Insurance & Technology News
London Evening Standard, Anthony Hilton column
Mar 19, 2013 (London Evening Standard - McClatchy-Tribune Information Services via COMTEX) --
The Chancellor has let it be known with the usual press leaks that he wants his Budget tomorrow to deliver a further boost to the housing market, most probably by putting more money behind the existing schemes that reduce the amount first-time buyers need for a deposit.
In this regard, something is better than nothing. Many had hoped for more direct aid to housing associations and others in a position to step up the rate of building, but that falls foul of the Chancellor's aversion to sanctioning Government borrowing even when its purpose is for investment. Still more money going into schemes that already account for a significant proportion of the sales of new build is certainly better than nothing at all.
Separately, and far from the buzz of the Treasury, the one-time head of Alliance & Leicester, John Windeler, is developing some ideas of his own that in time could have even more impact on the housing market. He and a small team have developed an economic model which, he says, predicts with an accuracy no one previously has been able to match exactly what will happen to house prices in an economic downturn. Obviously, you do not need a computer model to guess that they will fall, but this does not get you very far. What matters is how far they are likely to fall, and the extent to which similar properties in different markets will behave in different ways.
Thus a one-bedroomed flat in Manchester may have fallen by about 50 percent from its peak in 2008, whereas a one-bedroomed flat in Epsom may have fallen by 5 percent. A three-bedroomed house in Manchester could be down by 30 percent while the equivalent in Epsom may well have gone up a bit.
Windeler claims that his model can deliver a price prediction for every house in the country, taking into account what style of home it is, its age and condition and, of course, where it is located.
No one else has managed this, he says, and nor does it exist in any other country -- largely because the housing data available here to feed the model are far in advance of the information you can get in most overseas markets.
If this works, it could be highly significant because it would enable insurers to calculate the risk of a fall in the price of a specific house and provide a policy to cover the risk. Thus when a bank or building society advances a loan to a borrower, it can take out insurance that will protect it against the risk the borrower might default at a time when the value of the building is less than the outstanding mortgage.
This is the problem lenders often face because the economic downturn that causes prices to stagnate in the first place also causes the redundancies and divorces that are the most common reasons for borrowers to default.
Lenders cover themselves against this risk at the moment by agreeing only to lend 60 percent to 70 percent of the cost of the home, leaving the buyer with the need to find a massive deposit to fund the balance. But Windeler says if the lender could insure itself against this potential loss, there would be no reason for it to lend so little. It would be no more risky for the bank or building society to lend 90 percent of the price rather than 60 percent because either way they would be guaranteed to get their money back from the insurance.
It follows too that if more lenders were willing to loan up to 90 percent of the cost of the house, more people would be able to buy because they would not have to save so much.
So, if it can be made to work, this scheme could revitalise demand by making homes affordable to the thousands of people who could afford the loan repayments but cannot accumulate the deposit -- often because they are paying so much in rent.
Financial innovation is always hard work and this is no exception. People either think it is too good to be true or take fright at the large sums of money at risk in the housing market, and want someone else to try out the idea first. That seems to be the curse of the inventor inside and outside the world of finance.
The other question is how much the insurance would cost because, to make a difference in the housing market, it needs to be cheap enough to be widely adopted. Windeler's ideal is for it to be cheap enough at around pounds sterling 25 a month for the borrower to buy it and give it to the lender. The point is that this would remove a very real fear of homeowners that they could fall on hard times, be forced to sell and still not have enough to pay off the mortgage.
Finally, this is where the Government comes in. There is always the possibility, although massively remote, that house prices could fall to zero -- or at least far lower than they have ever done before. The insurance industry has to price for this, which makes a major difference to the cost.
If, however, the Treasury could be persuaded to cover this extreme tail risk -- as it did with its guarantees to pick up the cost of IRA bombings -- the price would be well within the range Windeler has set for it to be affordable. It would he suggests, be a very effective use of the Treasury balance sheet.
Only time will tell whether the Treasury agrees.
___ (c)2013 London Evening Standard Visit the London Evening Standard at
www.standard.co.uk Distributed by MCT Information Services
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UPDATED 5:34 AM EST - May 26, 2013
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