[A-List] UK economy: housing market bubble

["Michael Keaney" <michael.keaney@xxxxxx>]

More on the growing problem that is the UK's housing market, as that
distorts the economy whilst being an obstacle to eurozone entry. As reported
earlier, pan-EU moves are afoot to make entry easier for the UK via the
establishment of a Freddie Mac-type institution.

See http://lists.econ.utah.edu/pipermail/a-list/2003-November/028460.html

Now the UK government is in possession of a report commissioned by itself
which points to the need for the same thing.

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Brown should back borrowers who boost his treasure chest
SIMON BAIN
The Herald, December 10 2003

GORDON Brown's concern with "over-cheap" mortgages in the UK is something of
an irony.

In our super-competitive market, borrowers chasing the best deals have been
releasing £1bn a week from the rising value of their property, spending it,
and helping the chancellor boast that our economy outpaces the rest of
Europe.

The chancellor says the UK housing market is volatile, fuelling a stop-go
economy, because we have big swings in mortgage costs rather than long-term
fixed rates.
Critics, however, point out that countries such as Holland and Denmark also
have volatile property markets, yet most homeowners there are on long-term
fixed loans.

So the report by Professor David Miles has been seen in some quarters as a
solution in search of a problem.

The professor says borrowers love immediate cheap mortgage repayments, but
do not look ahead to when introductory deals come to an end and interest
rates may also be on the way up.

He says banks and building societies exploit customer apathy, and make their
mortgage profits from their back book of existing customers on the standard
variable rate (SVR) which typically sits 2% above the bank rate.

That enables the lenders to offer loss leader loans to more new customers,
typically for the first two or three years only.

Consumers have not all been asleep. When banks began to offer dual pricing
of the same mortgages, apparently barring the best deals to existing
customers, decisions by the ombudsman last year effectively forced them to
backtrack.

Northern Rock, for instance, says: "When the short-term deal ends, our
customers are free to move on to any of our new front-end (discounted)
products."

Nationwide has the same offer but Stuart Bernau, commercial and treasury
director, says some big rivals have one discounted mortgage for new
borrowers and a more expensive one, though lower than the SVR, for existing
customers who can be bothered to switch.

He adds: "Our calculation is that 33% of the market is on SVR, and a lot of
those maybe took out a 25-year mortgage 15 years ago, have reduced their
mortgage, and it is not their most pressing issue."

Analysts at Barclays Capital say that Professor Miles's final review in
April might recommend legislation: to stop cross-subsidisation of new
mortgages; to standardise fixed-rate early redemption penalties; and to
require interest rate caps on any new mortgage.

However, Mr Bernau says: "I think the government would have a lot of
difficulty in legislating to force action around individual pricing
structures. What they can do is talk about consumer education."

Tony Armstrong at Northern Rock agrees. "You have got to write to your
customers, put it on their mortgage statement, offer them a mortgage review,
and have full transparency. I can't see anything more prescriptive working."

Ray Boulger, at mortgage broker Charcol, says: "First-time buyers are the
very people for whom a long-term fix is not likely to be appropriate for the
simple reason that most first-time buyers move on after a few years."

The tiny Cheshire building society, one of only two lenders in the UK to
offer a 25-year fixed rate loan, says only about 200 of its 60,000 mortgage
customers have taken one out.

The only way to make long-term loans more attractive is to make them
cheaper. This would need an agency big enough to handle so much business
that it could borrow at lower rates and pass on the benefits to homebuyers.

In the United States, two such agencies exist, underwritten by the
government, but there is no hint that the chancellor wants to follow suit.

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Mortgage loyalty subsidises cut-price deals
LUCY BANNERMAN
The Herald, December 10 2003

CUT-price mortgage deals, which lenders use to lure first-time buyers and
those who are remortgaging, are being subsidised by millions of loyal
homeowners, a Treasury report said yesterday.

The long-awaited investigation into the British housing market revealed that
mortgage lenders are overcharging longstanding borrowers so they can lower
the price of discount loans or short-term fixed rate mortgages, and offer
more attractive deals to newcomers.

Professor David Miles identified the pricing policy of mortgage lenders,
which makes other deals appear relatively expensive, as one of the main
obstacles slowing the take-up of long-term fixed-rate mortgages in the UK.

He also warned that the Office of Fair Trading and the Financial Services
Authority may be called in to examine routine overcharging among banks and
building societies.

Gordon Brown, who hopes the report will spark a mortgage revolution, is
expected to give a cautious welcome to the findings when he delivers his
pre-budget speech in the House of Commons today.

He had commissioned the report earlier this year to examine ways of steering
borrowers towards long-term mortgage commitments. It is believed an increase
in 25-year fixed-rate mortgages will help stabilise the boom and bust cycles
of the housing market which have traditionally held the British economy to
ransom.

However, Professor Miles, of Imperial College, London, said the methods used
by the banks and building societies were "undesirable".

The UK Mortgage Market: Taking a Long-Term View highlighted how those on
standard variable rates - one in three of all borrowers - are paying over
the odds.
"I am concerned that some sections of the market are not working as well as
they should and in the interest of all borrowers," said Professor Miles.

He also accused lenders of not educating their customers on the benefits of
long-term deals. Many home owners focused too much on their initial payments
in the first few years of their mortgage, rather than the overall cost, he
said.

"The information and advice given to consumers during the sales process
often does not help them much in understanding risk.

"For many, particularly those borrowing a great deal and those whose incomes
are uncertain, there are significant advantages of fixing the level of
repayments for several years. Yet few of such borrowers take out longer-term
fixed-rate mortgages."

In the chase for the best short-term deal, he said many borrowers failed to
understand the insurance long-term fixed-rate mortgages could provide
against unexpected interest rate rises.

Unlike the US and Europe, 25-year fixed-rate mortgages have failed to gain
popularity in Britain, with borrowers preferring two-year deals that allow
freedom to shop around for the most competitive rates.

An increase in long-term mortgages would bring Britain into line with
countries in the EU, paving the way for entry into the single currency. It
was Britain's reliance on variable-rate mortgages that prevented euro entry
earlier this year.

However, according to the report, it could take some time to convince
homeowners to take out long-term fixed-rate mortgages, something that has
long been considered financial suicide.

It also showed that competition in the British industry, which is much
tougher than the US market, would make it difficult for banks and building
societies if they pulled out of the race for cheap deals on the most popular
mortgages.