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Mortgage-lending caps must not hurt first-time buyers

Limits on lending may help avoid property bubbles, but it's important first-time buyers can access high loan-to-value (LTV) mortgages.

 

by Lorna Bourke on Jul 25, 2012 at 08:07

Mortgage-lending caps must not hurt first-time buyers

The International Monetary Fund (IMF) is back on its regulatory hobby horse, pushing for new powers for the Bank of England to curb the amount that homebuyers can borrow in order to prevent damaging property price bubbles. 

The chancellor, George Osborne, floated the idea of capping the proportion of a property's price that a buyer could borrow back in February. However, the notion of limiting loan to values (LTV) drew almost universal criticism as a blunt tool that would cause considerable unintended harm to consumers – particularly first-time buyers.

Mortgage book controls

Clearly, some form of lending constraints in boom times may be necessary. LTV restrictions might work to prevent overheating of the mortgage market and excessive risk taking – if they are imposed on lenders’ total mortgage books. 

This would leave them free to continue to offer 90% or even 95% loans to support the first-time buyer market, provided their overall LTV didn’t exceed whatever maximum the Bank of England thought appropriate at the time. Lenders would simply need to control the mix of mortgages granted. 

Similarly, the Bank might need powers to restrict the amount of net new mortgage lending overall, or tie it to new house building to prevent demand massively outstripping supply, forcing up house prices and mortgage lending.

Mortgage affordability

Those who argue that the real problem is loan multiples are largely wrong, as affordability when measured by income multiples is also a function of interest rates.

In affordability terms a loan of three times earnings at 7.5% – which was the average borrowing cost as recently as 2008 – costs the same in monthly repayments as a loan of four and a half times earnings at today’s first-time-buyer rate of around 5%. In any case, crude multiples of earnings have now largely been replaced with detailed assessments that take account of the borrower’s total income, outgoings and financial commitments. 

But 'tick box’ mortgage lending based entirely on computer-generated credit ratings and affordability has its limitations too, and can also hurt consumers.

This rigid approach may work when applied to those who are an A1 credit risk and only need a low loan to value mortgage. But as we have already seen, it can completely stifle the all-important first-time-buyer sector, which in a healthy market has accounted for 50% of the market by number of loans.

First-time buyers under pressure

Lenders must have discretion to continue to lend to these hopefuls – and other ‘non-standard’ borrowers – if homeownership is not to become restricted to middle-class homebuyers in conventional jobs, fortunate enough to be able to call on family members to produce the deposit.

With rents continuing to rise the ability of first-time buyers to save the deposit is diminishing by the month. More lenders should be prepared to take into account the level of rental payments over the year prior to a mortgage application if the potential borrower has only a small deposit. 

In many cases rent, which has demonstrably been paid, is higher than the proposed monthly mortgage repayments. As mortgage lenders tell us all the time, the real security for the mortgage is not the property, but the borrowers’ ability to make the monthly repayments – and, equally important, their commitment to doing so. 

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31 comments so far. Why not have your say?

Rose G

Jul 25, 2012 at 09:02

The problem about irresponsible lending lies not just with the banks but IFAs who not only advised their clients to get self certificated mortgages, but were able to recommend accountants who would certify their income & expenses - I am not saying all self certified mortgages were edging on fraudulent, but I am sure if accounts were scrutinised more closely, we would have found discrepancies.

Gordon Blair & his predecessors were equally responsible for the irresponsible stance taken by the bankers - left in charge of their own affairs, which employee would not take risks with other people's money and lives?

Self regulation has been and continues to be a farce - police, politicians, media and the finance sector is rife with those who claim to have done no wrong, because there are no rules to begin with.

Even if the BoE had still retained their authority pre Brown & his fantasia, they would not have been able to keep up with what investment banking has achieved, a near bankruptcy of not an isolated country, but a global fiasco.

When those who have been given the powers to run our economy introduce a scenario where daylight robbery is seen as an achievement, attracting huge remuneration, no wonder we cannot deal with the resultant mess.

