In-focus: Acre Properties founder looks to get younger people onto the property ladder
Acre Properties is a property sales and lettings agency based in Chiswick, west London. In conversation with The Parliamentary Review, Acre’s founder and director Alastair Kerr discusses the need to help first time buyers and offers his take on how to get younger people onto the property ladder quicker.
The need to help first time buyers has certainly been on Kerr’s agenda before, but the key problem in his view is that the income multiple currently used by lenders is obsolete.
Kerr said: “The key problem is that the income multiple, which is used by lenders, and indeed the products that lenders actually offer, are essentially obsolete or deficient.”
Kerr went onto to describe an example of a tenant who is by definition a good quality and credit worthy individual but barred from accessing the property ladder.
“I have a tenant who is a decent, hard-working chap, for example. He has been in his job for 13 years and a tenant of mine for roughly 15 years. He is looking to purchase his first home.
“His first port of call is to visit his nearby bank, of which he has been a customer for over 20 years. The tenant has been paying £1,100 per calendar month in rent for the previous eight years, and he also pays £300 each month into a savings account at his branch.
“His bank, therefore, is clearly aware that he can afford to pay out £1,400 per month. Yet, what happens is that the bank, in their estimations, multiply his gross salary by an industry standard of 4.5, and he is provided with a figure which would equate to around £180,000. This, unfortunately, leaves him approximately £70,000 short of the average price of a studio flat in the area of London where he has resided for the past 15 years.
“Parental assistance is not possible, so he is basically back to square one.”
Kerr believes such issues are causing a number of credit worthy tenants to be barred from getting onto the property ladder, and so he presented his own proposals for a solution.
“Clearly this tenant is a great potential lend. If the bank could, therefore, increase the income multiple to around six, this would enable the tenant to be offered £240,000. The shortfall of £10,000 for the average studio flat in his area of London could quite easily be made up from money he has already saved in previous years.
“This scenario would enable him to move into his chosen home, he would save a good amount of money and could reduce his mortgage and not need to continuously rent for many more years.
“More importantly, he would not then have to consider relocating and commuting to his London workplace from further afield.”
A smart idea it seems, but a rather sizeable stumbling block is regulation, which lenders are bound to.
Kerr said: “The issue is that, while my idea is a good one, the reality is that lenders are regulated and, in many cases, unless scenarios such as this are approved, the status quo will remain the same.”
To resolve this issue, Kerr went onto say that a new independent referral agency for problems such as this, could be established.
“Of course, there would have to be known guidelines and parameters which would need to be agreed by the government, the Council of Lenders, and the Regulatory Authority, which lenders would then be familiarised with. Each individual case could then be referred to this new agency.
“From there, a decision can be made on every case within a set turnaround period, and an Approval Certificate given to the lender to allow them to permit a higher income multiple loan.
“That means that in the scenario of the tenant I discussed, they are able to get onto the property ladder immediately, with no need for continuous and expensive renting, and both the lender and the government are better off.”
Kerr believes that with such a solution, the so-called ‘Bank of Mum and Dad’ is also spared a large payout with parents not needing to contribute toward helping their children obtain their first home.
He added: “One can deduce that over multiple decades, property is a sound investment. So, getting your first home is a sensible thing to do.”
However, while house prices over the decades have risen substantially along with people’s incomes, Kerr points out that the income multiple of lenders has not risen to match.
“House prices have risen a hundred-fold or more over the years, and wages have gone up by almost forty-fold. Meanwhile, the income multiple used by lenders has gone up by around 29 per cent.
“It is, therefore, hardly a surprise that first time buyers in London are having to find deposits in excess of £100,000.”
The situation does beg the question as to why the income multiple has not changed in line with house prices and wages. Kerr shed more light on this, too.
He explained: “Originally after the Second World War, a conservative 3.25 to 3.5 income multiple was applied and a convention of giving mortgages for a maximum of 25 years was adopted, with only capital and interest repayment being the only repayment vehicle.
“A conservative approach to lending was also applied as The Bank of England set the benchmark for lending in the form of its Base Rate. Thereafter, lenders would charge a margin above this rate which could rise or fall depending on the performance of the UK economy.”
Kerr went onto explain that often governments could manipulate the economy to yield a fall in the general cost of borrowing and the cost of one’s mortgage, which had a knock-on effect on morale and influenced voters. Yet, this would eventually come to an end.
