SO the great crackdown on mortgages has started. With the Bank of England’s monetary policy committee uninterested in hiking interest rates, the only solution to contain house prices, sadly, is to ration credit. In theory, that is the job of the financial policy committee and its new-fangled macroprudential tools; but it has yet to act.
So the news that Lloyds Bank, the lender in which the government still retains a sizeable minority stake, has decided to take affairs into its own hands, despite the competitive disadvantage in doing so, will doubtless have delighted the Treasury.
Lloyds is limiting the size of mortgages to four times salaries for loans worth over £500k. The bank says this will affect about eight percent of its lending in London. So this is big news, and will have a substantial impact.
It goes without saying that lending needs to be much more prudent than it used to be, and it may well be that Lloyds’ move is commercially sensible and thus to be applauded. It is vitally important that mortgages be properly stress-tested, and that means being able to cope with rates of five to seven per cent (even if the bank still believes they will peak at a much lower level).
But blanket rules are never a good idea: they tend to discriminate against those with more volatile income streams, for example. Prudence doesn’t mean having to forgo judgement.
Given all of this, the government’s daft Help to Buy scheme should be abolished immediately. Its contribution to rocketing prices has turned out to be much more limited than many expected, but it’s still a terrible idea; and if banks are going to ration some mortgages, it makes no sense for the state to be subsidising others.
An analysis by Citigroup for the first 12 months of the scheme – from April 2013 to March 2014 – found that 19,394 Help to Buy mortgages were completed, accounting for just 2.5 per cent of all mortgage approvals and an even smaller 1.7 per cent of all housing transactions during that period.
Only seven per cent (or 1,312) of the Help to Buy mortgages signed off in that 12-month period were for purchases in London, with none at all in Camden, the City of London, Hammersmith and Fulham, Kensington and Chelsea, Richmond or Westminster. The scheme is open to loans of up £600k; but 81 per cent have been on properties worth £250k or under, with just 6.2 per cent for homes worth more than £350k, the Citigroup analysis demonstrates. It is clear from this data that the London property bubble has been only marginally exacerbated by the scheme; and in any case many of its recipients would have probably managed to obtain a mortgage even without the subsidy and government intervention.
While the popularity of Help to Buy has been growing, the total numbers remain small: there were £1.2k loans in the second quarter of last year, £4.2k in the third and £7.5k in the fourth, falling back to £6.5k in the first three months of this year. But the scheme was always high-risk and deeply misconceived; it should be scrapped with immediate effect.
The real problem, as I keep writing in this space, is fundamentally one of insufficient house-building. Of course, excessively low interest rates have helped make the problem worse, partly by increasing demand but also by keeping zombie borrowers on life support.
The other big problem is that of mortgage prisoners: many people were able to borrow under the old, laxer rules but cannot now move, or at least not to a similar property. If they were to do so, they would never be able to raise a big enough mortgage. This is reducing the number of transactions. There are no easy solutions, but the authorities are making two big mistakes. They are still not doing enough to allow more housebuilding; and they are relying on rationing, rather than pricing, to control demand. We will come to regret both of these blunders.