Over the last few weeks several politicians, bankers and other financial pundits have called for controls on the level of mortgage lending and cuts to the Help to Buy scheme.
Business Secretary Vince Cable recently criticised banks for lending five times a mortgage applicant’s income. He added that it is “crucially important that the banks don’t throw petrol on the fire” by dishing out risky loans that are a high multiple of the applicant’s income and suggested that a more ‘stable’ level would be up to 3.5 times salary.
But imposing such restrictions – and cutting the Help to Buy scheme – could freeze many first-time buyers out of the market altogether.
It has been suggested that too-high levels of mortgage lending together with the Help to Buy scheme have been responsible for a boom in house prices.
Outside central London there isn’t that much of a house-price boom
But it is questionable whether there is really much of a boom in house prices across the country as a whole. The headline-grabbing figures mostly relate to London – and even then to those parts of central London where demand from overseas buyers has certainly been fuelling a price boom.
The housing market in central London area is very different to most other parts of the country, and is much less dependent on ordinary mortgage lending. And it is doubtful whether there are many properties in areas such as Kensington and Chelsea which would even qualify for a Help to Buy mortgage so that scheme has not caused the rocketing prices there.
Outside central London house prices have not been rising nearly so rapidly as some reports would suggest, and in some areas prices are still virtually static.
Certainly the housing market looks a good deal stronger than it did a year ago. There has been growth in the number of properties changing hands, with many more first-time buyers in the market.
First-time buyers should be encouraged, not frozen out of the market
But claims that the government Help to Buy schemes were helping to cause a boom in house-prices seem misplaced. Recent figures show that the number of buyers getting Help to Buy loans was just 4% of the total number of mortgages granted between April 2013 and March 2014.
Most of those loans were to people buying homes outside London and the South-East, and most were on lower-value properties. So suggestions that wealthy buyers would take advantage of the scheme to buy high-value homes are misplaced.
Few would want to see a return to the irresponsible lending practices which lead to the crash in 2008. But concerns have been raised that restricting mortgage lending now would impact most heavily on first-time buyers – just the people the government is most anxious to encourage to buy their own homes.
Paul Smith, chief executive officer of Haart estate agents, believes such a move would strangle the recovery in the property market. He said ‘It’s not clear why Vince Cable wants to kill off first time buyers, vastly reducing their ability to get a mortgage and strangling the current housing market recovery’
‘Indeed his proposals would also hold current home owners hostage in their own homes, as they will not meet the lending criteria when they chose to move on and need a bigger mortgage.’
Cutting lending to first-time buyers will impact on the wider economy
For several years the housing market has been in the doldrums despite government attempts to encourage growth. But the recent strengthening of the economy has created more confidence and led more people to consider buying a home rather than renting.
The record low interest rates coupled with more relaxed lending criteria by the banks and building societies has also helped to swell the numbers of borrowers looking to buy for the first time or to move up to a bigger property.
Although this may have led to something of a boom compared with the last few years the government and the Bank of England should be wary of applying the brakes too hard.
Many of the people buying homes over the last year have been first-time buyers. These are the people who generally require to borrow a higher proportion of their income as most do not have large deposits available. Cutting lending to such buyers would affect not just the housing market but the wider economy.
House builders would have to consider cutting back as there would be no encouragement to build homes if buyers can’t get mortgages. Older homeowners who are looking to sell in order to downsize would also be affected if potential buyers could not readily get mortgages.
Building more homes is the key to averting a housing crisis
Rather than cutting back on the amount of money available for mortgages surely it would be better for the government to take steps to get more homes built. One of the principal reasons for the current level of house prices is the lack of supply of properties and this can only be remedied by building more homes.
David Cameron and George Osborne seem to like being photographed on building sites wearing hard hats and hi-vis jackets. But neither they nor any other members of the government actually build houses.
But perhaps they could do more to improve the supply of new homes to avert a housing crisis.
For instance more land owned by government departments and local authorities could be made available – if the armed forces are being cut back why does the Ministry of Defence still need to own so much land?
Speed up the planning process
Planning law is another area in which the government could act. The recent Queen’s speech did promises some reforms, but will this be enough to clear the log-jam?
According to the Home Builders Federation (HBF) there are currently some 150,000 potential new homes stuck in the planning pipeline – that is, awaiting full sign off by local authorities.
The HBF thinks that speeding up the rate at which permissions are granted – i.e. move from ‘outline’ to ‘implementable’ – will be the key to significant, sustainable increases.
Commenting on the present acute housing crisis, Stewart Baseley, Executive Chairman of the HBF, said;
“Existing sites are being built out quicker and we now desperately need new sites to come on stream if we are to see increases in house building sustained. All builders are now identifying the planning system as the biggest threat to further increases in supply.
“Everyone wants to see house building levels increase and Government should act now to speed up the planning process. It should ensure local authorities have adequately resourced planning departments that can cope with the new level of demand so they can meet their housing and planning obligations.”
The problem for the government is that even when builders have got planning consent it can still take several years before homes can be completed and sold. So relaxing planning restrictions will not be a short-term fix. But trying to cut current levels of mortgage lending could be an even worse solution.