Don't meddle with our right to buy a home

Published 25th Sep 2010

Tighter rules on mortgages will take ownership out of the reach of millions, says Jeremy Warner.


If there is one certain accompaniment to all catastrophes, it is the sound of galloping hooves as regulators charge, like a furious posse, after the disaster which in previous slumber they've failed either to prevent or even see coming.

Nowhere is this more apparent than in the UK mortgage market, where in addressing the supposed excesses of the last boom, the Financial Services Authority plans to impose a straitjacket of new rules and regulations governing access to home loans.

These rules threaten to combine with tight credit conditions, squeezed disposable incomes, scarce mortgage funding and tougher bank capital controls to produce a perfect storm of negatives that will destroy the promise of home ownership for a generation or more.

In a speech this week, Michael Coogan, director general of the Council of Mortgage Lenders, declared "the golden age of home ownership" over, and he is right. Throughout much of the post-war period, owner occupation has been something to which all but the lowest income groups have been able to aspire.

Common cause in home ownership is part of the cement that holds society together. By providing a sense of middle-class belonging, it creates a powerful vested interest in the rule of law and is therefore one of the great prizes of the democratisation of credit.

Even before the current crisis hit, this presumed "right" to home ownership was under threat. According to the last English Housing Survey, owner occupation fell from 70.9 per cent of households in 2003 to 67.9 per cent in 2008/9.

This trend will have been greatly accelerated by the financial maelstrom of the last two years. Even without the FSA's proposed rules, banks have of their own accord been making access to mortgage finance very much more difficult – and it is likely to be restricted further over the next two years as £280 billion of "special liquidity scheme" (SLS) funding support, provided by the government at the height of the financial crisis, is removed from the banks.

The expired SLS finance must be replaced with more expensive market funding, if it can be found, or banks must squeeze mortgage availability to compensate. First-time buyers without access to parental assistance will find it increasingly difficult to climb on to the housing ladder.

Logically, this process should have resulted in a far more severe correction to house prices than has occurred. Obviously, there are big regional variations, but on average the peak to trough fall in prices from 2008 onwards may have been as little as 10 per cent.

The comparative fall during the recession of the early 1990s was more than 20 per cent. Very low interest rates and still surprisingly compliant levels of unemployment mean that we haven't seen the repossessions or forced selling of past recessions.

Households have been able to keep their properties off the market, with the result that the pressure of what very limited demand there is on scarce supply has driven prices back to pre‑crisis levels. These high prices have combined with limited credit availability to create virtually insurmountable barriers to unsupported first-time buyers.

Into this already socially and generationally divisive mess has stepped, like some clumsy elephant, the FSA. Its idea, which is to save lenders and borrowers from the consequences of their own folly, is well-intentioned enough, and individually, many of the rules look reasonable.

Yet their cumulative effect will be disastrous. To cite just two planned constraints, households are to be limited to mortgage servicing and repayment costs amounting to no more than 30‑35 per cent of disposable income, however that's defined.

What's more, the lender may be forced to deny credit if there is any possibility of the borrower's earnings capacity falling short of this threshold even for as little as a month. This stipulation would seem at a stroke to deny mortgage finance to the self-employed.

In any case, if these rules were to be applied retrospectively to all current owner occupiers, the vast majority of whom have perfectly sustainable mortgage costs and huge accumulated equity in their homes, millions of them would never have been able to buy a property in the first place.

This is madness. Legitimate aspiration and financial risk-taking is being stifled by over-the-top, safety-first regulation. It's not even as if housing was the root cause of the banking crisis. Northern Rock was brought down not by the quality of its mortgage lending – which, though not brilliant, was across the book perfectly sustainable – but by the unreliable nature of its funding model.

The UK mortgage market was always quite different from its US counterpart, where by the time it all went pop the investment bankers had grown so adept at creating credit that even the mere act of breathing would qualify you for a loan. In any case, no traded security backed by UK mortgages has yet defaulted. The great bulk of the bad debt experience among UK banks has been in commercial property, business and overseas lending.

Lord Turner, chairman of the FSA, has asked for a debate on how to strike the right balance between safe lending practices to home buyers and disappointed aspiration. By all means let's have it, for what is proposed is a destructive over-reaction which will only make an already dire position much worse.

Source: ' Telegraph '

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