Why Are Mortgage Products Tightening?

It’s pretty much common knowledge that property booms are economically driven.

When the economy is in a good state, then more people move house. This creates a trickle-down effect of spend. And in times of recession, property sales slow-down and house values drop. There is also an element of supply and demand that has been prevalent but the impact here is not comparable to those of high impact economic issues. This isn’t rocket science.

Recently though, and contradicting the economic norm for a variety of reasons, the property market is experiencing an upsurge currently, with a set of unique circumstances creating the almost perfect storm for increasing property prices, record selling times and the high sales values being realised.

There has been much discussion as to why this is currently happening when most industry sectors are experiencing huge challenges. Banks and mortgage companies pretty much have their fingers on the pulse with both the economy and property lending. So, if things are so good, why are they slowing down with both product and offerings?

Many agents are having a great time, but should they be making hay as the sun is about to disappear for some time?

Why Are Property Sales Currently So Buoyant?

Much has been written about the current and unique set of circumstances that are driving the housing boom. Firstly, without a doubt,COVID-19 created pent up demand. There was a natural waiting list when lockdown was first introduced, and this is finally being satiated. Added to this are the huge stamp duty incentives that were introduced to stimulate the economy. This has worked to a degree, but generally higher up the property food chain, where savings are more appreciable.

Then there has been the availability of easy, cheap mortgages with high LTV, even for first time buyers. Combine these factors along with people spending so much time at home that they have begun to re-evaluate their core requirements, space and home office being high on many buyers lists of desirability, then we are some way to explaining the current property boom.

So Why are Mortgage Companies Worried?

The biggest recession in a lifetime just around the corner? One thing is certain, unemployment will rise when the Government furlough scheme ends in October. Confidence in the housing market will drop when employees are made redundant.

Banks are readying themselves for a tidal wave of loan defaults, including mortgages, and have set aside over £15bn for the first half of 2021 alone. The Centre for Economics and Business Research has forecast that house prices will drop by almost 15% next year when the stamp duty holiday ceases in March, and when the recession is taking full hold.

Banks and building societies are reacting quickly to these forecasts, and most have pretty much pulled out of high LTV loans. 10% deposit products are hard to find already, and with recent changes in people’s personal circumstances, underwriting has become a much more manual process, thus adding to the mortgage backlog.

10% is the new norm and the backlog here is growing daily.

So, the question is, will this approach be short or medium term? Banks are currently sitting on a huge amount of liquidity, and would normally be fighting to lend. However, with predictions of relatively high property price falls (with Lloyd’s worst case being 30% over the next two years) and unemployment currently being a huge unknown, it would appear that there is another perfect storm of factors that will have huge impacts on the property market.

Enjoy it while we can.