Tag Archives: financial
European Bank measures risk house price bubbles in UK, Germany and Norway
Quantitative easing by the European Central Bank could drive prices even higher in overvalued property markets in Germany, Norway and the UK, a new analysis suggests. House prices in these countries have risen quickly over the last year and a half and as a result the risk of house prices bubbles have re-emerged, according to a report from Moody’s Analytics. It explains that while the International Monetary Fund’s Global Housing Watch shows prices rising, it is case of a two speed market. Some have rebounded quickly after just moderate price declines during the financial crisis, the other group is still recovering from much steeper price drops. The first group includes Germany, the UK and Norway where house prices have shot up over the last few quarters and where the formation of a housing bubble is a real possibility and QE feeds asset bubbles, the report points out. Since March every month the EWCB has been buying €60 billion worth of euro-denominated assets issued by euro one governments, agencies, and European institutions and the programme will last at least until September 2016. This has seen yields on the government debt of countries viewed by investors as safe fall and this in turn has encouraged investment in property markets which yield higher returns. In Germany, house prices have been steadily rising since the middle of 2009 as its property market is viewed as a safe haven investment in an environment of increased uncertainty. Indeed, Germany was one of the few European countries to avoid a housing market slump during the 2008/2009 downturn, thanks to prudent bank lending regulation. However, the report says that growing demand for German properties is leading to overvaluation, especially given the insufficient supply. Only recently has construction finally picked up. In the first half of this year, German building authorities granted 10% more building permits than in the same period a year earlier. But it will take a few years before supply catches up to demand. German house prices have therefore been rising more quickly than rents and incomes. Although the price-to-income and price to rent ratios are still relatively low compared with Germany’s long term average, the report says that if this trend persists the housing market could overheat. While the outright risk of a housing bubble forming in Germany is relatively low, the Bundesbank is monitoring the situation. So far, it has not intervened. However, in the UK the authorities are doing so. Last year the Bank of England in 2014 warned of a possible housing bubble which could derail the country’s recovery and introduced tighter mortgage loan standards designed to reduce the supply of credit, taking some heat out of the housing market. The UK’s Financial Conduct Authority also introduced stricter underwriting rules for mortgages to ensure that banks assess borrowers’ ability to repay loans after interest rates start to rise. Yet loan standards are still relatively loose, largely the result of the UK government’s Help… Continue reading
Bank voices concern about higher mortgages and potential effect on UK economy
The Bank of England is concerned that home buyers are taking on bigger mortgages because house prices are rising too fast in the UK, but it is first time buyers who are not offered enough, experts warn. The Bank says that with prices rising faster than mortgages there could be rising debt levels and the economy could be at risk if interest rates rise and home owners struggle to keep up with their mortgage payments. The Bank's deputy governor, Sir Jon Cunliffe, said he is prepared to step in if the debt mountain gets out of hand in the bank’s latest financial stability report. 'Our concern is not so much about house prices, it is the chain between high house prices, prices growing faster than people's incomes, and people having to take out bigger and bigger mortgages and the debt that families then have relative to their income growth,’ he explained. Bank took action a year ago amid similar concerns and put a debt to income limit on mortgage lending. While the market cooled in the second half of the year it is now rising again on a steady basis. ‘Prices stopped growing as fast as they have been, mortgage approvals came down. There are now signs the market is coming back up again. We are not seeing the sort of growth in momentum we saw this time last year, but given the high level of debt to income we have in the UK anyway, and the ability of this market to move very fast, this is something we need to watch and that's why we have left that insurance policy in place,’ Cunliffe added. But his comments come at a time when mortgage lending is still low compared with historical averages and experts have voiced concerns about certain sectors in particular are seeing fewer loans available, for example first time buyers who are crucial to the health of the housing market. Indeed, a new analysis in the latest edition of the Genworth/Moneyfacts mortgage tracker report says that new product launches and falling interest rates are masking a growing crisis in high loan to value (LTV) mortgage lending. Despite more products being offered at record low prices, Genworth’s analysis of government and industry data suggests this part of the mortgage market is rapidly falling back into decline. It reveals that with total 95% LTV lending down by £147 million year on year in the first quarter of 2015, average lending per product has dropped by 38% over the same period. This has contributed to a 10% fall in first time buyer numbers which means that 10,400 fewer people have succeeded in buying their first home so far in 2015 than was the case last year. It also points out that new products come with extra price premium despite rates hitting record lows. The Tracker shows the number of products available to house buyers with a 5% deposit hit a… Continue reading
Warning over too much mortgage regulation in the UK
Regulators’ determination to reform the UK mortgage market has resulted in a layering effect which threatens to stifle consumer access to credit if it goes unchecked, according to a new report. The cumulative impact of new MMR financial regulations introduced last year and the implementation of the European Union Mortgage Credit Directive, is affecting the lending recovery, says the Intermediary Mortgage Lenders Association (IMLA). The report acknowledges and accepts the need and ‘inevitable’ cost of improving the safety of the banking sector and preventing a repeat of the financial crisis but it warns that the common objective of building a ‘sustainable’ market with enough room to deliver positive outcomes for consumers is threatened by the sheer volume of new rules. It also points out that the overlapping effect may unwittingly tip the balance too far away from consumer choice and it is calling on the Bank of England to establish a in industry panel to guard against too many rules. The report raises concerns over regulators’ potential ‘bias to action’ where they perceive a high cost to their reputation if they are seen to be too permissive, compared with a low risk of being too restrictive. IMLA cites the Financial Policy Committee (FPC) decision in June 2014 to impose interest rate stress tests and limit high loan to income (LTI) mortgage lending as an example of this bias. The actions came at a time when the effect of the MMR on the market was still unclear, and saw the fledgling recovery of 2014 followed by a subsequent downturn in mortgage activity that brought eight successive months of approvals falling year on year. Despite the slowdown, the FPC was given further powers in February 2015 to cap loan to value and debt to income levels for mortgages. These powers are as-yet unused but the IMLA suggests these actions support the view that regulators perceive a ‘normal’ mortgage market to be significantly smaller than that which existed before 2007, which has implications for access to home ownership as the UK population grows. To prevent regulatory layering from choking off the recovery, IMLA calls on the Bank of England to maintain an ongoing review of the new regulatory framework to identify unnecessary overlap and costs. One solution it proposes is a joint Bank of England industry panel that specifically focuses on identifying areas where regulations are unnecessarily complex or duplicative. ‘No-one is questioning the need for continued caution or the regulators’ responsibilities to put boundaries in place to ensure the mortgage market is sustainable in the long term,’ said Peter Williams, executive director for IMLA. ‘You could also argue that regulators and industry will naturally have differing views about what constitutes normal or healthy activity and this is exactly why it’s in consumers’ interests to put a permanent forum in place where the two can put the vast tomes of new regulation under the microscope,’ he pointed out. ‘We must ensure that future regulatory… Continue reading