Sometime somewhere, hopefully we will get a government who actually know what they are doing instead of flying by the seat of their pants, with their fingers tightly crossed, hoping for the best.

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Chris Powell

Jul 25, 2012 at 12:33

The CAP idea is a very good one and if it had been implemented after the housing crash of the late 80’s the UK would not have been in such a mess!

Without a cap you are telling everyone that house prices go up all the time and they dam well need to!

If a client buys a property with a 100% mortgage they take no capital risk if the housing market falls- they just walk away and start rebuilding their credit rating. This was stupid and I blame the FSA and G Brown.

People need to have a large deposit of at least 10% to stop house prices rising too fast or keeping prices artificially high like we have now. All we are doing is letting people you can’t save due to either spending on unimportant items such as a new car or you could save wait 5 or 6 years until they purchase. The thing is, if we have a rigid 90% cap house prices will not go up so people who have the income to save and afford a mortgage just need to wait until they have the deposit. It is not rocket science.

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S G

Jul 25, 2012 at 15:57

@ Chris,

What about people who could afford a mortgage but struggle to save a deposit? I know plenty of people who are scrimping and saving not buying new cars etc, moved to a small flat with less rent to save, 10% will take them years to get too, yet they could easily afford a mortgage now.... Its narrow minded to think that everyone is buying unimportant purchases! With rents increasing and currently more then mortgages, how could you say someone who has paid rent on time every month for 10 years not afford a mortgage.

They need to help first time buyers, house prices will always go up long term as our population is growing, and no new homes are coming on to the market. This is why rent is going up and up!!

At some point, the country will need first time buyers to buy property!

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Anonymous 1 needed this 'off the record'

Jul 25, 2012 at 16:10

More pro-property propaganda from B2L Burke.

First time buyers need affordable housing not large mortgages.

I bought my house in 2005 during the boom but well before the peak. I put down a 5% deposit, mortgage was 3x joint and I'm repaying over 25 years. My wife's twin sister bought her 1st house a few months after us. She paid nil deposit and interest only (Northern Rock, who else!). She had to sell last year at a loss as and is currently renting.

I live in the north and bought a 3bed at national Average price in an affluent town (offered £10k under asking price too) . House is probably worth what I paid for it or a little bit over. My mortgage is affordable, even if rates return to 5%+ and I have 20% equity.

Had house prices stayed in line with historic affordability trends I could have saved £30k which would have offset any extra deposit required by the bank and I'd be much better off now as would the sister in law.

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John Lacy

Jul 25, 2012 at 16:17

All good points Chris---unless the borrower has something to lose personaaly there is always the risk that they won't take their responsibilities seriously.

I would add the rule that the mortgage payment calculated at say a 6% interest rate should never be allowed to exceed 33% on the clients provable net income per month. Simple but effective and would allow all sources of income to be used.

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Chris Powell

Jul 25, 2012 at 16:18

If a person cannot save a 10% deposit in 5 years then they cannot afford a mortgage by definition. You cannot get interest only on 90% mortgages so it will have to be on capital and interest payments (repayment mortgage). In general renting is cheaper than a 90% loan to value repayment mortgage.

If you have no room to save then you have shown that you cannot afford a 90% mortgage. This is at interest rates of 0.5% BOE base. When interest rates rise in 5 or 6 years time all these mortgages above 90% will not be affordable. People should show that they can save for a deposit, show some discipline and daddy should not be allowed to gift them one!

This will stop negative equity, excessive house price inflation, an economy dependent on house price going up which G Brown milked. Let’s make people take responsibility! Additionally, let’s ban using benefit income for a source of income mortgage affordability!

China’s CAP is below 60%!

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Anonymous 1 needed this 'off the record'

Jul 25, 2012 at 16:19

@ SG my sister has just bought her 1st house, it has taken her 4 years to save the 10% deposit during which time the house she bought has depreciated in value by 24%. Had she bought it 4 years ago she'd have lost 24%, been in negative equity and still had a massive mortgage.

