“Debt in this country is out of control,” says Larry Elliot in The Guardian.
Home repossessions are the highest in 14 years, personal bankruptcy levels keep breaking new records and, however much it is predicted, the long-awaited slowdown in lending never seems to come.The number of individuals made bankrupt in the three months to September was 27,644 – up 55% on last year. Yet despite the debt burdens we already carry, we seem constantly keen to take on more: the number of mortgage approvals was at its highest in two years in October and, if Abbey has it’s way, it’ll soon move even higher.
Abbey, the UK’s second-biggest mortgage lender, has decided that it will now let people borrow up to five times their income to buy a home. Why? Because house prices are so high that this is the only way they can keep business coming in the door. The industry has described the mortgage as “innovative”, but Malcolm Hurlston, chairman of the Consumer Credit Counselling Service, isn’t convinced that that makes it a good thing. It takes borrowers “into dangerous territory”, he told the BBC. If their salaries don’t rise quickly, they’re going to find their lives dominated by difficulty in meeting mortgage payments for a very long time indeed. “It is quite possible that if people borrow the maximum they can get away with, they will be overstretching themselves,” said Nick Gardener of Chase de Vere Mortgage Management in the FT. “It may then only take one or two rate rises to put such a squeeze on their finances that they can no longer make ends meet.” And two rate hikes seem to be the least we can expect – most experts now believe interest rates will reach at least 5.25% by spring 2007. So the fact that mortgage repossession orders are already so high “is ominous”, says The Guardian.
Abbey argues that only households earning more than £60,000 a year, with a 25% deposit and a pristine credit record, will qualify for these loans. But those who can’t get Abbey to help them on to the ladder won’t have too much difficulty finding someone who will – there are now more than 60 mortgage deals offering larger multiples than the traditional 3.5 times. Cheltenham and Gloucester, Royal Bank of Scotland and Northern Rock all offer mortgages at, or above, five times salary. And 30-year, 49-year, and even lifetime mortgages are available.
Those who take out these loans may think they’re on to a winner (Nationwide tells us house prices are still rising at an annual rate of 8%). But are they? Excessive lending creates artificial demand (allowing those who can’t really afford it to buy) and in doing so is adding more fuel to an already bloated bubble. Indeed, many have suggested that Abbey’s offer – being indicative of the lack of affordability in the market – could well mark the top of the market.
News of the deal “should have sent most people scurrying for the exit”, says Lisa Buckingham in The Mail on Sunday. Those in doubt might consider a recent study from Price Waterhouse Coopers (PWC). Its conclusion appears to suggest there’s only a one in three chance house prices will be lower in 2010 than they are today. But in the detail, you find that, if you adjust for inflation, PWC analysts see the chance of a drop rising to 50/50. And the chances of house prices returning to their long-term average of around three times average earnings? Almost two in three. That house prices have risen almost without break for 11 years doesn’t mean they will continue to do so.