July 22 – Humpty Dumpty is off the wall

The world has turned on its head in so many ways over the last few months.  Whilst the Russian invasion of Ukraine was “expected”, its arrival and brutality has altered the balance of money and resources in Europe.  As the one-year transitional period for Brexit expired, we can now see what resigning from the club means at passport control, and simple things like more expensive holiday mobile phone costs.

The economy that was set fair is now beset by supply cost led inflation with increasing interest rates the only tool in the box alongside cancelling Quantitative Easing.  These actions will make inflation worse before it gets better.  Increasing base rate and the uncertainty driving swap rates upwards has meant swift upward changes to mortgage market new borrowing rates.  This combined with wider inflationary impacts driven by the cost of fuel and energy is driving a deep wedge into the economy here and abroad.

At the moment, the harshest impact is being felt by those on the living wage and reliant on benefits.  As the months go by however, we will see more and more people having no discretionary spend left as their mortgage costs increase, their shopping basket bill escalates and the energy companies price in their increased cost of raw materials.  However here is the conundrum.  Oil and Gas are natural resources, the UK has supplies and has firms well placed in the international markets.  If costs of extraction and processing are up, say 10%, where is the profit from the prices that are more than doubling going?  A conundrum that appears to be in the “unspeakable” box.

The world of housing is still beset by our failure to build enough in the places people want them.  House prices continue to defy economic gravity with double digit growth still being seen in many parts of the country.  However, it is clear that change is coming.  It is reported that the value of the UK housing stock has leapt past £10trn, whilst we have over £1.6trn in outstanding mortgage debt.   Its is estimated that £276bn of that is on fixed rates that expire in 2023.  The vast majority of borrowers will have to increase their repayments to service the increased interest rates.  Good mortgage advice for these people is an essential.

In addition, the continued rise in house prices and the imminent withdrawal of government support in the shape of Help to Buy makes getting on the housing ladder harder.  For many the best opportunity will be through shared ownership.  This is becoming an increasingly popular option for new homeowners.  It allows them to buy a proportion of the home through a housing association, with mortgage payments on the percentage of the home “owned” and rent to the association on the remainder.

As an example, buying a 50% share of a home which costs £200,000. This would mean “owning” the first £100,000, with rental payments on the remaining share.  This scheme gives the opportunity to own a percentage of a home, and more shares can be bought in the future (the process is referred to as staircasing) till you own 100%.

However, the conundrum that we all now face is the challenge of “green”.  There is a two pronged pincer movement on the housing market in England and Wales which the devolved governments will amend for their markets.  Firstly, there is a consultation, now closed, on the private rented sector.  Under this, BEIS has proposed its preferred policy scenario for improving the energy performance of privately rented homes.  Under these plans all rental properties must have an Energy Performance Certificate (EPC) rated Band C or better.  This will be a requirement for all new tenancies from 2025 and for all tenancies from 2028.  This proposal will require landlords to invest significantly in their property portfolios to improve properties that are mostly in category E or worse.

In addition to this, BEIS has consulted on lenders having to produce regular data on the average EPC rating of their lending book.  The intention is to generate league tables and measure improvement over time lender against lender.  There will be a push for mortgages that allow greater lending to more energy efficient homes (cheaper to run) or for cheaper interest rates to incentivise people to upgrade their property.  Whilst a consultation, and the ideas are seen as “voluntary”, there is no doubt that this will be coming.  The new benchmark will be an average lending book portfolio of EPC band C.

For homeowners, the challenge is about what to do by when.  Few of the changes people can make deliver cost effective solutions, even with the inflated costs of energy.  Pay back periods exceed the usual time people stay in that house.  Choices between better insulation, solar panels, air sourced or ground sourced heat pumps or waiting for gas boiler hydrogen conversion is too complex a range of choices for most.  Finding trusted suppliers and installers remains difficult.  We still have firms marketing spray insulation to roof interiors, which RICS valuers are clear destroys property values.

However, the temperatures enjoyed in the last few weeks must convince us that action is long overdue if we are to reduce the risks to our planet.  It will not be solved by giant leaps, but everyone moving a little way forward.  The mortgage sector, lenders and brokers both, are beginning to work together to provide pathways.  These will be clearer in the months to come.  We can and will put Humpty back together.

Robert Sinclair, AMI Chief Executive
July 2022