News & Views

Fincorp thinks: London property prices will keep rising

The thing about asset price bubbles is that they’re only bubbles if they burst.

There has been a lot of hype surrounding the London property market following the several government schemes launched in the past 18 months. A combination of Funding for Lending and Help to Buy has lent both financial and psychological support to the housing market and prices in the capital have recovered very strongly. But let’s actually look at the numbers.

Mortgage lending has also had a good year. The Council of Mortgage Lenders recently published 2013’s lending figures showing its members granted 268,800 first-time buyer mortgages over the year. These accounted for 44% of the total of 605,100 offered for house purchases, making it the highest percentage since 2000. Despite that rise however these numbers are still significantly below the levels seen in the years before the financial crisis.

Meanwhile the Land Registry has also just published statistics for 2013. Seasonally adjusted annual national house price growth was 3.5% across the year, bringing the average property price to £247,549 for England and Wales. The number of transactions on the other hand saw a sharp increase, rising 19% to 747,479, their highest level since 2007.

But though these numbers are encouraging and we should be relieved the property market appears to be on the road to recovery, the public reaction to them is overcooked.

Transactions at their peak were over 1.2 million per year. We are still miles off that. The issue this leaves the market with is supply and demand. The RICS January Residential Market Survey claimed a shortage of homes coming onto the nation’s housing market is seriously hampering growth and pushing prices higher in many parts of the country. During January, the number of houses coming up for sale across the UK hit its lowest point since July 2012, despite the number of potential buyers continuing to surge ahead in most areas.

This is particularly problematic in London. I’ve seen properties in prime London valued at £7,000 per square foot. It beggars belief when you stop and think about it. And it’s not just in Mayfair and Chelsea we see prices like this. Even in areas that have only recently “up and come” such as Hackney in East London property values are going through the roof. The average price in prime central London grew 12.3% to £1,447,894 over 2013. As lenders focused in the capital I have to admit the market seems frothy. But I just can’t see where this is going to stop.

The fundamentals are there and although it seems absurd that prices should keep rising at this breakneck speed, a lot of this is not being driven by lending at all. Foreign cash is still pouring into London’s prime market and we are witnessing the trickle effect of that in the mortgaged property market.

Real people who want and need to live in London are being pushed further from the centre of the city and paying more for their homes. That in turn is pushing those who lived there further out still. Landlords and property developers are capitalising on this, buying up property in less good condition and either selling it on for a healthy profit just months later or letting it out for an equally healthy sum. Rents are now in excess of £1,000 a month according to the latest figures from LSL Property Services, and income yields are between 5% and 9% depending on the property type. In an economy where most savings rates are below inflation and companies are still reluctant to pay large dividends it’s understandable that more people are considering property investment as a way to generate income.

Accusations levelled at Help to Buy are equally ill informed. Halifax published its lending figures in early February showing that it turned away 80% of applicants for the scheme because they didn’t meet affordability criteria. Also interesting is the average property value for its Help to Buy scheme applications - £157,660. Not exactly house price bubble levels despite the scheme being available on house purchases where the property is worth up to £600,000. Even the average amount lent to borrowers in greater London is only £280,000 and only 20% of the borrowers Halifax lent to on the scheme were in London and the South East – four out of ten were from elsewhere across the UK.

Talk of a house price bubble in London is easy to understand given how fast property values are rising. But it is just talk – political scaremongering lead mostly by Labour and the Liberal Democrats in fact, presumably trying to undermine the credibility of the Tories’ economic recovery plan.

Ultimately the price of anything is what someone is prepared to pay. London is a major cosmopolitan city and with a relatively benign government and tax environment. And with property in the capital so scarce, unless the government starts building on a very large scale, the law of supply and demand will mean prices keep rising.

Straight talking: Fincorp’s Matthew Anderson takes the hot seat

Matthew Anderson likes to be controversial. So controversial in fact that before we start this interview, his colleague and fellow director at Fincorp Nigel Alexander warns him half-jokingly, half deadly serious: “Nothing too controversial!”

Anderson is not so easily deterred.

“What’s the biggest risk facing this market in the next three years? I suspect it is the possibility that as interest rates rise a huge number of people who are already teetering on the edge of what they can afford will be tipped over into the abyss,” he says.

“The Bank of England has already signalled that it expects to start raising rates from next year, and even if they do this gradually I worry that we will still see more people fail to keep up with their mortgage payments.”

He is not alone in this fear – indeed the Bank of England’s governor Mark Carney has indicated the Bank is only too aware that this is a significant risk and could damage the UK’s recovery severely. But how does it impact on bridging?

“The problem is this will set the whole property market back,” explains Anderson. “Interest rates are going to go up. The problem is there are a great number of people, even people I know personally, who, even with rates as low as they are, are teetering. The ability to refinance mortgages as people come off fixed rates or variables is going to become increasingly difficult. The vast majority of people of my generation are on interest-only mortgages – well you can’t get those anymore. If you’re struggling to pay your interest payments every month and you have to move to repayment, it’s really going to hurt.

“This sort of thing is going to slow the property market right down. We are not going to see property prices plummet by 30% again but it will stall the market. The ability to refinance and the ability to sell is going to be hit hard. It will become more difficult and it will take longer.”

His concern is that this will lead to more properties being sold at auction at knock down prices. And that this could hit investors’ returns.

