MMR changes may prevent Scottish housing bubble

New mortgage rules could take some of the steam out of Scotland's mortgage market. Picture: TSPL
New mortgage rules could take some of the steam out of Scotland's mortgage market. Picture: TSPL
Share this article
Have your say

NEW mortgage lending rules are set to take the steam out of the housing market recovery in Scotland and help avert a possible house price bubble in 2014.

There have been growing fears of a damaging spike in prices north of the Border due to a combination of high demand from buyers and a shortage of homes for sale.

Yet the summer months could bring a slowdown in housing market activity following the introduction of new mortgage lending requirements. The mortgage market review (MMR), which the regulator launched amid the housing market crunch five years ago, finally takes effect in April with brokers warning that it could act as a “brake” on the housing market.

It will come into force in conditions quite different to those in which it was conceived. Lending has reached post-credit crunch highs in recent months in a resurgence sparked by the launch of the funding for lending scheme (FLS) in August 2012. By giving lenders access to cheaper borrowing the scheme resulted in lower mortgage costs and looser lending restrictions. First-time buyers returned to the market in 2013 as mortgages requiring modest deposits once more became attractive.

However, experts fear the government has thrown fuel on to the fire by forging ahead with the second phase of the help-to-buy scheme, which, by underwriting 95 per cent loan-to-value mortgages, is pushing demand up even further.

The Royal Institution of Chartered Surveyors Scotland said earlier this month that it was “very concerned” that a shortage of homes for sale was driving house prices too high.

And Robert Carroll, managing director of MOV8 Real Estate, has warned that Edinburgh faces a “mini property bubble” unless there’s a marked increase in the supply of homes for sale.

“The problem comes down simply to supply and demand,” he said. “With sellers holding­ off putting their properties on the market till spring but buyers continuing to look, the properties that are on the market at this time of year are selling far quicker.”

Another estate agent, Rettie & Co, has claimed that house prices in Scotland will rise by more than a fifth over the next two years.

But a house price bubble is not the only threat to a sustainable housing market recovery in 2014. New rules taking effect in April are expected to result in longer mortgage processing, more borrowers being rejected and potentially higher loan costs.

Among the new requirements on lenders will be full responsibility for assessing affordability (previously carried out by intermediaries); stress tests to ensure borrowers can withstand a rise in interest rates; and stricter criteria for interest-only loans.

Some lenders have adopted the rules already, yet many expect their official implementation in April to herald a slowdown in the mortgage market.

Mark Dyason, director of broker Edinburgh Mortgage Advice, said: “The industry will not be ready for it and it will act like a huge brake on the housing market as we all, but lenders especially, get to grips with it.”

The biggest problem will be the extra paperwork required by lenders, according to Dyason, while the Council of Mortgage Lenders warned earlier this year that the MMR would lengthen the application process.

“I would expect getting a mortgage agreed in May to August next year to be as challenging as it has ever been,” he said. “There will be a huge paper trail created initially as lenders will overdo the requirements to make sure they are compliant and seen to be ‘best of breed’ with the regulator.”

But others say the impact of the MMR will be cushioned by changes that have occurred since the financial crisis.

Jonathan Fair, managing director of Stewart Milne Homes, said: “Buyers now think more carefully before they purchase and lenders carry out vigorous affordability checks, only lending to those who can genuinely afford it.

“The MMR is made up of these fundamental principles so its formal unveiling will help crystallise the process of what has been taking place in the market in recent years.”