David Dalby Blog

Wednesday 9th May 2012

We all know that Britain needs more homes.

We also know that these will not be built unless there is an adequate supply of finance: finance to fund development, particularly in the growing rental sector, and sufficient levels of mortgage finance to allow first-time buyers to get on to the home-ownership ladder and for existing owners to be able to move on to another home.

The shortage of appropriate mortgage funding, alongside a continuing uncertain economy, remains the single biggest issue facing the residential sector today.

Whilst welcoming recent initiatives by Government and lenders to stimulate demand for new-build housing through NewBuy and similar schemes, RICS is concerned that such moves could result in unintended consequences for the rest of the market, and undermine attempts to increase market activity generally.

Promoting increased construction of new homes by providing access to higher loan-to-value mortgages to potential buyers helps to provide additional jobs in the construction sector and in other areas in the provision of goods and services, and also increases tax revenues at both national and local level.

However, just concentrating on the creation of new homes does nothing to help those looking to move from existing accommodation, either to satisfy personal aspirations or to allow people to take on homes more appropriate to their changing domestic needs. Such moves also stimulate demand for goods and services, with furniture, appliances and other items often replaced, and decorations, repairs and alterations being undertaken, all of which help to stimulate economic activity and growth.

The reality is that, if high loan-to-value advances are only available for the new-build sector, this will inevitably lead those seeking to get on to the property ladder to seek out such homes and ignore the existing housing stock, where the need for significantly higher savings to provide a deposit will delay their ability to secure their first home, or even move from their existing one if there is little surplus equity within it.

RICS believes that government, lenders and other industry stakeholders need to address this issue as a matter of urgency, to seek solutions that ensure an adequate supply of funding at appropriate levels for all sectors of the market, not just new-build.

A mortgage indemnity scheme, such as the one now in place for the new-build market, needs to be extended across all properties, to provide a level playing field and to allow greater mobility across the whole of the housing market.

The impact of schemes such as the Local Lend a Hand initiatives, whereby the buyer puts down a deposit of at least 5% and the local authority provides a cash-backed indemnity of up to 20%, needs to be analysed to see if such proposals could be rolled out more widely. A number of commercial providers are also investigating the possibility of introducing such indemnity schemes, and RICS would encourage all stakeholders to come together to ensure that these initiatives are properly assessed to ensure that they offer robust and prudent solutions.

None of us want to see a return to some of the profligate lending policies seen in 2006/7, which led to the market crash, but there is an urgent need to provide appropriate stimulus to the whole of the housing market, not just the new homes sector.

As part of this wider review of mortgage funding, we believe that interest-only mortgages can still play a role in keeping the market moving, provided they are allocated as part of a responsible lending plan.

The proposed criteria for interest-only mortgages laid out in the FSA’s Mortgage Market Review (MMR) appear overly restrictive. They could prevent responsible borrowers from entering the market and leave existing interest-only borrowers with fewer remortgage options.

The MMR does go some way to addressing the issue of so-called ‘mortgage prisoners’ through its transitional arrangements.

However, these arrangements are only optional, limiting their impact. Furthermore, they are restrictive by not allowing lenders to increase the size of a borrower’s loan or raise monthly repayments, even where their status would support such additional funding.

Decisive measures are needed to help those trapped in existing mortgages, especially those in negative equity. RICS is urging the government, CML and BSA to work with lenders to develop new mortgage products, such as schemes that allow negative equity to be transported to a new property, further helping the flow of the market.

Early action is vital: without movement through the whole chain, transaction levels will remain stagnant.

David Dalby is the residential professional group director at the RICS