I was scouring the financial press and yesterday’s headlines were about a fall off in mortgage approvals post-MMR, restrictions on high multiple mortgages and stress tests based on future, higher interest rates.
For commentators predicting problems from a house price bubble these all seem like eminently sensible things to do (though the Bank of England’s new director of financial stability has stated that: “It is not our job to control house prices, nor can we control house prices”).
However, underlying these macroeconomic arguments are real people with real aspirations and it is sometimes easy to forget that when looking at economic statistics in aggregate.
If you are working in the mortgage industry it is a fair bet that you see property ownership and property investment as a core element of personal financial strength and future wealth creation. I am sure that many of you have put your first foot on the property ladder through maximising the amount you could borrow and pulling together the minimum deposit. Most people would begin their property ownership in this manner and then see their wages and property values grow to put themselves in a stronger position and then be able to trade-up to bigger or better located properties.
It is a genuine concern that people are currently struggling to buy homes and it seems like an obvious step to try to curb house prices to make it easier for first time buyers to make purchases. Unfortunately, this most recent recession has been non-standard in that in was a lending bubble that caused all the problems rather than an old-fashioned property bubble.
For those old enough to remember, please cast your minds back to the property crash and recession in the late 80s / early 90s. This was a property bubble caused by an artificially low, politically inspired base rate (of 7.5 per cent!) and other factors such as the removal of double tax relief on mortgages. The market overheated, inflation took off and interest rates doubled to 15 per cent. Cue mortgage arrears, repossessions and a market crash.
From this wreckage the economy bounced back relatively quickly and despite property prices being dramatically lower than the peak, lenders were willing to lend and first time buyers (me among them) were able to get their start.
Compare this to 2008-09 where lending crashed, rates dropped to 0.5 per cent and most people were able to weather the storm, sit tight paying a low interest rate and hold on to their properties. So, even though prices notionally fell, lending was tight and there were no great opportunities for first time buyers to take advantage.
Now they are being told that lending is going to be held more tightly in an effort to help them. Eventually, we should see the wages to house prices ratios ease, but how long will it take? Are we not just engineering a situation where those first time buyers are going to have to wait still longer to be able to buy a property due to policies designed, in part, to assist them?