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Morning Line: Why should first time buyers suffer?

If the Bank of England is serious about capping mortgage loan-to-value ratios as a means of preventing another credit crisis then it risks excluding more young people from home ownership. Is this what the coalition really wants?

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by Lorna Bourke on Aug 31, 2010 at 11:20

The global banking crisis, by no means yet resolved, has much in common with the UK secondary banking crisis of 1973-75 - only this time round it’s global rather than domestic. Bean, like his predecessors, is keen to ensure that politicians, bankers and central banks learn from their mistakes.

‘Policymakers would be remiss if they did not re-examine their own decisions in the lead-up to the crisis and strive to learn the lessons for the future conduct of policy,’ said Bean. ‘Generally speaking, monetary policy seems too weak an instrument reliably to moderate a credit/asset-price boom without inflicting unacceptable collateral damage on activity.’

True, but we need only look back to the 1973-75 secondary banking crisis to see that little has changed. In 1971 Edward Heath’s conservative government had partially deregulated the banks to enable them to compete internationally with the introduction of Competition and Credit Control - later described as ‘all competition and no control.’ By early 1973 credit was expanding at an unprecedented rate accompanied by a 25.6% increase in money supply. Those who benefited most from a real interest rate of around 1.2% were primarily the financial and property sectors rather than industry. Sounds familiar?

Credit expanded at a terrifying rate and the upshot was the banking crisis of 1973 when the Bank of England, under Sir Gordon Richardson, was forced to bail out the banks. He launched the ‘lifeboat’ taking onto the Bank of England’s books the massive amount of property against which the banks had lent and on which they could no longer foreclose without precipitating a disastrous collapse. It was not widely appreciated at the time that NatWest Bank and possibly Barclays, were effectively bust.

One of the real causes of the problem then, as now, is that the Bank of England had no idea how much the banks had lent, against what security and whether or not these loans could be repaid. Bankers had long expressed concern that the Bank of England still ruled with a ‘nod and a wink’ and didn’t have any idea of the extent of the Big Four’s exposure to property until the crisis struck. There were no qualitative or quantitative controls on bank lending. Some banks acted responsibly – other didn’t.

So having learned nothing from the 1973-75 experience, we are once again looking at tighter regulation of banks. Bean maintains that the interest rate mechanism alone could not have prevented the banking crisis – and he is probably right. He has called for central banks to use tougher regulation such as higher capital requirements or maximum loan-to-value levels for mortgages to damp down credit booms that are getting out of hand.

But it will be a sad day for all if that means that only those young buyers who can call on their families to help out with the deposit are able to buy their own home and lower income families are excluded. For a government whose watchword is ‘fairness’, where’s the fairness in that? Yes – the Bank of England does need new tools such as qualitative and quantitative controls on bank lending. But that is no reason to penalise young homebuyers.

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13 comments so far. Why not have your say?

A limit on the amount of money that can be borrowed would be beneficial as it would reduce the quantity that goes into housing and redirect it into more productive uses such as industry.

If buyers are no longer able to borrow the levels of money required to sustain current house prices then the prices will have to come down or vendors will be unable to sell.

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I don't think that it is unreasonable to expect First Time Buyers to pay a deposit of some sort. I agree that 25% is very much on the high side but a 10% to 15% deposit would ensure that they had a vested interest in the property and would be far less likely to give up too easily if times get tough. And before anyone says that wouldn't happen I would point out that I've been in the property market since 1972 and I assure you that it does.

The other alternative is to bring back mortgage indemnity policies but that is worse because it is dead money as far as the buyer is concerned as it is a policy from which the purchaser can derive no benefit

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Surely the best scenario for first time buyers is to allow house prices to fall to affordable levels that don't require being saddled with a lifetime of debt?

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Absolutely agree with Jon Williams.

A decent fall in house prices would allow the whole of the market to start trading again.

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I agree with Jon. First time buyers want a house they can afford not a mortgage that they can't.

Those already stuck on the ladder are far too kean for others to jump on behind them to push them up by keeping prices inflated, which is wrong and articles liek this do not help.

House prices remain too high and added to FTB's staying away you have first home owners stuck as they can't afford to move on either as they have no equity.

I for one bought my first home 5 years ago and despite not stretching myself have no prospect of moving up the ladder as the next rung up is still over priced meaning the ladder is now effectively broken. Funny how no one seems to have grasped this with all the concentration on FTB's.

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I agree with MC, a lot of first time buyers I know are actually selling their 1/2 bed homes in order to rent a bigger property when they have kids, often settling the negative equity themselves.

