Housing unaffordable? What rubbish. Greedy banks will simply lend more

With all the news about house prices set to continue booming - earlier this week the National Housing Federation said prices would leap 50 per cent in five years - it is easy to overlook the role that banks play in stoking up housing inflation (see blog by Richard Browning, below).

Prices are rising mainly because of a shortage of supply - true. They also rise because more owners are buying with the power of two incomes. And they also rise, in a small part, due to our gradually rising wages.

But a big inflationary factor has to be the banks' willingness to lend ever greater multiples of income. Lenders are relaxing their typical maximums at an astonishing rate - and every single one of them is at it, in order not to lose business to the greedier bank next door.

The Council of Mortgages Lenders, which publishes consolidated industry figures, says that the average loan to a first-time buyer is just over three times their income.

That number doesn't tell half the story. Many lenders - banks, rather than building societies - are cheerfully offering four times joint salaries, and more. Of the high street giants Abbey, for instance, will lend a couple four times their joint income without quibble, even if their deposit is relatively small. Halifax probably would too, and Alliance & Leicester - maybe even Nationwide.

Some specialist lenders will happily roll out loans of six times income, even where borrowers have a record of arrears and defaults. And these banks, by the way, are not tentative minnows nibbling at the fringes of the mortgage market. They are big, big names.

US bank Morgan Stanley, for instance, is setting up a mortgage outfit over here and it has (naively, you might think) published a comprehensive online calculator showing what vast sums it is prepared to lend. (Click here - and then ignore all the warnings and proceed to use the site as if you were a mortgage intermediary.)

Where these jumbo loans are concerned, the banks usually require a larger deposit - surprise, surprise - so that if the market does go belly-up, it's the borrower not the bank that takes the hit....

The point is that banks are devising ever new, ingenious ways to lend buyers more money. By so doing they are stoking up the boom at a tremendous rate. Can't afford to buy a house? Well, say the banks, how about borrowing five or six times your income on an interest-only basis with a mortgage that has a term of 50 years? See if that doesn't get you on the housing ladder!

This strategy can go very wrong. It will cruelly exacerbate the effects of any future correction, heaven forbid.

And all this talk of people using their house as their pension? Nice joke. If it's mortgaged up to the chimney pots and the owner's hitting 70, a home won't make much of a pension. And you don't need to be an economist to work that one out.

- Richard Dyson

Comments

[John]

I believe the lenders are now acting irresponsibly, surely they should suffer some penalty if people cannot afford to pay at some time in the future. Perhaps they should have to lose any interest charges until the borrowers financial situation improves. The borrower having to continue to pay off the capital and only once their financial situation allows should interest charges be reapplied. Perhaps then the banks etc would think twice before lending inappropriate sums of money to all and sundry.

[Eric Blair]

We live in a free not market, not in communist China. If the banks want to lend higher multiples then they should be free to do so, and if borrowers want to stretch themselves then who are we to stand tut-tutting at the sidelines.

However, what I do object to is the inadequate information and financial institutions exploiting customers’ lack of financial insight. People talk about interest-only mortgages as if they are just another mortgage product, they appear not to realise that at the end of the 25-year term the house they thought they had bought will not belong to them, and they certainly don’t realise that they pay much, much more in interest payments.

If a bank wants to take bigger risks then it should only have to answer to its shareholders, and if customers want to over stretch themselves then they are acting entirely of their own free will. When the market turns the taxpayer should not pick up the pieces.

[Richard Dyson]

I agree about the free market and right to choose etc. Also about warnings on interest-only. There seem to be very different approaches taken by the banks in alerting borrowers to the risks of interest-only deals. For instance, Nationwide boasts that it demands of interest-only borrowers proof that they are making contributions to some sort of repayment vehicle. Sounds worthy - but who is to say that the borrowers keep their savings up? However, Nationwide's approach is much less gung-ho than, say, Morgan Stanley's: Morgan Stanley will actually lend MORE if for interest-only loans, because it reckons that interest-only borrowers will have more disposable income.... For now, other lenders work out affordability based on monthly payments INCLUDING contributions to a repayment vehicle, where the deal is interest-only. Once that approach is abandoned in favour of Morgan Stanley's - and you can bet it will happen - we will see multiples really start to lift. And interest-only borrowing, especially among younger buyers, will become even more popular than it is now.

Richard Dyson

[A W Cook]

Britons have strongly ingrained beliefs about housing and finance. The beliefs are; Mortgages are for 25 years. You will pay it off by the time you retire. You can borrow 3 times income. But these just beliefs. They have no basis in reality, they are merely economic illusions of our time.

The only realities when it comes to UK property, future prices, demand and the economic wellbeing of the UK are these;

The UK is treasure island... the 4th largest and most active economy in the world. We are in a global market place, with a expanded euro labour market- and this has major impacts on to the property market in the UK.

Our little over crowded island will follow Japan in terms of housing- prices will continue to rise with no social allowance, government tinkering or economic adjustment being made to ease the problems for first time buyers. The norm for mortgages WILL become 30 years... then 40, 50, 60 years and so on. People will look back in misty-eyed wonder at the days when anyone could even dream of buying a house with a 25 year repayment mortgage.

The norm will be to borrow 4 times income, then 5... then 6, and so on. It will become the norm to have our parents/ siblings/ family act as guarantors for the mortgage debt. it will become the norm to take on hefty and expensive insurance policies to guarantee payments. Society will gradually get used to the idea that we will never actually pay off a mortgage within our lifetime- it is more like a lengthy HP agreement.

WHY such faith in property? Because virtually no other asset is guaranteed to rise in value and is such a necessity to life. Demand will always outstrip supply in our bureaucratic NIMBY ridden island where development trails decades behind demand. Because, free for all immigration creates huge demand at the bottom/ sub-prime end of the market. And because the government has fudged the company pension issue, workers have (rightly) no faith in company pension schemes where funds can still be plundered for numerous reasons- this leaves the issue, where can I put my money, which is safe, I can keep I eye on it and will provide a future income... answer... property.

All the best. Buy, buy, buy.

[Homes for sale]

This is definetley irresponsible behaviour on the part of the banks. They will be contributing towards over-valuation in the property market.

[davemooregan]

The money would be better spent on building new council housing as its going to be needed in the near future as the "want it all" now generation end up having their homes repossessed. Why should the taxpayer bail out greedy developers, buy to let landlords, and profiteering banks?....Yeah!!! send those greedy b****** to us and we'll exploit them! http://www.greedypeople.com