This week the Republic of Ireland introduced some of the toughest mortgage lending controls anywhere in the English-speaking world. Desperate to avoid a repeat of the extraordinary “Celtic tiger” property boom-and-bust that did so much to wreck the country and its banks, regulators there are demanding that borrowers put down a minimum 20% deposit (slightly less for first-time buyers) and take out loans of no more than 3.5 times their income. Buy-to-let landlords have even tougher rules, and are now forced to put down deposits of at least 30%. Is it a path the UK should be following?
Despite all the talk about a clampdown on lending after the excesses in the run-up to the financial crisis – such as Northern Rock’s notorious 125% mortgages – it really isn’t that difficult to max out on borrowing on this side of the Irish Sea. There are now scores of 95% mortgages as a result of George Osborne’s Help to Buy scheme, while buyers can find loans at five times their joint incomes, with lenders increasingly willing to spread repayments over 30 or 35 years rather than the traditional 25 years.
The 95% deals are generally pricey, but the 90% ones are not. For example Darlington building society has a two-year deal at 2.39% for a buyer with just a 10% deposit. Meanwhile, landlords can find buy-to-let loans with just a 15% deposit if they go to Kent Reliance or 20% at lots of other lenders.
Regulators in Britain think that cast-iron caps on things such as income multiples are too crude. Instead, they have introduced “affordability” tests which look at your spending commitments (from children to gym membership) as well as your income. Bank of England governor Mark Carney has the power to impose a loan-to-value cap at, say, 80% or 90%, but in practice can’t because that would rather screw up Osborne’s Help to Buy scheme. So much for his much-vaunted “independence” from political control.
The so-called “crude” measures can work. They have the advantage of simplicity – everyone knows where they stand. It’s not a matter of a mortgage broker telling a client to temporarily suspend that gym membership, or decrease pension contributions, to magically make a loan appear more “affordable”. But, more importantly, a simple limit on income multiples plus a crackdown on buy-to-let loans would reduce the total amount of money that can chase after a property – and therefore help bring prices down to more sensible levels. House prices are largely a function of how much a bank is willing to lend, and if borrowers are barred from jumbo-sized loans the market will naturally deflate, to the benefit of nearly everyone apart from speculators.
But there is plenty of intelligent opposition to these sorts of controls. Ray Boulger, one of the most respected voices in the mortgage market, says a cap on LTVs and an end to the Help to Buy programme would be “madness” as it would reduce new private housebuilding, which Britain desperately needs. Above all, first-time buyers would lose out as they wouldn’t be able to find the huge deposits required. Property would become the preserve of those with wealthy parents able to cover the deposit. He adds that the fall in home-ownership levels in the UK – from 71% to 65% over the past decade – has also become a major government spending issue, as those who have rented all their lives will need housing benefit through their retirement years.
A survey this week found that seven in 10 tenants cite their inability to build up a deposit as one of the biggest blocks to home-ownership – and said they put housing on a par with the NHS when choosing who to vote for. But just making more money available for mortgages – by enabling five times income loans and low deposits – simply makes the problem worse.
The Irish solution is crude, but more likely than ours to bring the property market back towards sanity.
