3%).
With base rate at 5%, a 2-year fixed rate loan at today’s average of 6.39% is not extortionately expensive. And there are plenty of lenders offering lower rates, like RBS/NatWest with a 2-year, 75% LTV fix at 5.99%, or Halifax with a 2-year fix at 5.59%. These rates are not quite as competitive as those seen at the peak of the lending boom, but you can’t deny that they’re pretty good value for the borrower.
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Lending capacity is increasing
July saw the lowest level of new mortgage approvals since the early 1990s at 33,000, down from 35,000 in June and from an average of over 50,000 over the preceding six months.
The big mortgage lenders can afford to finance this level of lending without any need to package up and ‘securitise’ their mortgages. And these latest rate cuts show that there is probably now more lending capacity in the system than there is demand, at least for loans at 80% LTV or below.
Of course the shortage of demand for new loans reflects an unwillingness of people to move home, which is a result of
• Uncertainty about how far the decline in prices will go
• Unwillingness to pay Stamp Duty on a move when prices are falling
• Reluctance to attempt to negotiate a bigger mortgage
Squeeze likely to last until mid-2009
A lot of this is mood-related. We’re in for a winter of discontent when middle class dinner party conversations will consist of energy bill moans rather than property gain boasts.
The squeeze on spendable income will probably last until the second half of 2009, though by that time interest rates should be on a downward trend, which will take a bit of the pressure off household bills.
But an upbeat mood is unlikely until food and energy prices stabilise. So even if the government does work out how to increase the lending capacity of the mortgage market, it’s unlikely to have much effect on the housing market.
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Stamp Duty blocks moves
The single biggest factor affecting the market in the South-East is the 3% Stamp Duty on properties valued at between £250,000 and £500,000. If you own a property worth £300,000 with a £200,000 mortgage and need to move to a similar-priced property, the 3% Stamp Duty is £9,000, and this represents not 3% but 9% of your equity in the property. It is in fact a 9% tax on moving. No wonder people are staying put.
The pundits haven’t got it, because Gordon Brown introduced these higher rates of Stamp Duty – one of the many stealth taxes he imposed to avoid having to raise income tax - when prices were rising, and nobody cares about paying a few thousand in tax when prices are going up every month. Today it’s a different story. Many people who own those homes worth £300,000 today paid Stamp Duty at only 1% when they bought. The idea of paying 3% now, especially to the coffers of a deeply unpopular government, is a big deterrent to moving. Stamp Duty is now the biggest factor locking up the housing market in the South of England. Raising the threshold at which Stamp Duty starts to be paid from £125,000 to £175,000, as Chancellor Alistair Darling did this week, won’t make the slightest difference to the Home Counties property market.
I reckon the government will be forced, eventually, to cut Stamp Duty more widely, but will only do so in a panic when the Daily Mail is calling for Chancellor Darling to be hung, drawn and quartered in Parliament Square.