The reason why the house has fallen by 24% in 4 years? Because FTB's can't get 100% mortgages anymore.

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Chris Powell

Jul 25, 2012 at 16:21

sorry

In general renting is not cheaper than a 90% loan to value repayment mortgage.

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Michael ac White

Jul 26, 2012 at 12:20

The arguments against self-certification mortgages are generally knee-jerk media-led nonsense....which suit lenders (banks in particular) who are trying to hoard cash; the performance of such loans plus interest only loans proves this. The problem, dare I say it!, is that excessive regulation has completely stunted credit.... just at the time when we need it most, quite simply excessive caution is a nonsense when in recession.

I am not suggesting, analogically speaking, that the best cure for a drunk is more achohol, however, even drug addicts cannot just have their addictive supply cut off completely in order to cure them, it simply makes them at best ill if not worse! I trust you get the point I am making?

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Chris Powell

Jul 26, 2012 at 12:53

Just because in the past you were allowed to do something does not mean you should carry on allowing the mistake!

90% should be the bench mark and in 10 years time mortgages will be more affordable for first time buyers and everyone will say what a cock G Brown and the FSA were.

As for Self-cert these should never have been invented. These were for the people who lied about their earnings and so should not be getting a mortgage whilst the others that self cert were designed for could show enough gross income but paid little tax because they did not declare it. Both situations were wrong and it was about time that self-cert is now not available.

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Rightcharlie

Jul 29, 2012 at 10:18

Over lending means overspending!! From credit cards to property, to Greece, Spain and Italy!! So, the return of prudency should be welcomed!!

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Michael Brooks

Jul 29, 2012 at 12:52

As a man of (modest) property, living in the south, I can only look on as an interested spectator as the housing market goes up in smoke. It probably takes a two income professional couple to be able to afford a small 1 or 2 bed close to central London, which is why councils like Westminster are pursuing policies of social engineering. After all why crowd the local market when the ordinary folk can be pushed further out, or better still, oop north. They may as well pull up the drawbridge.

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clive norbury

Jul 29, 2012 at 18:20

As someone who can remember having to have a building society account for two years before you would be considered for a mortgage and having to put down 20% deposit I have little sympathy with the cry for help for first time buyers. Most are the children of the "golden age" baby boomers anyway and can and should get help with their deposits from the bank of mum and dad. The affordability criteria used today is reasonably sound but the 3x + 1 income rule used in my day is probably about right. Irresponsible lending? Nobody seems to consider irresponsible borrowing.

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brian tworods

Jul 30, 2012 at 10:26

As well as being a fully qualified mortgage underwriter, I became an IFA specialising in Mortgages. Yes, there were occasions when self-certification was used by me, but as an ex-underwriter, they were considered carefully, clients had to have equity behind them as well as provable income to me to allow this type of mortgage. The problem was then exsarperated by a number of lenders who then allowed interest only deals without any form f repayment vehicle - and I mean any. Not necessarily endowments plans before somebody attacks that, but long term investments of any type, assets, etc . As far as I am aware, as I am now retired, most of my clients were and are okay because I used proper lenders for my business, not some of the mickey mouse boys who ranked their rates up through the roof. I still many of my ex-clients on tracker deals etc who love me to death fortunately.

I tried my best to ensure that the clients could afford their mortgages in this arena.

The major problem was ensuring those new to the market, ie first-time buyers were aware of what they were taking on and in some instances felt I was a family planner informing them that Boots was next door! The income multipliers were three times joint income, and sometimes I was concerned for these youngsters, sometimes sons/daughters of long term clients that the amount of mortgage available was high, but then I would insist that they would go onto a fixed rate, lowest I could find even over a longish term say five years, to ensure that they knew what they were having to pay.

It's called old fashioned lending and not computer controlled nodding!

I enjoyed it and now that I am retired, I miss it.

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Simon Taylor

Jul 30, 2012 at 11:19

I'm constantly surprised that anyone takes seriously the notion that a mortgage cap could hurt FTBs.

