Christine and Vince, Tim and Dawn – the Bubble and the mortgage myths

Press myths about mortgages

The National media has been awash with the big guns of International finance this week.

Firstly we had the highly intelligent and extremely glamorous Christine Legarde on Channel 4 News. Christine is MD of the International Monetary Fund who had recently reported on state of the UK economy.  Later in the week Dr Vince Cable could be heard the on Radio 4 Today programme discussing ‘overheating’ in the housing market.

All fascinating stuff, but nothing I heard discussed was relevant to the problems being faced by our clients Tim and Dawn from Maidstone.

Burst the bubble

Christine’s team at the IMF had been very clear that the UK are risking a housing price bubble and they should seriously consider reining in the Help to Buy scheme.

Vince was similarly concerned, and was of the view that the way to stop prices getting out of control is to limit mortgages to 3 or 3 ½ times people’s income. Presumably, he didn’t mean Tim and Dawn’s income – or perhaps he did.

We can confirm that Tim and Dawn are not causing the housing bubble. Their interest in the help to buy scheme will not be troubling the IMF any time soon, and 3 ½ times income will not get them a family home within 100 miles of their parents (and child minders).

What is the real problem?

The press would have you believe that soaraway house prices are going to halt our brave new world in its tracks and send us back into the dark days of the noughties.

You remember then? Back when there were employment opportunities and everyone didn’t have to become ‘self-employed’ to make a living. Back when a zero hour contract was bracketed in the same class as a verbal one – not much use to anyone.

Yes, house prices on the move again, we know this because in the last 30 days both Halifax and Nationwide have told us so. But some of the other information that they told us (that the press, and perhaps Christine and Vince, aren’t listening to) may be more relevant.

If we all got a 100% pay rise tomorrow, house prices would look very inexpensive. After all it is spending power that dictates the affordability of everything.

The key statistic in the report from the Nationwide Building Society seems to us to be the UK house price to earnings ratio. Whereas a generation ago a house cost on average 3 ½ times earnings, that figure now sits at 5.7 times earnings.

I know Christine and Vince must be very good at mathematics, perhaps even better than Tim and Dawn, so here is fairly simple sum for them.

If your home will cost you 5.7 times your income and you want to fuel the price bubble by using the help to buy scheme, you will need a mortgage of 75% of that price, or 4.275 times your income.

Based on that Vince is presumably suggesting that lenders ensure that Tim and Dawn can only afford to borrow 80% of what they need.

Which market?

If Christine would like to join me for cocktails in a trendy bar in one of the pricier parts of London I’m sure I can introduce her to dozens of people who will confirm that the buyers ‘blowing up’ the London house price bubble are not queuing in RBS for a help to buy mortgage in order to do so.

The reality is that the UK property market consists of dozens of disparate markets with their own unique characteristics. Whilst we understand over 12% of quarter one mortgage transactions in the North-West benefited from the help to buy scheme, only 4% in London did so – yet London is right at the core of the bubble.

In fact the five UK regions making most use of the help to buy scheme, currently have the slowest house price growth in the country.

House prices will continue to surge in the south-east while there is insufficient supply and enormous demand.

Reining in the help to buy scheme will merely dent the aspirations of the Tim’s and Dawn’s in the North.

Capping lending levels will ensure that Tim and Dawn in Maidstone can’t use the help to buy scheme in any case.

Proper jobs, proper contracts, and proper incomes are what is needed – not soundbites to pacify journalists.

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