Looming mortgage drought threatens housing market

As dark economic clouds gather, and a double-dip in the housing market looks less like media speculation and more like tomorrow’s news, it’s once again the mortgage market that’s leading the headlines.

The boring, bespectacled nerdy sister of sexy property chat first turned party girl in the mid-2000s, putting herself about with abandon. It took the credit crunch for the entire property market to realise it had caught something nasty and, although we’re still taking the medicine today, the headlines are all about a resurgence of the symptoms.

It’s been keeping Monetary Policy Committee’s Adam Posen awake. In a recent speech he described sleepless nights spent worrying about the second dip. Nor is he alone: there are a number of analysts who’ve noticed alarming changes in credit conditions over the last few weeks.

The Bank of England confirmed their worst fears days ago, with a warning that mortgages – after what many have described as a period of relative easing in the market – are expected to once again become harder to find.

Before looking at the reasons for a looming second credit crunch, it’s worth examining this so-called easing. According to Bank of England data, there were less than 50,000 house purchase loans in May, compared to more than 100,000 per month every month in the two years previous to the crunch. Pre-crunch, there were 12,000 mortgage ‘products’. Now, the shelves are relatively bare… there are 2,600 to choose from, according to Moneyfacts. My own entirely unscientific hearsay from off-the-record conversations with mortgage brokers entirely bears this out. If you don’t need the money, you can find a competitive loan. If you do, forget about it. Any second credit crunch is going to hit a market that’s already at a historically low ebb.

The Bank of England’s Credit Conditions Survey was its first negative lending prediction since the crunch proper, with hostile conditions in the wholesale market – spooked by efforts to cut the deficit – singled out as the main cause. In addition, it’s payback time for some of the UK’s largest banks, with the Bank of England expecting the first £250 billion next year.

A second mortgage drought will, of course, knock the property market. It will be terrible news for first-time buyers, terrible news for vendors who’ll see deals fall flat and chains collapse when their buyers fail to secure loans. It will be terrible news for estate agents who’ll once again see turnover stall; and terrible news for mortgage brokers who’ll see loans not just constrict but disappear further in-house. They’ll have nothing to broker.

At least mortgages will be interesting. Because as much as house prices and turnover have peaked and troughed during these difficult three years, the changes have been nothing compared to those seen by the mortgage market.

Back in 2005/2006, my property blog – theRatandMouse.co.uk – ran a series of articles covering the extreme mortgages fad. These were loans that defied common sense, but satisfied the zeitgeist for fast, cheap money. Highlights? The Bank of Ireland first-time buyer mortgage that paid out the full value of the buyer’s salary plus four-times the salary of their highest-earning parent. A young person on £20,000 with a parent earning twice that could take out a mortgage with monthly repayments of £1050. Their take-home pay would have been £1,200.

Then, of course, there was the HBOS 125% mortgage, which provided enough cash to pay for the house, the furniture and a course of professional psychiatric help. And Abbey’s 57-year mortgage, which added a further £280,000 to the £160,000 of interest on a £150,000 loan, paid off over 25 years. (All calculations were made using contemporary interest rates.)

The current version of the extreme mortgage couldn’t look more different. The party animal’s back in sensible shoes. With the Bank of International Settlements making noises about the need for European interest rates to start rising, and a general sense of vulnerability and uncertainty in the wake of the 'austerity budget', there’s been a surge, according to brokers, of interest in the ultra-long term fixed rate loan. Ten-year fixes are rare, but they exist. They also charge a lot for that extra peace of mind. Paying the Yorkshire Building Society 4.99% (on a 75% loan) over ten years is quite a gamble on medium to high rates in the second half of the decade.

Or how about this for the austerity mortgage: Kent Reliance Building Society’s 25-year fixed-rate mortgage at 5.98%? Marriages rarely last that long.

Linton Chiswick is the proprietor of the Rat and Mouse, (www.theratandmouse.co.uk), Britain’s leading blog about residential property