Grand, empty gestures - 14 April 2008

Posted by Paul Collins No comments

So the crisis in the financial markets and in the property world continues, with announcements this week that prices are falling and banks are becoming ever more reluctant to lend to homebuyers.

In this same week, there have been two moves made ostensibly to encourage the property market. The sad thing is, neither of them are remotely likely to have any effect on reassuring buyers or promoting more transactions.

Firstly, banking giant HSBC announced that it will match the fixed-rate mortgage deals of its rivals to make life easier for the 1.4 million or so borrowers who will be coming to the end of their current agreements in the course of 2008.

This is a little bizarre, given that almost every other bank in the mortgage lending world has decided to cut back on the mortgages they approve by putting their rates at a level such as to only attract the most solid, dependable borrowers – the so-called ‘super-prime’ customers. The general feeling uncertainty in the market means that lenders are unwilling to expose themselves to too much more risk in the property market. All the more bizarre is the fact that HSBC’s own internet banking arm, First Direct, was among the first wave of institutions to announce the suspension of their fixed-rate products.

While this may provide relief for the rafts of people who were awaiting the end of the fixed-rate terms with trepidation, a cynic might suggest that the move was nothing more than a well-timed and executed marketing ploy…

Following this, the Bank of England made the widely-predicted (and demanded) cut on the base rate of interest to five per cent. This fits in with the past record of the Monetary Policy Committee (MPC) to watch and wait, and not to indulge in the kind of headline-grabbing cuts that the US Federal Reserve have made in the first quarter of 2008 (and which appear to have had little or no effect).

The reason that neither of these measures will have the desired effect of improving confidence in the housing market are two-fold. Although the mortgage lender have stated that they will be passing on the cuts in the interest rates to their customers, the likelihood is that they will still be paying around the same amount in repayments for their mortgages as they were before.

This is because the ever-generous banks have been shown to undertake some practices to, let’s say, protect their income. A recent study showed that some of the major mortgage lenders have the habit of raising their mortgage rates shortly ahead of the MPC so as to ‘insulate’ themselves from the effects of any cut on their profits and margins.

Perhaps more importantly, any drop in the base rate of interest – whether in theory or in reality, depending on the attitude of the banks – only goes to help out those people who already have a mortgage and keep their monthly repayments in check. If the government is really trying to boost the housing market, not only for the sake of the economy but also to make their own targets for building in the next few years even remotely attainable, it needs to do something to attract new buyers to the market.

This invariably means first time buyers, and cutting interest rates will do little to help them get onto the property ladder. On top of this, the HSBC offer is not open to any first-timers and 100 per cent mortgages are now virtually extinct, so young buyers have to contend not only with a shaky market and the need to have a healthy deposit just to get a little toe on the ladder.

The government has announced a new package of measures to help younger buyers get started in property, with a grant available of up to £1,500 towards the cost of the first steps in the property market. Although I am sure this grant will be appreciated by those just about ready to buy, the grant does not even cover the average first time buyer stamp duty costs of £1,700.

Little wonder then that the government announcement came with little or no fanfare…

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