Mixed messages of mortgage market

Dominic Thomas
March 2024  •  6 min read

Mixed message of mortgage market

I wonder if I’m exaggerating if I suggest that property is such a UK obsession that it is the political dividing point between the ‘haves’ and the ‘have nots’. Think about it – what policies are designed to protect and inflate the value of property and which are there to house people (irrespective of your political beliefs or persuasion)? The value of mortgage borrowing in the UK is now £1,657.6bn 1.1% lower than last year.

Anyway, the current Government is keen to reassure us that the UK is not really in a recession and talking about one merely leads us into one through negative talk. We know that the Chancellor considered offering guarantees to banks if they issued 99% mortgages, but this never made it into the final list of ideas, probably because most of us thought it was daft.

Meanwhile the UKs largest Building Society Nationwide (who have recently bought Virgin Money for £2.9bn) report that property prices have been rising, up 0.7% in February 2024. The average house price is now £260,420 up 1.2% over 12 months. This is in contrast to the figure that the Land Registry produce of £284,691 for December 2023.

As our office is currently based in SW20, the average price of all property in the area was £555,262 but for a detached house £1,604,983, or a semi at £884,485, a terraced house at £611,401 and a flat or maisonette at £390,792. You can search your location using the UK House Price Index here

On the other hand, reports from the Bank of England also show that mortgages in arrears (missed payments) now stands at around 13.2% of mortgages.

Comparing the last two quarters of 2023 (Q3 and Q4) isn’t really ‘fair’ as we all know that most house buying and selling is done in the summer months (Q3) not over the Michaelmas term. So in that context, the Bank reports that new mortgage commitments is down 21.2% comparing Q4 in 2023 with 2022. The value of advances is down 33.8%. In Q4 2022 £81.6bn of loans were agreed, a year later it is £54bn.

The number of First Time Buyers continues to decline, from 351,000 in 2019 to 287,000 in 2023. Affordability is the key phrase in lending these days and rising rates have evidently placed pressure on borrowers, stretching their mortgage over greater lengths to make the monthly repayments more ‘affordable’. I imagine most of us are familiar with a 25-year mortgage, but 1 in 5 (20%) first time buyers takes on a 35 year mortgage, double the number a year earlier.

“It was the same in our day”… no it was not.

You will likely have heard or thought that everyone struggles at first with a mortgage and their finances. That’s true, but it’s worse for young people these days, much worse. Admittedly everyone is different, there are enormous regional variances, but if we go with averages for the UK, here are some facts that may convince you that buying a coffee and avocado on toast really isn’t the issue. The system is broken and it is deliberately set up to favour property owners here in the UK. Most law is based around the notion of property ownership.

As is evident from the above, clearly it is not possible for someone wanting the average mortgage with the average income to afford the monthly repayments on a 25 year loan, so lenders have responded by offering longer durations. This does not address the problem, it merely keeps the system going and keeps young people in debt until they are definitely not young! Of course better mortgage rates can be found (true in both periods) and of course property prices differ as noted in my local example of an average flat in Merton being more expensive than the average UK home.

If you factor in other costs that young people have which you and I did not have in 1993, it would include student loans and auto-enrolment pensions. The latter being a very good thing, the former being a State-wide fleecing (my opinion).

Yet, I suspect that you and I are likely to presume that these same young people will be happy to do all those jobs that keep civilized life ticking along, from emptying the bins, caring for the elderly and unwell to policing our streets and running the country. I imagine that they may not be quite so enthusiastic to keep doing the work and the paying of taxes to support it.

Remortgages, which you would think should be increasing as people shop around for better rates are actually in decline from 849,000 in 2021 to 538,000 in 2023. The table below makes me wonder why on earth people are not remortgaging. I do hope that it isn’t a sense of fear. To provide a reminder let’s consider mortgages and houses in December 1993. The average property price was £54,026 (Land Registry) and the standard variable mortgage rate was about 7.9%. The average salary in 1993 was £17,784  in December 2023 it was £32,240.

Perhaps your energy costs are starting to subside, if you have a mortgage or pay rent, I am sure you will have been aware of the increases in your monthly costs, at least if you have had to renegotiate terms. Variable rates are considerably higher than they were a few years ago. There is a fair chance your mortgage is with Lloyds, Nationwide, NatWest, Santander or Barclays who account for 64% of the entire mortgage market. The top nine lenders in 2022 (out of 79) affirm Pareto’s law of having 80% of the market from 20% of the players (or less).