What errant nonsense. A mortgage cap will help bring prices down, something that can only help FTBs; their deposits are then worth more proportionally to the house they buy and they spend less of their income on mortgage interest.

Any cap will hurt mortgage lenders hardest, hence these PR fluff pieces masquerading as financial journalism.

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S G

Jul 30, 2012 at 12:30

I disagree, a mortgage cap could affect FTBs. Currently our population is growing, therefore more people need a place to live.

Even more are renting then before, and rental properties are flying off the shelves, which is pushing rent up! As there is an increase

need for properties, there is a greater need for more landlords to rent such properties. These small properties are being brought cheap,

by either landlords to rent or property developers who are doing them up/converting them and selling them off higher for a profit.

Now we cant force a crash and for prices to coming crashing down, which would be great for FTBs, it is very unlikely we are going to get the huge drops, but if it did happen,

it will impact too many people home owners. The only other option is how to stall house prices long enough for wages to catch up???

The damage has been done, its no good focusing on how it happen and thinking that just reversing the situation is going to sort it all out! There needs to be numerous incentives/initiatives across

Renting, buying and selling…..

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Simon Taylor

Jul 30, 2012 at 12:54

SG,

it will impact too many people home owners.

How will it impact them? Will their houses be any smaller, will the views be any less pleasant?

No, the houses will be exactly the same, it's just the 'value' that will have changed.

Propping up the housing market with 'incentives/initiatives' your refer to is only going to prolong the agony. Let the market do it's work and allow the next generations enjoy their lives without being debt slaves to venal banks.

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Chris Powell

Jul 30, 2012 at 12:59

House prices should be controlled by a cap because excessive house inflation is extremely bad for the economy. Brown and Blair were able to show economic growth because household’s were increasing their mortgage debt to fund their excessive life styles and we now have the consequence of growth from housing debt and public spending and not from extra private investment which will improve are long term growth.

At last we have a government who wants housing to become affordable for FTB eventually and stop house price inflation destroying our economy. The trouble is that our fickle nation will vote Labour in next time, who will spend, spend, spend and we will be back on the road to eventual total destruction.

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Simon Taylor

Jul 30, 2012 at 13:10

Chris, I'm not sure that this government really does want to make housing more affordable. The insane FirstBuy scheme which transfers the liability of over priced building land from the housebuilders who bought it to hapless FTBs. And even when this goes wrong, the lender is protected by a state guarantee.

A government which really wanted to restore some sense into the housing market would have told the volume house builders that instead of seeking government backed 'schemes' they simply lower their prices.

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S G

Jul 30, 2012 at 13:19

If prices come down, by the margins needed to allow for 3 x salary ect, will mean homes going into negative equality, which means there is a greater risk to these owners.

Many more people who may have been building up equity with the aim to use this to either fund an upgrade, move or retirement will also be hit. All in all increasing risk, just for the sake

of making things affordable for FTBs.

I never mentioned about propping up the market, the market is doing that all by itself with the help of low interest rates, increasing population, and lack of homes coming on to the market.

There is a lot of money based on the false economy of house prices, however you can not just remove this as it will impact to many people.

Which leads me on to the next point.

You have to replace a false economy of this size with a real one, by slowly building a new one under it, slowly eating away at the old one. Or once the false economy is small enough,

to be removed having little risk or impact.

I am talking about incentives/initiatives from all areas, for example encouraging new homes to be built, helping FTBs, Long Term Contracts on Renting rather then just 6 months…..

All these will have their positives and negatives. Nothing is going to change fast, and the agony is going to go on and on. Then any changes take time to come into effect……

You also can not have a straight cap... There is a difference between a 50 year old on £30k having to repay a mortage to a 20yr on the sale amount. (Just an extreme example)

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Chris Powell

Jul 30, 2012 at 13:23

The FirstBuy scheme is window dressing- not that important. The best way to lower house prices over the next 10 years is to have a LTV cap. The Government might not do this for FTB, rather for long-term growth. However, house price inflation will be limited over the next 10 years and that will be good for FTB and the economy. The Chinese have one at 60% so we would not be that extreme to have one at say 90%!

