Mortgage lenders to be banned from lending over three times your salary
The Financial Services Authority says it will place a cap on mortgages to prevent people from borrowing more than the traditional multiple of three times their annual salary, in order to stop the kind of lunacy we saw at the peak of the property boom when people were able to obtain mortgages of up to six times their yearly earnings. The newly emboldened regulator also says it’s going to put a stop to 100% mortgages – although that’s kind of a moot point since the banks have already figured that one out for themselves, these days it’s almost impossible to get a mortgage without a 5% deposit at the very least.
While the FSA might be feeling a bit brave and feisty in the wake of the near total collapse of the global financial system, once things settle down a bit (probably in another year or two) we’ll see how serious it really is about enforcing responsibility amongst mortgage lenders. After all, the organisation seems to have done very little to stop this crisis from happening in the first place. During the heady days of the property boom, when banks were handing out high-multiple, low interest mortgages to practically anybody who wandered in off the street and was capable of signing their name, the FSA was happy to sit idly by and let the lenders dig us all deeper into this hole, rather than encouraging prudence back when it might have done some good.
Still, the horse may well have already bolted, but if the FSA is indeed going to clamp down on irresponsible mortgage lending, that could have a serious impact on the future of the UK property market. For a start – all those overly optimistic home-owners who need to sell their properties but are desperately holding out “until the market picks up again” are going to be sorely disappointed. The market is not going to pick up again. If the FSA really is going to enforce mortgage lending restrictions such as those being suggested today, then there’s simply no hope of people ever being able to obtain the kind of massive sums of money required to re-inflate the property bubble. Even without regulation that was always unlikely, since most banks aren’t stupid enough to make the same mistake twice, but this represents the final nail in the coffin of blind optimism.
Even after a year of heavy falls, house prices are still painfully high – much higher than most average earners could afford with a mortgage of three times their salary. So where’s the money going to come from to support current prices? Nowhere. Prices simply have to fall. It may take a while, people who don’t have to sell are likely to cling on for as long as they can in the vain hope that prices will swing upwards again, but ultimately most houses need to be sold sooner or later – people die, get divorced, or are forced to move for any number of reasons, and in those circumstances the property will be sold for whatever the market thinks its worth. And you can bet that the market’s valuation will be a lot lower than seller’s current expectations. Eventually, after a long period of attrition, people who bought property during the boom years will have to grudgingly accept that they made a bad investment and they will have to wait decades before their homes are again worth what they paid for them.
This is going to be painful, but if these kind of mortgage lending regulations were put in place before the property bubble inflated, we wouldn’t be in this mess in the first place.
What remains to be seen is how the FSA’s new mortgage borrowing rules will square with the government’s insistence that banks (particularly those who have been bailed out) should increase their mortgage lending. Obviously, if banks are being restricted by the FSA in terms of who they can give mortgages to (i.e. those with at least 5% deposits) and how much they can lend, that’s not really going to help them lend more – so perhaps we’ll see some sort of showdown between the FSA and the goverment over these mortgage rules.