If there is one thing we have all learned over the last decade or so, it is that elections are notoriously difficult to predict, and at the time of writing, the ballots are still yet to be cast. On that note, if you are sitting here reading this blog in the near future where Count Binface is now the MP for Richmond and Northallerton, and the Monster Raving Looney Party has managed to form a successful opposition with the Liberal Democrats, some of the following policy issues may seem rather trite, in that world, there may be more significant issues to face, so please by all means, skip the rest of this monologue. However, let's assume that you sat here in early July, and things have more or less played out as expected; what can we expect in the mortgage markets, and what will provide that liquidity boost to get things moving again as we come out of this period of post-election malaise?
House sales are rising, as per the data published by Which. The bottom, for now, seems to have been 2023 when it comes to transactional data, and the last lot of published HMRC data shows a 17% pick-up year on year. This suggests the return of the second group of retail buyers to the market, the 'we want to move' category. To clarify, in the retail mortgage world, excluding all commercial transactions, with active buyers, demographics tend to fall into three categories: the people who 'have to move or refinance', the people who 'want to move' but may be cautious and delay when rates are high and affordability is tight, and the third group, the 'we may move'. This final group will return to the market as rates begin to fall. It's crucial for the housing market to function effectively that all three groups are out there buying, there's a proportional mix of first-time buyers and people scaling up, and there's enough liquidity in the system to create the debt required to run the whole show.
Looking at the Labour Manifesto pledges around housing and kicking the tires in a fair and honest way that will allow discussion, excluding the home-building pledges, one of the key promises will be the Freedom to Buy Scheme for first-time buyers to secure mortgages. The issue is quite simple: we have ballooned asset prices in housing, part intentionally, part as a natural consequence of economic rationing function, but either way, the mechanics of the basic mortgage as a product are teetering on the brink of plausibility. The income multiples and contribution levels required to participate seem to be so wildly mismatched with the lives of the customers; in any other industry, selling any other product, there would already have been a collapse in demand; it's only sheer necessity propping up the entire spectacle at this point. These transactions are vital in our industry as this is the end-user liquidity, so to speak when housing developments come to market. Property development is unique in the sense that for a large amount of the time, you are producing an asset that is simply being swapped from one debt market to another; the only thing that really changes is the ultimate beneficiary.
Can an incoming government change that very quickly? It's problematic; the proposed schemes don't inject any fresh capital into the markets; they simply offer frameworks for private enterprises and banks to follow. We are short on the details at this stage. Still, traditionally, it's simply incentivising one party to offer a better deal to another, in this instance, providing some limited financial recompense to providers in the instance of default, moving the pieces around the board without any radical change.
The other concern is unintended consequences; for example, the historic Right to Buy scheme, on paper, is arguably a brilliant idea; the defining policy of Thatcherism gave millions of UK citizens self-sovereignty over their own lives. The economic reality pushed much-needed social housing into a deficit it never recovered from. We are yet to see a policy around housing markets that trumps adding to the supply; it's almost a holistic approach to market making; it's not pulling leavers or unpacking a thousand and one ways to structure the same debt pile; it's just building a bigger market, and allowing the laws of economics to price things accordingly.
All we know for sure at this stage is there will need to be an ever-closer relationship between Labour and private sector actors in this sector. The technology businesses, the FinTechs, the disrupters, are the bridge between the two and will continue to be so into the next government and beyond. That is, of course, (as heavily caveated above) if we are not now existing under the reign of the Hon Count Binface MP for Richmond and Northallerton; at that point, all bets are off, but thank you for reading this far as always.
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