In his recent budget, the Chancellor of the Exchequer Gordon Brown made an
interesting statement in relation to the provision of finance in the UK
housing market. His comments indicated that, rather like much of the country
's population, he is losing patience with the UK's volatile house price
rollercoaster. And, with homes in some regions doubling in value in less
than three years, the government, like many others, has reason to wonder
where it's all leading to.
Well, the boom of the 1980s differed fundamentally from that of the last
couple of years. For a start, it was caused by an overflow of outward
confidence from The City, fuelled in the main by huge bonuses made by
traders. This instigated a ripple effect throughout the country, despite the
fact that interest rates were on average fifty percent higher than at
present. So, when the bust came, in the guise of Norman Lamont's ill-fated
dalliance with the European Exchange Rate Mechanism (ERM) snake, disaster
was, for many, inevitable.
Understandably, our current Chancellor (whose middle name is Prudence, not
Danger) is anxious to avoid a repeat of the 1990s slump that followed the
1980s boom. And, even though there can be no realistic comparison between
today's interest rates and those of the early 90s, the parallels are still
causing Mr Brown some uneasy nights. So, very sensibly, he is looking at
ways of smoothing out the boom and bust philosophy that has pervaded the UK
housing market for long enough.
One of the possibilities that the Chancellor is investigating is whether a
move to US-style long term fixed rate mortgages will help bring some
stability to the UK. Now, our cousins across the pond have a very different
view to us when it comes to defining what is meant by the phrase 'long term'
. For example, a quick straw poll around a few UK based brokers reveals
that, over here, the longer term is regarded as anything over three to five
years. In the United States, however, we are looking at mortgages that offer
borrowers a fixed rate for twenty five or even thirty years.
So, what is it that's so different about the North American market, and
would it help us over here? It's a question that Gordon Brown deemed
sufficiently important for him to appoint Professor David Miles, Head of the
Finance Section at the Business School within London's Imperial College to
investigate further. Professor Miles' interim report is expected shortly,
with a more comprehensive analysis due in April 2004.
At the moment, the UK housing market is enjoying the lowest mortgage
interest rates for over forty years. Moreover, because of the uncertainty
about whether or not we will join the Euro, many borrowers feel that the
next move for UK interest rates will be downward rather than up. For this
reason, the majority of homebuyers are reluctant to sign up to what they
feel will be an uncompetitive product, should our rates fall further.
But that's not really what it's like in The States. Over there, the Federal
Reserve base rate recently fell to a scarcely believable one percent - a
forty five year low. But, that doesn't actually mean that mortgage rates
have plummeted to the same degree. In fact, because long term interest rate
predictions are something that's beyond the knowledge and control of even
the globe's top economists, there has to be a considerable margin between
the prime rate and the mortgage rate that's actually charged. As such, while
the Federal Reserve cut its rates to a single digit, the average American
still pays about six percent on his long term fixed rate mortgage.
The big problem here is that - given the fact that the UK remains Europe's
most competitive and sophisticated mortgage market - our consumers simply
wouldn't be interested in a product that ties them into a fixed rate of that
magnitude, for the full length of their mortgage term.
This historical competitiveness means that the UK consumer believes he or
she gets the best deal in any event. And, if the market emphasis changes
after their current offer expires, they can always take out another product.
(abridged)
For more information, visit the Mortgage Talk web site at
www.mortgagetalk.co.uk or telephone Andrew Frankish, Technical Director, on
01709 530 555 or 07768 603 700.