“It’s a combination of all of these risks that poses the biggest challenge for our industry,” says Anderson. “There are some very big fundamental problems in our economy that no political party is addressing and at some point, whether it’s in the next three years or longer, we’ll see some fall out from that.”

Anderson’s view is strongly held and many may find it a bit shocking when we are seeing headlines welcoming the UK’s recovery on a weekly basis. But despite this he is right – it is a risk. 

But this is why Anderson and his colleagues at Fincorp, which was founded 26 years ago, have lasted the course through three recessions and property market crashes when many other lenders have gone to the wall. Being aware of the risks and planning contingencies for them is what sets experience apart from rooky and over zealous lenders.

And Anderson has experience. He joined Barclays Bank in 1983 and spent six years learning the ropes in corporate lending. From there Anderson made an interesting move, to corporate lending at Bank Leumi, the UK’s biggest Israeli bank. 

“That was a real learning curve,” says Anderson. “I went from a culture of the customer’s always right to the customer always wants to argue. But it was a really good training for getting complicated deals done.”

In 1992 Anderson had a belated gap year (or two), travelling around New Zealand, Australia, Bali, Sumatra and Hong Kong which, he jokes, meant he spent the early 90s recession “on the beach”.

By 1994 however he was back in the UK and it was then that Anderson made his debut into property lending at Fibi Bank.

“I’d always thought of property lending as dull,” he admits. “You buy a property, stick a coat of paint over it and sell it on. What could possibly be interesting about that? Well, I had a really interesting client at Fibi Bank who took me out with him to various developments in central London one day and I just got bitten by the bug.”

In 1996 he was offered a job at Wintrust, a bank which specialised in property lending and development in particular, and it was here that he met Nigel Alexander. Both Alexander and Anderson spent a good deal of time at Wintrust, honing their lending experience and in 2003 Fincorp’s founding director Ronnie Natas approached Alexander to set up a “Wintrust-like” development lender for Fincorp. Anderson followed just a year later.

After just shy of 10 years at Fincorp, what has been Anderson’s favourite thing to date?

“Because of its size, Fincorp has a flexibility to its approach that I enjoy and find challenging every day,” says Anderson. “No two days are the same and both Nigel and I have a good deal of responsibility and autonomy to take the business where we think there are good opportunities. That’s very satisfying. The flexibility and adaptability just makes it more interesting.”

So which are the areas that Anderson thinks offer opportunities at the moment?

“My background is really in development finance and I think this is beginning to turn a corner,” says Anderson. “This market hasn’t really been there for a good few years now and I’d like to get back to that if we can and it makes sense.”

While he won’t confirm if Fincorp has solid plans to expand into offering development finance he does acknowledge that it could be a complement to the existing business Fincorp has, which now focuses solely on short-term finance – bridging.

And although Anderson is clearly setting his sights on what the future might hold for the business he doesn’t forget to doff his cap to where Fincorp has come from.

“The bridging market may be niche but there are some great characters and personalities in the industry and it’s been a real pleasure working over the past ten years with them,” he says. “Same goes for the auction houses – strangely enough despite what’s happened to the property market there are a lot of the same faces.”

Bridging has moved on despite this consistency of personality however, Anderson is keen to point out. The recent launch of yet another new short-term lender is testament to the ongoing attraction of the bridging market for lenders. And their numbers have multiplied in the past five years.

“I think these new entrants to the market have brought some established lines of funding with them and with that, they’ve also brought a certain degree of credibility to bridging,” says Anderson. “In the past there was an image of bridging as lenders coming to collect on a Friday night – that’s definitely not the case now. I think short-term lenders today that want to compete have had to streamline their approaches and become much more sophisticated. It's been a good thing for the quality of the market overall."

Straight-talking indeed. But as well as erring on the controversial side, Anderson is also demonstrably honest. He says it how it is and as a result he speaks with integrity.

So while he might shock with warnings of a challenging market to come in the new few years, you also get the impression that with Fincorp, you're in good hands.


Snapshot

Name: Matthew Anderson
Born:
Shepperton
Age:
  49
Lives:
  Surbiton – yes “The Good Life” – yawn!
Family:
Wife and two sons
Education:
In Nigel’s (Alexander) eyes the worst kind – public school – “no idea about the real world!!”
Rugby or football?
Played a lot of rugby and have coached it too. But now have two sons into football.
Team:
Family are Chelsea – my grandfather was a pro and had a couple of seasons there, but are AFC Wimbledon season ticket holders.
Tomato soup or baked beans?
  Tomato soup
Ketchup or brown sauce?
  Ketchup
Laurel or Hardy?
Hardy
Home or abroad?
Abroad
Mornings or evenings?
  Neither – sometime around midday.
Proudest professional moment?
Since joining Fincorp in 2004 we built a loan book of development finance, we repaid it without losing our investors a penny and we’ve build another loan book in bridging as well. To do that successfully twice in the conditions we have over the past ten years says an awful lot the management of this company and I’m very proud to have been part of that.
Proudest personal moment at Fincorp?
To have been able to raise in excess of £30,000 for the Cystic Fibrosis Trust last year has been great. My son suffers from the disease and what started as a small aim to raise some money has completely blown me away. I’ve also been hugely touched by the personal conversations I’ve had with clients and brokers about it. It has really personalised business for me.