There is concern among some economic commentators, including the Bank of England governor Mark Carney, that recent house price inflation will create a property bubble that will burst and hurl the country into a new recession. However, what these experts may have missed is the affect the Financial Conduct Authority’s Mortgage Market Review – and the banks’ tougher mortgage application questions – could have on housing demand.
A simple supply and demand economic model drives property price inflation. Historically low new build numbers kept supply down and massive demand pushed property prices up. What people tend to forget is that if the banks had not been so keen to supply bigger and bigger mortgage loans, property prices could have been subdued. After all, why push up the price of a property if the purchaser cannot get a mortgage to cover the cost?
However, with estate agents, banks, developers, existing homeowners and the government (through stamp duty) benefiting from high housing prices, who was going to blow a whistle and say ‘are we pushing property inflation a step too far?’
Then the American’s took a terrible toxic step, selling homes to purchasers who could not afford to keep up their mortgage payments. The rest is credit crunch history.
Mortgages in the ‘good old days’
It may shock many to know that in a time before credit cards if you wanted a mortgage you had to go to your bank manager on bended knee. In those dark and distant days you would have had to bank, and if possible save, with your local branch before you stood any chance of getting a mortgage. Your bank manager did not have to ask probing questions about your spending habits as there were no credit cards to hide your outgoings and he had access to all your bank statements. Based on this information the bank manager could work out how much you could afford and had the power to provide a mortgage that he thought was appropriate.
Then came the ‘enlightened’ age of the credit card and bank managers were no longer able to easily see what mortgage applicants’ real financial outgoings were. But they didn’t care. By then lenders were under instructions to accelerate mortgage origination and at one point banks and building societies even bought whole estate agent chains to achieve this.
And then it all went wrong. Interest rates hit 15 per cent, homes were reposessed, property prices stalled and lenders were left with toxic mortgage books. That was back in the late 1980s and early 1990s.
Getting a foot on today’s property ladder
How little we learn and by the early 2000s once again plentiful mortgages and increased lending levels helped leverage up house price inflation. Then came the credit crunch and a seriously wounded, toxic and debt ridden banking system became far more risk averse.
This manifested itself by the demand for much larger mortgage deposits, which the government countered with Help to Buy. This ensured property purchasers could still get a foot on the housing ladder, lenders could continue to lend and the strengthened housing market – and the consumer confidence it created – could continue to help the country emerge from its economic nightmare. But the Financial Conduct Authority (FCA) still felt that there should be greater control when it came to mortgage lending.
The FCA’s resulting Mortgage Market Review (MMR), meant that borrowers had to have greater certainty about whether they could afford the mortgage repayments required, both now and in the event of future interest rate rises.
Justifying the new mortgage regime chief executive of the FCA, Martin Wheatley, said:
“Since the crisis, lenders have been taking a far more sensible approach to mortgage lending, and the MMR is designed to ensure that this common-sense approach continues.
“We do not want to see mortgage lending return to the practices of the past where people were taking out mortgages they simply couldn’t afford.”
“While for some borrowers the questions being asked may seem more detailed, they should feel confident that practices which led to hardship and anxiety for consumers in the past will not be repeated.”
However, this return to a ‘what can you really afford’ mortgage application process may have a collateral impact on new property prices. After all why build a home no one can get a mortgage to buy?
So will the banks’ more draconian mortgage allocation process gradually put the brake on house price inflation? If it does it will not happen immediately. It could take the steam out of the inflated prices demanded and avoid the bursting of a property bubble. Unfortunately it will only affect those homes being purchased by folk who need a mortgage. It will not touch the city towers of empty apartments being purchased by affluent foreign and domestic investors.
A moderating property market
All convoluted theory? Perhaps. However, it is interesting to see that the country’s largest building society, Nationwide, has just reported seeing ‘tentative signs’ of cooling of property inflation as the monthly rate of house price increases fell from 1.2 per cent to 0.7 per cent in May.
Nationwide’s Chief Economist Robert Gardner, said:
“There have been tentative signs that activity in the housing market may be starting to moderate, with mortgage approvals in April around 17 per cent below January’s high.”
This was then supported recently by RICS, which said that the number of new enquiries from househunters had fallen to its slowest pace since February 2013. Their report suggested that new mortgage lending rules have also had a dampening effect on the market.
By David Mote.