The BoE is assessing if contagion from this scandal could spread to the broader housing market and cause a new financial crisis.
The Bank of England is now fretting about the impact the UK’s flammable-cladding crisis could have on broader home prices in the UK and what that means for banks. New data shows that affected properties — and there are up to 1.3 million of these flats — sell for as little as one third of what the owner had paid.
The BoE is concerned about the banks that sit on loans backed by those properties and is assessing whether contagion from this scandal could spread to the broader housing market and cause a new financial crisis.
The BoE’s Prudential Regulation Authority (PRA) has surveyed mortgage-lenders on their exposure to leasehold flats with fire risks. And it is asking lenders for regular updates.
The crisis, now in its fourth year, has uncovered a litany of fire safety issues afflicting high-rise and medium-rise buildings. And it’s the apartments’ leaseholders — the people who own the apartments, but not the land, and who hold zero responsibility for the problems — who will have to foot the bill to rectify them. Many can’t afford to. Some are facing bankruptcy.
With banks refusing to offer mortgages on apartments in these buildings, and with cash buyers demanding crippling discounts, even selling the unit is not really an option.
In the wake of the fire at the Grenfell Tower of June 2017, which resulted in the deaths of 72 people, up to 1.3 million leaseholders in the UK discovered that the buildings in which they own their flats may have also been rigged with flammable cladding and insulation materials.
They’ve had to pay hundreds of pounds a month — in addition to the mortgage payments and other costs — to cover the costs of round-the-clock fire-patrols to make sure the building they occupy doesn’t suddenly go up in flames. Home insurance costs have soared. Some have also had to pay for a safety inspection. And if their building doesn’t make the grade, they have to pay tens of thousands more to have the flammable insulation and cladding materials replaced and other fire risks remediated.
“Leasehold” arrangements are still common in England, particularly with regard to apartment buildings. When an apartment is purchased as a leasehold, the buyer is really a tenant with a tenancy agreement that typically lasts for up to a century.
The “freehold” — the building and the land — belongs to somebody else, usually the developer, a financial entity the developer sold it to, or a large landowner such as the Queen or the Duke of Westminster. They are able to extract annual rent on those assets.
Under leasehold law, owners of the flats are liable for the costs. Over the past 12 months, apartments in many multi-occupancy buildings, even those of four stories or fewer, have required a so-called external wall system (EWS1) form in order to qualify for a mortgage. But many of the buildings are still waiting for inspection, leaving their occupants trapped in financial limbo, in buildings that may also be a firetrap.
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