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S G

Jul 30, 2012 at 14:31

Going back to a comment about affordability, take this example;

A person rents a one bed flat and pays £550 rent and saves £250 a month for a deposit. To buy a £100k home he will need to save £10k plus lets say £2k for moving and fees, so £12k would take him 4 years to save.

Mortgage @ 4% would cost him £475 a month (25yrs), but if he can afford £800 a month he will be fine until the mortgage rate reached 9.75%

Now what about 95%, would only have to save for 2 years, Mortgage 4% would be £500 now he is not going to get 4% but he would be no worse off until the rate reached 9.1%

The second option will put the owner 2 years a head of the first example.

So here is a thought to throw out there, should there be a cap inline with the amount borrowed? So anything under £80k is 95 anything between 80 to 110 is 90%, 110 to 160 85% etc

This will help FTBs get onto the ladder in a small property, hopefully get some money behind them before moving up, so the risk to the banks are covered on the high values they have to lend.

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Chris Powell

Jul 30, 2012 at 14:45

SG you are assuming wrongly like the FSA that house prices go up forever. Factor in a 10% reduction over the next 4 years and I know what I would have rather happened if I was FTB.

If house prices keep increasing it is not healthy for the economy!

Income multiples are OK on 5 or even 6 if the client can well afford them but they need to have a stake in the property of at least 10%. So that they realise that they can lose all this if they do not think hard about what they are taking on! You need to deserve your first home not expect it!

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John Lacy

Jul 30, 2012 at 15:21

Chris Powell--- your comments throughout this discussion make a lot of sense. The suggestion that I would put forward is that as well as a 90% LTV cap that the mortgage term is restricted to 20 years. I know that this will increase the monthly payment but it will also reduce the mortgage debt much more quickly and hopefully keep the borrower out of negative equity even if the market continues to fall. The plus side for the borrower is of course that the total repaid to the lender will be much less over the whole term.

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S G

Jul 30, 2012 at 15:34

Chris, totally agree a home is deserved and not a given. However without FTBs there is no one at the bottom of the chain, so it hinders people all the way up in trying to sell their homes.

The problem with the larger deposits required, means it harder and harder for people to save. As suggested having a staggered LTV depending on value. So lets take your example to 10% drop, which is very unrealistic, but lets use it anyway. So £80k would drop to £72k, the FTB would have put £4k savings gone only leaving them £4k in negative equality, that is not an unmanageable amount, and could if we use my previous numbers would only take him 2 years to claim. This is why I threw the idea of a staggered LTV rate so the more you borrow means a bigger risk so therefore a larger deposit is required.

Now you can argue prices will drop, just as you can argue they will stay the same. One thing is definite is the price of renting is going up due to lack of people buying and not enough homes. Also any rent payed in that time would have also been lost so looking back at the example I put, £500 per month for 4 years assuming no rent increase which their would be would put him at £24,000 rather then the £4k/£8k total.

Chances of a 10% drop maybe 1/25. Chances of losing the 24k 25/25. But this then becomes a totally new debate.

If people end up in debit they cant afford that’s their own fault, the issue is when the Tax Payer has to bail them out! When the money could be used else where. But with the right checks and processes, the correct people could get the right mortage without over extending themselves.

The issue has come with people borrowing 6 to 7 times salary for homes 160k+ with no deposit, with record interest rates. May the cap should be, what could they afford on 10% rates, for the period of the rest of their working life…That way when rates go up, they still have spare cash…

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Chris Powell

Jul 30, 2012 at 16:03

If you offered me 1/25 that house price will not be 10% lower in 4 years time I would take that. SG your whole argument is about propping the housing market up. Children should be taught that house prices do not go up forever and this is the main issue that people think they do even the FSA thought this. Instead, there are periods when they go sideways for a couple of decades or fall over a 5 year period.

