Should mortgages be capped against wages?
Lord Heseltine, a leading figure in the UK political scene, has today suggested that UK mortgages should be capped in line with wages. This is not the first time that such a cap has been proposed by politicians although unfortunately in a free market it is proving very difficult to push through. The fact is that major mortgage lenders want full control and flexibility and would prefer not to work within various caps. So is this a sensible proposition?
On the face of it many people will suggest this is the government dictating to mortgage lenders and homeowners in the UK. Some people will automatically dismiss this suggestion and fight the move although unfortunately they may be missing the bigger picture.
Are we heading for another property crash?
Even though the UK property market is proving to be extremely resilient during these difficult economic times, there is no doubt that on the surface the property market seems to be stronger than the economy. Indeed the ongoing rise in property prices is far outstripping any negligible increase in wages and therefore stretching the finances of those looking to acquire property.
Quote from PropertyForum.com: “The UK property market is in effect two very separate markets with London and the rest of the UK often showing different levels of performance. We would be very interested to learn your opinion of the UK market at the moment and the prospects for the medium to long term.”
Lord Heseltine commented upon some extreme cases which saw property buyers obtaining mortgages on rates of 5.5 times their annual income. This is just crazy because it would not take an enormous increase in UK base rates to put these individuals at serious risk of default. But what are the options?
First-time buyers priced out of the market
The main problem lies in the fact that property prices have been extremely strong over the last couple of years while wages have struggled to remain constant. This has pushed the UK property market further and further away from first-time buyers and forced more people into relative risky transaction such as taking out mortgages on 5.5 times their annual income. Is this the fault of the government? Is this the fault of property investors? Is this the fault of mortgage providers?
This age-old question is one which is ever more prevalent today and one which is impacting more and more people. The average UK house is now worth well in excess of £200,000 leaving many people with little or no chance of ever climbing aboard the property ladder. There has been talk of government assistance, which will help in the short-term, there has been talk of “affordable property”, but this has been discussed time and time again in the past. So what is stopping the UK government from building more affordable property?
Maintain demand and subdue supply
Whether you believe it or not, successive governments in the UK have manipulated new property build numbers to ensure there is continued demand for UK property. This ensures that property prices on the whole continue to move higher and higher in the longer term thereby securing the financial future of many people. However, this plan does not take into account those looking to climb aboard the property ladder for the first time which is forcing many people to take risks such as long-term unaffordable mortgages.
It is difficult to know what the answer is, or indeed if there is an answer, in the short, medium and long-term because a reduction in UK property prices to affordable levels would in effect be a “crash”. Where do we go next from here?