This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
At the BBC last week an interviewer persistently asked me when the mortgage market would return to “normal.” Surely, she said hopefully, the Bank of England bail out (or Special Liquidity Project) announced last week would mean that lenders would go back to lending everyone as much money as they wanted to buy houses they couldn’t afford? I said I didn’t think it would.
Why? Because the collapse in the number of loans available to UK borrowers is no longer about just liquidity – the amount of money the banks can get their hands on and therefore loan out. Instead it’s about the attitude of the financial sector to risk.
Two years ago, even one year ago offering 125% mortgages worth 6 times a borrowers salary made sense to lenders. They had managed to convince themselves that house prices would never ever fall and that they could never lose money on a house deal: if the borrower defaulted they could simply sell his house and get their money back. Easy.
This year, having been slapped in the face by horrendous house price data (Land Registry figures have just come out showing that house prices have been falling for seven months now), they have collectively come to their senses: if they lend someone 100% of the purchase price of a house right now and he defaults they know that they will lose money. With prices falling at an accelerating rate how can they not?
No going back to ‘normal’ market conditions
So of course the banks aren’t going to lend out as much money as they once did and of course they aren’t going to let income multiples get out of control again. There is no going back to the market conditions many think of as ‘normal’: no more self certification loans, no more 100% plus deals and no more uneconomically cheap introductory deals designed to grab market share. The Bank of England can chuck as much money as it likes at the market and the Treasury can nag as much as it likes but neither of them can actually force the banks to go back to making the risky loans that have sustained the housing bubble for the last few years.
And if they were in any doubt whatsoever about that, the banks made it extra clear to them this week. Nationwide has just capped the amount it will allow new borrowers to take from them at £500,000; put a limit on the number of people who can borrow on its Standard Variable Rate; and raised the minimum deposit on its fixed and tracker mortgages to 10%. Abbey has joined in by announcing that anyone who wants an interest only mortgage from them these days need only bother applying if they have a 50% deposit.
This is all shocking stuff for a market used to easy money. Last year no one wanted to take out a loan at an SVR (these tend to be a bank’s highest rates). Today so many people do that they aren’t all allowed to and those that get them often have to pay horrible fees on them – £799 at Skipton for example. Last year no one bothered about deposits. This year if you haven’t got a good 25% to put down – enough to give the banks a good cushion against falling prices if you default – you haven’t a hope of getting a reasonably priced mortgage deal from anyone.
None of this is likely to change any time soon so we had better get used to it: this unforgiving market is the new normal.
The silver lining in the credit crunch
On the plus side, the change in the property market has brought some good news with it: the collapse of Inside Track which, says the Guardian, went into administration early on Tuesday morning. Bubbles encourage exploitation and Inside Track has long made it its business to exploit the naiveté and greed of the general population, convincing them to pay up to £4000 for property seminars and then hundreds of thousands for new build flats in dismally bad locations in the UK and Florida.
The company specialized in peddled the myth that property investing is easy (“live on easy street instead of struggling for a living”) when it is not and that it is as easy to make money in a falling market as a rising one when it is not – something many property investors have found to their cost. You can read about my experiences of one of their seminars in What really happens at an Inside Track seminar and a detailed investigation of the miserable returns made by those who fell for their sales pitch by clicking here: The shocking truth about buy-to-let investment clubs.
The fact that they won’t be parting any more enthusiastic amateurs from their money and their credit ratings this year is not much of a silver lining to take from the credit crunch, but right now its one of the best we’ve got.
This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense