Tighter FSA and City Bonus regulations signals change for the UK Mortgage Market

In today’s market, there are a number of “mortgage prisoners”. In essence, borrowers who do not have sufficient equity (possibly are even in negative equity) or cannot prove their income and are therefore unable to move homes despite their motivation.

For these owners, their options are limited to staying put or selling at a loss. The Financial Services Authority’s (FSA) mortgage market review paper is partly aimed at these borrowers whose unrealistic mortgage has caused them problems. This shift in the FSA’s behaviour is meaningful for the mortgage and housing market as it pursues a dedicated role in the prevention of borrowers taking out mortgages which may cause them problems at a later stage.

Furthermore, the FSA is being tough on lender applications, although some new lenders are expected to enter the market. The new lenders will probably create about £5bn of new lending, but all of this will be distributed through intermediaries with a great sum of it being directed especially to London property agencies.

Re-mortgaging remains sluggish whilst the base rate is so low, meaning that many borrowers who would currently opt for a re-mortgage are unable to do so because of the absence of equity in their property. This will mean that in 2010, the market will continue to be dominated by purchases. Dual pricing will continue but not to the extent of 2009. However we do anticipate the re-mortgaging market opening up, but this will then have a negative impact on the volume of funds available for purchases.

Despite the FSA’s paper and new regulation, mortgage supply should not have any further consequences for the housing market in the foreseeable future. However the mortgage lenders may have to be more selective if the volume of house sales increases sharply in 2010.

The worst is definitely over for the mortgage market but progress will be slow. However we anticipate that obtaining a mortgage will not be any more challenging than in 2008/9. The optimistic bull-case scenario sees GDP figures rising briskly in Q1. At the end of 2009 gross lending was around £145bn, well-down on 2008’s £256.4bn and even further down on 2007’s astounding £363.7bn. Predictions for 2010 are approximately £155bn to £160bn

Taking all of this into account we are hopeful that the end of mortgage rationing is in sight and consumers will gain confidence in the property market once again especially when it comes to properties for sale, since rentals remain more stable.

City bonus money has always been a key factor in the housing market, especially in Prime London stock. 2009 obviously saw a dramatic decrease in city bonuses and the government has now imposed a 50% tax levy on all bank bonus payments to their employees.

As we approach the “bonus season”, where traditionally uplift occurs in purchases, many institutions have made their intent clear that they will still be awarding these bonus payments. We do not expect, however, after the descent of the financial market, bonus payments to be as large as those experienced in previous years. Potentially a large proportion of pay-outs will be made in shares and investments and may still negatively affect sales volumes in 2010.

Despite this, bonus money will undoubtedly entertain a central role in the housing market and many cash rich individuals will be investing in the UK and abroad.

For: Hamptons International