14 May 2014

Will young people find it even harder to buy a home now?

Sorry guys – but the news for wannabe first-time buyers just isn’t getting any better. This time it’s Bank of England Governor Mark Carney, interest rates and new mortgage measures.

With a rise in interest rates

The good news is that a rise in base rate, which is at an historic low of 0.5 per cent, is not imminent. The bad news is that this is likely to happen at some point in 2015.

In the words of Bank of England Governor Mark Carney: “As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which bank rate will need gradually to rise. The exact timing will inevitably be the subject of considerable speculation and interest.”

But future increases will be “gradual” – presumably, 0.25 per cent at a time – and interest rates are “likely to remain low compared to historic rates”.

The fact we are unlikely to see big rises will gladden the hearts of would-be homeowners, who are already struggling to raise a deposit for a loan and are having to satisfy new mortgage affordability criteria designed to clamp down on irresponsible lending.

But amid talk of a house price bubble – with the cost of a home rising by 11 per cent in the last year, according to Nationwide – Mr Carney made it clear that action could still be taken to deal with a market showing signs of over-heating.

He said an interest rate rise “wouldn’t be the right tool” to prevent a bubble, but suggested another arm of the bank – the financial policy committee – could step in.

Locked out?

We do not need any more reports to tell us what we already know: with wages failing to keep up with house price inflation, young people are finding it increasingly difficult to get on to the property ladder.

Saving for a deposit, at a time rents are rising, is hard enough, and they may well be the ones who pay the heaviest price if interest rates rise and it becomes harder to obtain a mortgage.

The Intergenerational Foundation campaigns to protect the rights of younger people. Its co-founder Angus Hanton told Channel 4 News: "Raising interest rates represents a transfer from young to old and would be devastating for young new homeowners facing unprecedented house price inflation.

"Tighter mortgage rules may well lead to an entire generation of aspiring homeowners being locked out of home ownership. What we need are lower house prices and better use of the existing housing stock."

Sir Jon Cunliffe, one of Mr Carney’s deputies, spoke this month about “blinking warning lights” and warned there was a danger of “a major overshoot in prices and a build-up in debt, followed by a sharp correction with negative equity and an overhang of debt for many households”.

The Financial Conduct Authority has just introduced new rules as part of its mortgage market review. The laudable intention is to make lenders responsible for ensuring that people can afford to repay their loans. The result for borrowers is a tougher test about their spending habits – from household bills and childcare costs to hobbies and leisure activities.

The stricter rules have the potential to reduce the availability of loans that would have been agreed just months ago.

If the financial policy committee decides action is needed to take the heat out of the housing market, it could instruct banks and building societies to demand bigger deposits from borrowers – making mortgages even harder to obtain.