Banks mortgage offerings distort UK Mortgages

A few years ago the standard lending criteria for the average UK borrower was a simple 2.5x the combined income or 3.25x the largest income. Then came tales of offers of  whopping 4x the largest income, now we hear that in many cases banks are willing to offer 6x income for the average borrower and 10x income for some customers who put a deposit of 25% down. What is going on?

Well clearly the answer is that spring is in the air and the banks sense that this may be the last chance to grab customers.

Speaking with a few leading London estate agents over the last few weeks (off the record of course!), there is a sense that the season for buying in London in particular have moved from Spring to January, when many of the city folk looking to buy in the sub £2m market receive the £250k and above bonuses. The London market very much generally affects the rest of the UK, but the last six months has seen this change, with a flattening of the market outside of London (though with the increase of prices in London still driving up the all important ‘average’ price).

Looking into the markets in more detail, some of the ‘international’ part of London (Belgravia, Chealsea, Knightsbridge) are still moving up as seriously rich global investors offset risk (and launder money) by moving capital into London, much of this money coming from the usual suspects; Russia, China and Arabic countries). The ratio of overseas to UK buyers in this market is about 80%.

The traditional British ‘middle class’ areas in London such as Fulham, Clapham and Putney are starting to see the fizz go out of the market as city bonuses have all but been spent, and as buyers become nervous at spending over £800k ($1.5mUS) on two bedroom houses where the water and heating doesn’t even work properly (a common problem in London’s substandard housing stock).

The market below this is dead for ‘normal’ buyers, with inexperienced buy-to-let buyers leveraging everything they have to get into this market – the worry here is that this may be the first sector of the market to fall as interest rates bite into already low yields and prices remain flat, effectively killing off any opportunity to ‘flip’ or ‘spin’ houses and make a profit on capital gain.

Below this market is the sub-prime market, where the government has actively encouraged workers who can least afford it such as nurses, teachers and government workers, to invest in half-ownership schemes that are at least tenuous and ironically spread risk to those who are most vulnerable and can least afford any potential downward shift in the market.

So where does this leave the market? Simple – the housing market is now more susceptible to external vagaries than at any point since the UK was forced to exit the ERM. Turnover of properties is slowing, though demand is still there.

It’s ironic that those who should know better are often flattered into making foolish decisions – if you are sitting at a dinner table over the next few months and hear stories of someone who’s taking out a 10x mortgage, they may feel flattered by the banks ‘confidence’ in them, but it’ll be the same bank that comes knocking on the door to repossess when things go wrong – and they will go wrong.