Cameron Hometown Booms as Easy Finance Raises Prices: Mortgages

Peter Saunders had to stretch his resources to buy a house this year in Prime Minister David Cameron’s constituency town of Witney, where values have risen at twice the U.K. average over the last three months.

The 27-year-old hotel manager said he needed money from an inheritance as well as a mortgage to afford the 200,000-pound ($325,000) Witney home in Oxfordshire. The market town, which has a 13th-century church at its center, is surrounded by rolling hills and farms. Oxford, 13 miles away, is even more expensive, he said.

Cameron’s efforts to spur the economy by supporting mortgage lending are fueling price increases across the country, prompting buyers to extend their credit and leaving them vulnerable to interest-rate increases. People purchasing a first home in the U.K. are borrowing 3.4 times their annual income on average, matching a record set in August 2007, according to data compiled by the Council for Mortgage Lenders.

“Witney is a bit of a bubble,” Saunders said. “We kept hearing in the news about how the Bank of England is feeling more positive about the economy and how interest rates might rise quicker than expected, so we went with a five-year, fixed-rate mortgage.”

House prices climbed in all of the U.K.’s regions for the first time in more than six years in November, according to Hometrack Ltd. Values have reached records in areas of the Southeast including Oxfordshire, Hertfordshire as well as the Welsh capital, Cardiff, LSL Property Services Plc said in a Dec. 13 report. Price growth in the West Midlands region was second only to Greater London in the three months through November compared with a year earlier, according to the report.

‘Very Dangerous’

“It’s very dangerous to boost house prices, given they already start from an unsustainable level based on price-to-earnings ratios,” David Blanchflower, professor of economics at Dartmouth College and a former member of the Bank of England’s Monetary Policy Committee, said by e-mail. “There are no signs of wages rising, so buyers beware as interest rises eventually will come.”

Cameron first took steps to bolster home purchases in the aftermath of the recession as banks curtailed mortgage lending and demanded higher down payments. The London market became the first to recover in 2009 as lower unemployment and higher-than-average wages, as well as investment from abroad, pushed up prices.

Help to Buy

The government’s Help to Buy and the Bank of England’s Funding for Lending programs have helped drive the price gains. The government in October brought forward the second phase of Help to Buy by three months. It enables purchasers to take out a loan with a down payment of as little as 5 percent on homes valued at up to 600,000 pounds. Funding for Lending permits banks and building societies to borrow from the BOE if they use the cash to fund residential mortgages or loans to businesses.

During the next five years, prices in the center of the capital will rise about 23 percent, slower than the 25 percent gain for the U.K. as a whole, according to broker Savills Plc.

The number of mortgages with down payments of 15 percent or less rose 80 percent in October from a year earlier to the highest since April 2008, according to property appraisal firm e.surv Ltd.

The International Monetary Fund said in May that unless the U.K.’s efforts to lift housing increased the supply, the initiatives would cause price increases that “would work against the aim of boosting access to housing.”

Already Costly

The average home in England and Wales costs 6.2 times the median income for full-time workers, according to government filings this year. U.S. homebuyers by comparison pay four times their median household income for an existing property, according to an estimate from the U.S. Census Bureau and data compiled by the National Association of Realtors.

Bank of England Governor Mark Carney last month signaled that the housing market needs cooling when he limited the Funding for Lending program to business loans rather than household borrowing starting in 2014.

“This will help keep the housing market on a sustainable path and ensure the broader economy continues to receive the stimulus it needs,” Carney said when he announced the change. “By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later.”

Chancellor of the Exchequer George Osborne told Parliament’s Treasury Committee on Dec. 12 that the housing market is not in a bubble. Osborne has asked BOE’s Financial Policy Committee to carry out an annual review of Help to Buy.

About two-thirds of 27 economists in a Bloomberg News survey last week said property in the U.K. is at risk of overheating.

Variable Rates

Most mortgages in the U.K. have variable rates, meaning property owners benefit when interest rates are low and pay more when they rise.

The improving economy is helping to push unemployment closer to 7 percent, the level at which Carney says officials will review their policy stance. He has said he won’t raise the benchmark interest rate at least until then.

About a third of 29 economists in the Bloomberg News survey see the threshold being reached by the end of next year, while two-thirds expect it to happen by the second quarter of 2015. The jobless rate is currently 7.6 percent.

Rates banks charge each other to borrow are forecast to rise to 3 percent at the end of 2017, according to data compiled by Bloomberg based on the London Interbank Offered Rate, or LIBOR. That would mean a buyer with a 20 percent down payment and a variable-rate mortgage would see monthly interest payments double in four years, Green Street Advisors analysts including Hemant Kotak said in an Oct. 23 report.

Young Buyers

“There are many young people who can afford a mortgage but are struggling to save for the deposit because there aren’t 95 percent mortgages available,” Cameron said in a Nov. 13 speech. “We’re not encouraging people to buy homes they can’t afford or have mortgages they can’t afford; we’re helping them get mortgages they can afford.”

Homebuilding has increased, partly thanks to the government’s FirstBuy lending program. U.K. residential construction expanded at the fastest pace in a decade in November, rising 60 percent from a year earlier, according to a survey by Markit published on Dec. 3. The Bloomberg U.K. Homebuilder Index of 10 stocks has gained 49 percent this year, led by Telford Homes Plc, Redrow Plc and Taylor Wimpey Plc.

The current level of price increases shouldn’t be cause for concern, Pete Redfern, chief executive officer of High Wycombe-based Taylor Wimpey, said by phone.

“We’ve had four or five years of totally stagnant house prices, which means real prices have been going backwards,” he said. “With that backdrop, 2 or 3 percent inflation isn’t the kind of environment that should worry anybody.”

Supply Deficit

Even after the increase in construction, demand is outstripping the supply of homes. Demand for housing rose by 3 percent in November, while the supply of homes for sale declined by 3.5 percent, Hometrack said. The greatest imbalance is in London and the Southeast, where prices have grown 4.8 percent and 3.2 percent, respectively, during the six months through November.

Prices in Witney, which is about 67 miles northwest of central London, rose 1.2 percent in the last three months, according to property website Zoopla Ltd. That’s more than twice the average U.K. home’s gain in the three months through October, according to data compiled by the Land Registry.

Martyn Brittain, a branch manager of local broker Connells Ltd., said home buying has “shot up” in Witney during the past six months. Connells is advising buyers to use Help to Buy to obtain the biggest home they can get, so they can avoid moving again if their personal circumstances change, he said.

“I’m hoping that the government is going to take more care so that the crash doesn’t happen again,” Brittain said in an interview. “They seem to be a lot more wary than last time, but you never know until it happens.”

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