Moduloft, The Affordable Housing Manufacturers. Defining the Terms of and Boundary Conditions of our Domain.![]() The outstanding value of all residential mortgage loans was £1,527.3 billion at the end of 2020 Q3 two thirds of households own the house they live in; half of these are still paying off their mortgage 28,536,000 Dwellings 29,180,071,800 sq ft 29 Billion Sqft . ![]() ![]() ![]() 29,180,071,800 sq ft 29 Billion Sqft .Plot Size and Dwelling Size ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() A second innovation is the theory-justified use of an estimate of the proportion of mortgages in negative equity, based on an average debt to equity ratio, as one of the key drivers of possessions and arrears. Possessions and arrears are driven by three economic fundamentals: the debt service ratio; the proxy for the proportion of mortgages in negative equity, calibrated from an average debt to equity ratio; and the unemployment rate. Modelling the three equations as a system with common lending quality and policy shifts helps greatly in the identifying the unobservables. By sharp contrast with earlier UK literature, there is no significant effect on the rate of possessions from either measure of arrears. This important finding is discussed further below. The long-run effects24 on the possessions rate are shown in Figure 7 for the debt-service ratio, estimated proportion in negative equity and the unemployment rate. Figure 8 shows the longrun impact of loan quality and forbearance policy, discussed further below. The figures suggest that in the first possessions crisis in 1989-93, the initial rise in possessions was driven mainly by the rise in the debt-service ratio, combined with lower loan quality, but later the rising incidence of negative equity emerged as an important driver. The persistence of negative equity prevented a faster decline in possessions, despite lower interest rates and the forbearance policy introduced at the end of 1991. In the second possessions crisis, the rise in possessions from its low level in 2004 again was caused by a growing debt-service ratio, and later the increasing incidence of negative equity, which rose sharply in 2008-9. To illustrate the magnitudes implied by this research, a 10 percent increase in the debt-service ratio, for example due to the mortgage interest rate rising from 4 percent to 4.4 percent, is estimated eventually to raise the possessions rate by around 19 percent, and the 6 month arrears rate, corrected for measurement bias, by 15 percent. This calculation holds the proportion of mortgages in negative equity and the unemployment rate fixed. At 2009Q3 house price and debt levels, a fall in house prices of 1.4 percent would raise the proportion of mortgages with negative equity from an estimated 8.5 percent to 9.35 percent, a 10 percent proportionate increase. An increase of this magnitude in the rate of negative equity is estimated eventually to increase the possessions rate by 7 percent and the 6 month arrears rate by 3.5 percent. A ten percent increase in the unemployment rate from 8 percent to 8.8 percent is estimated to increase the possessions rate by 2 percent32 and the 6 month arrears rate by 10 percent. The sustainability of these relatively benign conditions is questionable, however, given the 31 In late 2009 the spread between mortgage rates on new loans and base rate was close to 350 basis points, with base rates at 0.5%. It seems likely that the spread would narrow with base rates at 1.5 or 2 %. Also with slightly higher base rates and hence higher deposit rates, retail saving flows into banks are likely to improve, perhaps easing credit constraints on lending. 32 This estimate is less accurate than the others and the figure could well be as high as 4 percent. 32 funding gap between retail deposits in UK banks and their loan book33, the time-table of withdrawal of the Special Liquidity Scheme and the Credit Guarantee Scheme, and concerns over the UK‟s sovereign debt.?, see Exploration of claimed link between Deposits and Bank Lending, in Werner Quantity Theory of Credit.???? ( otherwise this seems a very good paper!!! Two UK government objectives are to improve housing affordability and to restore financial stability. Housing has become unaffordable for many younger people, perpetuating the inequality from the redistribution of housing wealth of the late 1990s to 2007, from potential first-time buyers to older and wealthier households. However, substantial falls in house prices, triggered by the removal of income support, higher interest rates and potentially by supply and demand side reforms34 , could increase negative equity and exacerbate the problem of bad banking loans. It would, however, be a mistake to take the risk of substantial falls in house prices as an excuse for not expanding residential land supply. For if reforms of the planning system and of incentives for local governments to expand the supply of residential building land were to increase the rate of future building, DCLG‟s housing affordability model and research done for the Barker review suggests that the effects on house prices would be felt only gradually. A further advantage in the short-run would be employment gains in the building industry at a time when the public sector will be shedding jobs. In the long-run, a more sustainable level of house prices relative to the financial capabilities of households should reduce the risk of new crises.https://www.ftadviser.com/mortgages/2019/09/11/high-ltv-mortgages-spike-to-2008-level/ ![]() BoE data showed mortgages with LTVs higher than 90 per cent accounted for nearly 11 per cent of the market in the second quarter of 2007, but that had dropped to 2 per cent in the same quarter of 2009. Between 2009 and 2014, the share of high LTV mortgages spiked above 2 per cent in only three quarters but has gradually increased over the past five years.December 2020 The share of mortgages advanced in 2020 Q3 with loan to value (LTV) ratios exceeding 90% was 3.5%, 2.4pp lower than a year earlier (Chart 3). Back to December 2019, ( A year is a long time in Confidence Land.) Dan White, director at Champion Hall & White, thought the mortgage price war was partly responsible for the increase in high LTV products. He said: “Customers will opt for 90 and 95 per cent mortgages more partly because the rates have come down so much. “I think lenders are more willing to lend at the level, too, although it’s more strict than it was in 2007. A consumer’s affordability and credit score have to be strong to get a 95 per cent mortgage.” Mr White added that lending at 95 per cent LTV was acceptable as long as lenders looked after their borrowers and were willing to offer their customers new deals, rather than expensive retention rates. But Sarah Drakard, independent financial adviser at Cruze Financial Solutions, said the high share of high LTV mortgages was “worrying” because the property market was “just not strong enough” to deal with the risks. She added: “People forget about the financial crash. A few years ago, my first-time buyer clients didn’t want to buy a property with small deposits as they thought it wasn’t the ‘safe’ thing to do. “But now people are perhaps struggling to save, or parents are less willing to give money in unpredictable political times, so less people are able to save for big deposits.”
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Roger G LewisMarket Commentary and shooting the breeze. Archives
December 2020
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