You will not have heard of Mr FM Osborn. However, I feel I know him rather well. Why? Because I have a copy of an article he wrote in a sadly now defunct magazine called The Statist back in April 1967. Then, he was the managing director of the Northern Rock Building Society.
That’s interesting in itself – but when I tell you the title of the article, you will see why I find myself re-reading it pretty regularly. It was headed “Mortgage Option Scheme and 100% loans.”
Yes, more than 40 years ago, the managing director of Northern Rock was fussing over easy credit. At the time, owner-occupier levels were around 45% and the government had stated a “wish to assist and encourage with financial help the less well off sector of the community who . . . wish to become owners of their own homes”.
It should be no surprise that the drive to make us all homeowners was already underway even then: homeowners mind inflation much less than non-homeowners (they feel protected from it by the ownership of an asset) and that is in the interest of modern governments.
So the government of 1967, just like that of 2007, thought it perfectly reasonable to think that given “ability to pay” they could push home ownership up to 80%.
New Labour’s way of creating ability to pay was to keep interest rates very low and adopt an “anything goes” policy towards mortgage products. In 1967, Harold Wilson’s Labour administration did it via a direct subsidy for people taking out 100% mortgages. Let us hope, wrote Osborn rather nervously, that allowing people to take out loans like this – loans greater than their incomes would “otherwise have justified” – will not “materially increase the price of the £1,750 to £3,000 house and so work against the very people for whom the scheme has been devised”.
He hoped in vain. In 1967, the average house price was £4,000. By 1970, it was nearly £5,000, up 25%. That was not, of course, all about the subsidies (the pound was devalued in 1967) but it is worth noting that, despite large building programmes, house prices rose significantly faster than inflation.
The point? That it was perfectly clear even in the 1960s that if you increased access to credit, you’d get a house price boom that wouldn’t necessarily be helpful to first-time buyers.
I was back with Osborn this week when I was re-reading the Financial Services Authority (FSA) report into the mortgage market – the one that lays out plans to outlaw self-certification mortgages (where you lie to a mortgage broker about how much you earn, he lies to the lender and the lender agrees to pretend to believe the lie in order to allow you to borrow much more than you can afford to repay).
It is a shocking report. Not because it wants to ban self-cert – clearly it is ludicrous to lend money to people who can’t prove they can repay it – but because it tells us there are still so many self-cert loans about.
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Read the press on the subject and they’ll say there are none on the market now. But, if that’s so, why is the Council of Mortgage Lenders making such a fuss about a ban and why, on FSA numbers, were 43% of the loans made in the first quarter of 2010 types of lending in which “income was not verified” (self-cert or ‘fast track’ – which is effectively self-cert for richer people)?
I called a couple of brokers. Both told me that while self-cert mortgages no longer technically exist, there are “alternatives” with some lenders being fussier than others about what kind of proof of income they demand.
The Self Cert Mortgage Centre (which you’d think wouldn’t exist any more) has a 2010 testimonial on its site from a Mr and Mrs Whitfield in Cumbria. They are “both quite newly self- employed” and were “concerned” they wouldn’t be able to get a deal “in the current market”. I’d have been pretty concerned too. But nonetheless “within 48 hours” they had a “great deal”.
I wonder what kind of deal it was: when I spoke to a broker elsewhere, he mentioned, in passing, that he could get me a loan of “over five times” my income.
None of this is to say that the collapsed mortgage approval numbers don’t show a mortgage famine out there – talk to any estate agent and he’ll tell you credit problems are killing deals. But, clearly, the market is still a lot more accommodating to liars, tax dodgers and those who just can’t really afford a house than I thought it was (and than it should be). That’s important because it means that the implementation of the FSA rules (which will insist borrowers properly prove their income via tax returns and the like) really will wipe out a large proportion of the demand for mortgages – and that prices will fall further as a result.
Add credit to a housing market and you get a boom. Take it away and you get a bust.
• This article was first published in the Financial Times