“Over the decades, nothing changed, until the deregulation of The City occurred. New products then came about, including mortgages backed by pensions or endowments. From there, prior to the end of the century, the UK decided that The Bank of England should operate more independently of the government, in a similar vein to the Federal Reserve in the US.
“The result was that we saw huge fluctuations in the Bank’s Base Rate. Once Lehman’s Bank collapsed in October 2008 and we entered recession, the Base Rate plummeted from five per cent to 0.5 per cent in a five-month period.”
Since the 2008 Recession, the rate fell to 0.25 per cent and had a brief period at 0.75 per cent.
In Kerr’s view, the credit crunch had put an end to double digit base rates. However, he then compared the UK situation to that in Japan and Sweden, where one can be offered mortgages of 100 years.
Kerr said: “Taking everything into account, and the fact that you can be offered 100-year mortgages in Japan and Sweden, how realistic is it to think that a 25-year period is relevant?”
For Kerr, the problem has largely been aggravated by the regulator.
“In previous decades, the regulator has watched lenders act irresponsibly, for instance by giving loans for up to 125 per cent of a person’s home. Naturally, when the economy shrunk, all lenders encountered difficulties and either closed or had to be bailed out.
“Property will tend to go up in value the longer that it is held, and the regulator knows that aside from death, illness and unemployment, the only real risk to mortgages is if the amount payable fluctuates. In this respect, the longer the rate cannot move, the less risky it becomes in principle.
“For example, if the rate cannot change for five years, it is less of a risk than one which is fixed for two to three years. In the case of Buy to Let mortgages, the regulator favours five years over the shorter period, so they are hardly going to lose sleep if the rate at the outset could, as a minimum, be fixed for the duration of the loan. With the Base Rate now down to 0.1 per cent, it is the best time is over 320 years to take a long-term fixture”.
Then presenting his proposal for a solution, Kerr said: “First and foremost, the government, lenders and the regulator need to meet and agree a new product fit for this century can be introduced.
“I would suggest that ‘capped’ rate mortgages of 50-60 years are introduced, and the rate offered to first time purchasers should not be undermined by lower rates for shorter fixed products. This will prevent lenders from gaming the system.
“With a capped rate, the homeowner would start their mortgage and effectively never pay a higher figure but could pay a lower amount any time within the 50-60 year period if the Base Rate were to lower further. In Denmark, for instance, a 20-year mortgage has zero interest on it, so one cannot say that this idea could not be possible in light of the fact that the Base Rate was 15 per cent in the late 1980s and is now in decimals.”
Kerr then referred to the earlier case study of his tenant to further support his idea.
“The example of the tenant showed that higher income multiple lending can be granted if sensible parameters are adopted. If people decide to go for 50 or 60-year mortgages, which has a capped rate of maybe 2.5 per cent, then an income multiple of 6-8 times more than the purchaser’s income could very easily be adopted. 95 per cent mortgages could be advanced, and in doing so, the ‘Bank of Mum and Dad’ is also better off.
“Parents could and should be allowed to join in on a mortgage to help their children gain a first home. A certain period could certainly be agreed in my view, after which the parent would withdraw from the mortgage.”
Importantly for Kerr, the income multiple should be regarded as dynamic, which can be increased by around 0.125 points every other year.
Kerr elaborated: “Doing this would allow succeeding years not to be unnecessarily damaged by a static figure.”
He added: “Potentially, under these proposals, a good and credit worthy person could be granted a 100 per cent mortgage, and if need be, the government could give the lender a guarantee for, let’s say the five per cent extra lend, which could expire after a specific pre-agreed period.
“If nothing else, I feel a pilot scheme should be encouraged in different areas of the UK to see the plan in practice, and then it can be gauged as to whether the scheme was fit to be fully rolled out.”
Ambitious this may seem, but Kerr remained adamant that if executed, it could give younger people greater freedom and possibilities for a better and more optimistic future by getting onto the housing ladder quicker.
Kerr concluded: “Every day, quality and credit worthy young men and women are being unreasonably denied the chance to own their first home due to the issues I have outlined. We need people to get on to the housing market early, not in their 40s or later.
“Doing what I have suggested would give individuals greater freedom and possibilities for a better and more optimistic future.”