Anyway, in terms of your financial planning, we don’t arrange mortgages, but advise you speak to Martin and his team at London Money (see our professional contacts page). You may be concerned about your children or grandchildren getting onto the property ladder or perhaps downsizing to release equity at some point. Please ensure that you keep us up to date with any changes in your thinking about how you intend to use property in relation to your planning.

Reference: Bank of England: Mortgage and Lender Administrators Statistics 2023 Q4 (LINK HERE)

Reference: UK Finance: Household Finance Review, latest data Q4 2023 (LINK HERE)

Reference: UK Land Registry: UK House Price Index (LINK HERE)

Mixed messages of mortgage market2025-01-28T10:04:23+00:00

Beating the market

Dominic Thomas
May 2023  •  12 min read

Beating the market

Hopefully as a client, you understand my views about investing over the long term. One of the many constant challenges to investing is the fear of missing out. This is particularly apparent when you see a chart or data revealing the outperformance of a particular Fund Manager (these are known as active fund managers). There is a tendency to imply that the Fund Manager is particularly skilled and should be looking after your life savings.

The problem is that invariably you learn this after the fact. After the outperformance has been achieved, investing at the beginning was no ‘sure thing’, but it all appears all so obvious in hindsight. The Fund Manager now sits towards the top of the tables and you probably ask yourself “why haven’t I got any of that?”.

Well, because it’s difficult to pick winning fund managers. It’s even harder to pick one that provides continued success, they invariably tend to revert to average. I get emails every day from Fund Management groups attempting to change my mind and use their funds, which have of course performed rather well lately, picking up awards along the way, (otherwise they would have nothing to say). I might argue that this is like awarding someone that has simply tossed a coin a few times – a bit unfair, but not miles off the truth. What I find amusing is their commentary about how they are positioning their fund for the new current conditions. In other words, all the choices that resulted in that great performance is changing, underpinned by a belief that they have unique insight into the future. So do they?

Standard and Poors (S&P) are one of the agencies that rate funds and assess performance data. So in the interest of proving my point of view (I am aware of bias). S&P assessed European Funds (including the UK). I quote:

  • Very few actively managed equity and fixed income funds managed to maintain consistent outperformance relative to their peers over the three or five-year periods ending in December 2022
  • Of the actively managed Europe Equity and U.S. Equity funds whose 12-month performance placed them in in the top quartile of their respective category as of December 2020, not a single fund maintained its top-quartile performance over the next two 12-month intervals
  • Over a five-year horizon, it was statistically nearly impossible to find consistent outperformance. Among the 1,102 actively managed funds whose performance over the 12-month period ending December 2018 placed them in the top quartile in one of our reported categories, just two funds remained in the top quartile in each of the five subsequent one-year periods ending December 2022
  • Over discrete five-year periods, a greater-than-expected proportion of funds in three of six equity categories and two of four fixed income categories maintained relative outperformance. If performance were purely random in terms of comparing funds to their peers, one would expect 50% of top-half funds to remain in the top half over a subsequent five-year period. Our scorecard reports that an unweighted average of 54% of top-half Emerging Markets Equity and High Yield Bond (EUR) funds remained in the top half for two consecutive five-year periods
  • Over the long term, poor performance has proven to be a reliable indicator of future fund closures. Across the 10 categories reported by our scorecard, an unweighted average of 37% of actively managed funds whose performance placed them in the bottom quartile in the five-year period ending December 2017, were subsequently merged or liquidated over the next five years, while the comparable figure for funds whose performance placed them in the top quartile of performance for their category over the five years ending December 2017 was just 20%

Source: SPIVA European Persistence Scorecard: Year-End 2022 (May 2023)

If you wish to see the S&P report, do click here!

In short, there is about as much skill as there is luck when it comes to picking the ‘right’ companies to invest in. Active funds cost a lot more than passive funds (a terrible way to describe patience).  One of the few things that we can control is the cost of investing, we can minimise it. At Solomon’s, the portfolios we use are weighted to global market sizes and are very low cost. In fact, the cost of the mix of funds is lower than 99% of all others. The portfolios are not available to anyone, cannot be accessed as a DIY solution and represent extremely good value.

The returns will reflect market realities and how much of your portfolio is held in global shares or bonds and cash. This ‘asset allocation’ is where the bulk of investor returns reside over the long term.

The most important ‘normal’ investment experience is that of underperformance. Over the long term the vast majority of funds underperformed. Active management takes more risk with your money by being selective and charges more; the results are poor; the winners are rarely investors and I might suggest a cursory glance at the remuneration of fund managers may provide some insight into who is.

Beating the market2023-12-01T12:12:32+00:00
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