Like cigarettes can damage your health there should be a warning that buying a house can seriously damage your wealth, credit rating and leave you homeless. The third biggest event after finding a partner for life, having children and we do not have tough rules and criteria for everyone to meet to make sure they know what they are doing.

Why SG are you so set on house prices going up. A new build house should cost the same as it does to build it. A house is only worth what someone will pay for it. We are still in a housing bubble and the best solution is to deflate it now slowly not expand it further so it goes pop and it will. Every financial bubble has burst that ever existed accept for UK housing and apparently gold (that’s if you think you’re in one).

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Michael Brooks

Jul 30, 2012 at 16:25

Chris, I would bet my house on house prices rising substantially over the next 20-25 years. On your suggestion that Britain will be voting Labour next time, you had better hope that `Dave` stops being a serial cock-up merchant.

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Michael ac White

Jul 30, 2012 at 21:13

Michael B, as anyone knows who understands simple supply and demand, you are entirely correct. On the other hand, Chris P and others like him who are so judgemental and yet clearly have no expertise apart from possibly reading the Guardian once a week, really do spout complete nonsense......Bless

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S G

Jul 31, 2012 at 08:37

@ Chris, I am not set on house prices going up, and I don’t believe they will go up in the near future, in 10 years time I believe they will be up as the population is growing, and not enough new homes are being built to accommodate this growth. But I am not saying its going to at the pace it has been in previous years.

What I am saying is a full on housing market crash, being houses dropping to the level people have suggested 3x salary or for enough FTBs to be able to raise a deposit, will have negative consequences on all home owners, epically the millions who brought in the boom years. This will have a real impact on an already fragile economy.

There is some wriggle room to allow house prices to come down slightly without having such an impact, but we are only talking a few more percent. Now I admit I do not have the answers hence why I threw out suggestions in previous comments, the damaged has been done. What we need to do is to keep prices of homes down going forward, while we replace some of this bad debit with some strong economics, and ensure there is not a bubble again in the future.

Imagine a Jenga Tower, 20 blocks high with only one block in each row crisscrossed, that is what the economy is now, you don’t want to bring it crashing down or it effects everyone, what you want to do is at each level, add two blocks and remove the middle (the bad/high risk). But to do this you need to start at the bottom. Which is the FTBs in small properties and helping them take on acceptable risk for their circumstances, and not allowing them to overstretch themselves and get greedy with wanting a 3 bedroom house straight from the start….Then over a period of time you then move up the tower.

It is very short sighted to believe that there is one or two single fixes to sort the whole housing market. This is not even taking into account the regional difference in house prices, wages, unemployement etc…

For the record, a complete housing crash would help a lot of my friends and family members, but I am thinking of the bigger picture, which is how do we repair.

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Simon Taylor

Jul 31, 2012 at 08:51

Michael ac White - you sound like a free market fundamentalist. So am I. But there is no free market in housing so the pure laws of supply and demand dont apply.

Supply is severely restricted - by the politically manipulated T&C Planning act, and demand is stoked by unlimited, loose lending which is underwritten by a (taxpayer funded) state guarantee to those lenders. In a pure market which you appear to be advocating, those banks and buidling societies would have been wiped out and those who borrowed too much would have been forced to sell. As it is, both are being propped up by the taxpayer.

The mad housing bubble is the inevitable result of the state interfering in market mechanisms. Pull away the state guarantees and let the market find its own level.

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Chris Powell

Jul 31, 2012 at 09:03

SG I don't want house prices to drop I want them to stay the same for the next 20 years and deflate this housing bubble slowly. I also think the lenders are doing the right thing and now test for affordability. A single young person with no children and earns over £40,000 should be able to get 6 * income. A 50 year old couple with 4 kids earning £40,000 should get less than 3*.

I also don’t think lenders should take welfare into account and that is now happening. If you have the equity in a house to remortgage or purchase a new house you should use it to live on and not take, take, take from everyone else!

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