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First time buyers are suffering because house prices are so high. They are so high because of the years of low interest rates, excessive loans given by building societies and banks, also because self-certified mortgages where anyone with a 15% deposit could borrow as much as they liked just by signing a certificate to get on the housing boom.

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I wish people would stop talking about a 'ladder'. There is no such thing. If you want to buy a house or buy a bigger house, you either have the money, have the equity in your existing house, or borrow the difference. There is no ladder!!

And i wish young first timers would stop moaning about not being able to save. Me and my partner are first time buyers, we've only been on average or below average wages for the last 7-8 years and we have managed to save a sizable deposit, more than enough to secure a mortgage with a decent rate, and with no help from parents at all. It all comes down to priorities, and not wasting your cash on drink, drugs and mobile phones!!

Asking prices are now the highest they have ever been as greedy old sellers are trying to cash in on what they percieve is a continued boom. I know of numerous properties recently that have accepted high offers only for the chain to collapse as the people at the bottom pull out; an increasing trend. Mortgages are costing around the same as they were back in 2004, even though the base rate is much lower. It's just not looking good at the moment, and lower prices are good for everyone, so bring em on!!!

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Speaking as a first time buyer currently looking for a house I agree with many of the comments above. I see no reason why a minimum 20-25% deposit should not be a requirement, it gives people a real grasp of just how much money they wanting to borrow if they have had to save up a decent deposit beforehand. I also think there should be more control over the banks when it comes to mortgage salary multiples. What was wrong with the old 3.5 times salary or 2.5 times combined salary, at least this prevented people over stretching themselves and gave people more chance of being able to pay through the bad times.

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I believe that one of the root causes of the credit crisis and consequently of the recession was irresponsible lending by banks to the residential property sector on both sides of the Atlantic. The securisation of those debts took them off the balance sheets of the banks thereby allowing them to lend more and more which served only to feed the property price bubble which ultimately burst with all the corresponding economic consequences.

I would say that central control of mortgage lending is very much required but that 25% minimum deposit is too high. 100% mortgages should be a thing of the past so a 10% minimum deposit combined with a income multiple cap of 3-4 times would seem fair to me.

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It is difficult to generalise. Each area of the country faces its own unique problems concerning employment opportunities, skills shortages, and housing availability/affordability.

However if I restrict my comments to the North East, which I know the most about I can safely say that house prices are heading lower. In this region many of the first time buyers which fueled the sub prime mortgage boom were either NINJNA,s (no income, no job, no assets.) or people heavily reliant on benefits, in various shapes and forms. These people should never have been considered for a mortgage in the first place; however that's yesterday's story. The situation today is that there are thousands of perfectly habitable terraced houses for sale at less than £100,000. And yet the indigenous populace cannot afford to buy them. Since it is unlikely the majority will change their lifestyle, I can only conclude that many of these properties will never be owner occupied again.

There are plenty of landlords on the sidelines waiting to fill this void but they are not going to rush their fences. They will let the market drop first. Its bound to happen, some of these properties have been on market for three years.

The NINJNA's are not that daft either, as anonymous 1 pointed out. I am beginning to see instances where families, having outgrown their mortgaged homes, have moved to larger rented accomodation, and simply dumped the property on the bank.

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When we bought our first house in 1980 we had accounts with at least half a dozen building socs and had been members of them for several years in order to get a loan when we were ready. Not the plethora of mortgage products were available back in those days either!!

When we applied for the mortgage, every building soc refused, even though we had an excellent credit history with them all, and had saved substantial sums of money wih each. It was only when I wrote a rather bolshy letter to them that eventually the Halifax relented, but even then we had to find a 25% deposit and fortunately the only mortgage on offer was a repayment!! Also about 3x salary was the norm making it affordable.Thank goodness for that.

Lets get real, houses are far too highly priced and people have got to be encouraged to be more responsible, by putting more of their equity into the property.

Houses should be a place to live not just another investment opportunity. I do not count the value of my property for investment purposes.

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Graham Barlow

Sep 06, 2010 at 11:37

When we first bought a small house in the 1950s A deposit of 1/3rd was required plus I could borrow no more than 3 times my annual income which had to be independently verified. To do it my wife and I had 5 jobs between us to save the deposit. We spent as little as possible for 2 years going without holidays, cars and lived frugally but determined in our resolve. What a triumph when we suceeded, at the age of 25yrs. We never regretted the sacrifices we made, and left many of our more profligate contemporys behind us. Dont ask why I cant have it or whine just get out there and get going what ever the financial conditions. Nothing that comes easy is ever appreciated.

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