Robert Sinclair: The bigger ticking bombs

Robert Sinclair: The bigger ticking bombs

Robert Sinclair is chief executive of the Association of Mortgage Intermediaries

The market appears stable, with forecasts suggesting that transactions will reach 1.2 million in 2019, in line with the long-term average.

However, according to analysis by Zoopla and Hometrack, activity in the market is not evenly spread geographically.

Sales volumes in the South East and London, where house prices are high and stamp duty bills large, have plummeted by between 15% and 25% between 2014 and 2018. Transactions in the North East, Wales and Northern Ireland have risen, largely as a result of better affordability.

This is positive for those looking to get on the ladder in these regions, but there remains a severe and widening wealth gap between the North and South.

This is evident when considering the average value of equity held in the homes of those over the age of 65. Hometrack and Zoopla figures put this at £363,000 per home in London but just £76,000 in the North East.

There has been much political rhetoric about investing in the North of England, less actual delivery.

Decommissioning heavy industries in the late 1970s and all through the 1980s has left a lasting legacy in regional economies, with long-term unemployment, abandoned high streets and few career opportunities.

In spite of repeated promises to invest in infrastructure in these areas, to support better mobility and encourage more employers to move out of London and further North, the economic reality remains bleak for much of the country.

Perhaps this has contributed to the social and political differences evident between those in the North and those in the South and partially responsible for the political mess that is Brexit.

These divisions are likely only to get worse over the coming decades as so much of an individual’s ability to scale the social ladder depends increasingly on inherited wealth built up by generations in their homes.

Looking more deeply at recent data, the latest government statistics show that in Quarter 1 2019, district level planning authorities in England received 111,300 applications for planning permission, down 5% on the corresponding quarter of 2018.

They granted 81,500 decisions, down 7% from the same quarter in 2018; this is equivalent to 88% of decisions, unchanged from the same quarter of 2018. The statistics also showed that local authorities decided 88% of major applications within 13 weeks or the agreed time.

Anecdotal evidence suggests that new builds are selling off-plan within four weeks of listing, up to a full 12 months ahead of completion. Developers put this down to accelerated demand from buyers, combined with a lag on planning application approvals from local authorities for new residential developments.

ONS figures for Q1 2019 bear this out in England. District level planning authorities granted 11,200 residential applications, down 6% on a year earlier, including 1,600 for major developments and 9,600 for minor ones.

However, we are hearing that the ratio of planning applications applied for to be granted has tightened, with the logjam in the delivery of homes now sitting squarely with developers.

Restricting the volume of new build starts to the degree that off-plan sales are selling a year ahead of completion and within a month of listing, coupled with stories in the media revealing the aggressive sales tactics being used by some developers should not be misconstrued. This looks like developers controlling the supply of new homes to maintain unit values.

Indeed, the latest results season saw builders post another round of record profits. The last time we saw this offer to completion gap was back in 1988, a year ahead of the 1989 crash. Food for thought?

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Picking the right remedies

The FCA is due to deliver final remedies from its Mortgages Market Study in Q4, unanticipated events notwithstanding.

AMI has already been vocal about a wholesale move to allow execution-only sales to re-enter the mainstream market. It is a mistake, and one that risks the FCA’s own MMR on advice being gamed.

AMI has identified worrying potential unintended outcomes from a shift towards execution-only sales. The first is that there is likely to be increased pressure on both intermediaries and lenders to generate volume sales through the execution-only channel, particularly as it is lower cost for lenders and brokers to sell and would seem to present lower ongoing risk of inappropriate advice claims.

This could create a reason for mortgage product manufacturers to design up front offers that look attractive to customers, but which may include penalty clauses that bite at the tail end of the deal period. PRA rules requiring residential affordability stress-testing would not rule out this type of abuse, particularly where deal terms are longer.

At a time of very low interest rates and comparatively high house prices making longer mortgage repayment terms increasingly normal, the additional expense incurred by customers could be significant.

The question AMI would ask is whether it could result in customer harm? There is a real challenge here, reliant on whether regulators in the future are likely to consider a scenario such as this worthy of customer compensation.

Much will depend on whether the FCA and/or FOS deem lenders and/or intermediaries to be deliberately generating volumes on an execution-only basis to keep costs low and whether the bulk of this volume should have been advised.