Like Easter, the start to the buying season for househunters has come early this year. Mortgage approvals in February were 20% up on the same month in 2015.
It’s not hard to see why. Higher stamp duty on buy-to-let properties and second homes comes into force at the start of April, creating an incentive for potential purchasers to evade the clutches of the taxman. The surge in activity is giving an added upward twist to house prices, which are rising by around 10% a year – five times faster than average earnings.
Britain has been here before. In 1988, there was an orgy of buying after Nigel Lawson announced in his spring budget that double mortgage interest relief for couples would be abolished in August that year. The boom was followed by a six-year slump that saw a record number of home repossessions.
Could this happen again? Well, clearly many of the same ingredients are in place. Mortgage demand is strong, prices are going up fast and there is a strong belief among buyers that the market can only ever go up.
All that is lacking is a trigger, provided in 1988 and 1989 by a doubling of interest rates from 7.5% to 15% in little more than a year. Prices started to fall and those who had joined the party late found that they couldn’t keep up the monthly payments on homes that were worth less than they paid for them.
The Bank of England currently has no plans to raise interest rates, which have been pegged at 0.5% for the past seven years. Even so, Threadneedle Street is rightly concerned about the amount of money being pumped into buy to let and the vulnerability of the sector to even a modest increase in the cost of borrowing.
The terms of buy-to-let mortgages tend to be less onerous than they are for owner-occupiers, and this tends to accentuate the boom-bust cycle. Why? Because it encourages buy to let when the property market is hot, but means the buy-to-let sector is more sensitive to rising interest rates. The Bank is keen to avoid a downturn in the housing market being amplified by buy-to-let landlords selling up en massebecause their investments have gone sour.
On Tuesday, the Bank will publish the findings of its Prudential Regulation Authority on underwriting standards for buy-to-let contracts. Put simply, Threadneedle Street suspects that the clock has been turned back to the days before the 2007 financial crisis, when lenders were not especially picky about who got a mortgage.
The problem is that the Bank has been making this point for a while now and is starting to look a bit like the boy who cried wolf. Potential buy-to-let landlords know that there is not going to be a doubling of interest rates, as there was in the late 1980s, and could be forgiven for believing that Mark Carney and the rest of the financial policy committee are all talk. It really is time for the Bank to put up or shut up.
The FPC could do a number of things. It could say that the percentage of buy-to-let mortgages granted by a lender should not exceed a certain percentage. It could tighten the terms of buy-to-let loans so that they are brought into line with the more stringent yardsticks used for owner-occupiers. It could force lenders to hold more capital against buy-to-let loans, thus making them less profitable. Or it could try a combination of all three.
If the Bank again does nothing, lenders will assume – quite understandably – that permanently low interest rates, FPC timidity and the ability of landlords to pass on higher stamp duty to tenants in the form of higher rents make buy-to-let pretty much risk-free. But it isn’t. There is a bubble inflating out there that needs to be pricked – and the sooner the better.
Frackers no longer cooking with gas
After all the hoopla about the US shale gas “revolution”, you might have thought the first shipments to Europe would create a stir. Chemicals group Ineos even flew journalists to Norway to witness its first tanker discharging gas from Pennsylvania shale fields at Rafnes, but headlines were few. This is mainly because the bubble of excitement around low-cost American gas has been popped by the collapse of hydrocarbon prices worldwide.
Similarly there was little euphoria about the huge, and hugely expensive, Gorgon gas project in Australia coming on stream last week. That $54bn scheme was meant to work wonders for Chevron and its partner Shell, but the liquefied natural gas (LNG) shipments are sailing into choppy waters: Asian gas prices are two-thirds below 2014 levels and expected to fall further.
Around the globe, as with oil, there is too much gas floating around. It makes no sense now for Chevron to export the Gorgon gas that is not already sold on long-term contacts. Nor is it likely to be worth Ineos’s while to cart ethane 3,800 miles across the Atlantic to Norway – and later to its Grangemouth refinery in Scotland.
But Swiss-based Ineos no doubt expects prices to recover and is also hedging its bets. It has bought $750m of North Sea fields from Russia’s Mikhail Fridman, and is promising to invest £640m in Britain if a shale boom can be created here. There is currently no shale gas drilling in the UK, although pioneers such as Cuadrilla Resources and Igas hope it will not be long before planning authorities consent to more wells. Murdo Fraser, the Conservative member of the Scottish parliament, has been using Ineos’s planned imports to Grangemouth to bang the drum in favour of a homegrown industry.
Would-be UK frackers still face major opposition from environmentalists and people living near potential shale sites, but, just like US ones, they have a bigger problem at the moment: the bottom has fallen out of the market.
Lord Wolfson is rarely the most cheerful man on the high street, even when Next, the retailer he runs, is trading well. However, this time, there may well be some substance to his pessimism.
The Next boss warned the retailer faced the toughest year since 2008, sending its shares down 15%. This is partly down to a wider slowdown in consumer spending, but the main concerns about Next are unique to the Leicester-based chain.
Critics of the company have often questioned why it has been able to increase profits ahead of the market, when its ranges of clothing can appear so dowdy.
The answer is its credit business, which generates more than £150m in interest charges for Next and encourages customers to spend more.
However, the number of credit customers is now in decline and Next is struggling to turn it around.
Given that Next faces tough competition from the likes of Zara, Primark and Marks & Spencer, the weakening of this potent weapon poses a genuine problem for Wolfson.
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