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magazineWhy mortgage innovation could spell trouble for housebuilders
One follower of the housebuilding sector is alarmed to see the return of the ‘flexible’ mortgage given what it reveals about the state of the property market.
Shore Capital analyst Robin Hardy notes the launch of NatWest’s HomeFlex product, which allows borrowers to take money out of their mortgage in his words ‘as quickly and easily as withdrawing money from an ATM’, and its similarity to products which played a key role in the credit crunch just over a decade ago.
Initially available to the bank’s Premier customers, the product is set to be rolled out across the board by the end of 2019.
Lenders have already resorted to offering cheaper rates at higher loan-to-value and on longer terms, but the market remains stagnant.
In February the number of loans approved to home buyers fell to their lowest levels in nearly six years according to figures from UK Finance, a trade association for the UK banking and financial services sector.
Some 35,299 mortgage approvals for house purchase were recorded – the smallest monthly figure since April 2013.
Banks’ desperation for new mortgage business needs to be closely monitored as it could lead to a rise in bad debts, putting pressure on balance sheets and undermining the sector’s renewed commitment to dividends.
Hardy says: ‘Overall, these evolutions in the mortgage market all point to market strains and stresses that highlight that borrowers are stretched and that the housing market is struggling due to poor affordability. We have long held that this is the issue in the market, not Brexit.’
While the easy availability of mortgages might be helpful in the short term, these ‘strains and stresses’ could put further pressure on average asking prices for new-build homes at a time when the housebuilding industry is having to contend with rising costs, thereby putting pressure on margins. And they could also be an early warning sign of a property crash.
Look for news on prices when the housebuilders update on first quarter trading in the coming weeks, as well as an indication of how the key spring selling season is going.
Upcoming trading statements from housebuilders
Taylor Wimpey 25 April
Persimmon 1 May
Barratt Developments 9 May
Bovis Homes 22 May
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