Plans expected to be announced by the Chancellor George Osborne this evening to control mortgage lending will change the property market at a stroke. Imagine a world with no house price inflation. A world with a simple housing ladder rather than the ‘housing escalator’ we have lived with for the past twenty years. Where making money out of property will require active rather than passive endeavor.
Numbers from the Council of Mortgage Lenders yesterday confirmed that despite the billions pumped into the banks over the past 18 months the number of new mortgages granted last month remained close to record lows. First time buyers still have to find 25% deposits and we know that arrangement fees are often extortionate. The Chancellor is said to be planning to give The Bank of England control over how much people can borrow to try and avoid a repeat of the lunatic business practices of the likes of Northern Rock’s 110% mortgages and 5 or 6 times salary multiples. In a stable market the average multiple of todays borrowers according to the CML is between 2.75 and 3 times!
We had already discounted the prospect of further rises in house prices this year. CGT proposals that have been leaked and these rumors about a cap on lending clearly signals the Government wants to ensure that there is absolutely no chance of house price inflation in the years to come. If true, I can see a decade of zero increases in house prices. This would be one unexpected way to neuter those who have made a fuss recently over proposals to raise Capital Gains Tax on second homes and buy-to-lets as there would be no gain to tax!
Many people will have to go back to school when it comes to making money from property. Old fashioned development will make a come back – changing or improving a property in a way where ‘one-plus-one-equals-three’ rather than just sitting back and riding the market. Over the last decade we have all met armchair property investors who have made money accidentally simply by owning a home. If the Government is serious about calling a halt to house price inflation then there will be real opportunities both for those who create value from their expertise and knowledge as well as the millions for whom the prospect of home ownership looked like it would always be a dream.
Un-checked house price inflation has been responsible for much of the trouble the country finds itself in today. The increase in asset values was the result of crazy lending practices rather than a genuine increases in demand. The Government clearly wants to call time on a rampant housing market and remind people that making money, be it in property or in the wider economy, should require effort. The results will be painful for some who will shriek like a child whose dummy has been removed but I expect that society as a whole will be better off as a result. One thing is certain, although housing took something of a back seat in the election property now looks like it will stand centre stage and will feature heavily in next weeks emergency budget.