No need for a security blanket

In the end, it was a wild goose chase. When The Daily Telegraph reported last week that Lord Turner’s review of banking regulation would include a cap on mortgages of three times income and a blanket ban on 100% mortgages, the industry assumed it was a genuine leak.

No such limits were announced. There may be future restrictions on mortgage lending, but they will take a more sophisticated form. And we will not get a firm idea of any changes until the Financial Services Authority (FSA) produces another document in September. Even so, the exercise reminded us how people often get the relationship between restrictions on loans and the housing market wrong.

For a start, average incomes of home-buyers are different from those of the population as a whole. At the peak in the summer of 2007, the median income of a first-time buyer was £35,600; for movers, it was £45,600, compared with less than £25,000 for the population as a whole. This meant a median loan-income ratio for first-time buyers of just under 3.4, while for movers it was just over 3. Borrowing at this level supported an average house price of £180,000 to more than £200,000.

It is true, as the Turner review points out, that loan-income ratios rose as the boom progressed: the last two years of the boom saw the proportion of mortgages with a loan-income ratio of more than 3.5 increase to nearly 30%. But the 100% or 100%-plus mortgage was not the villain of the piece. In fact, Turner found that the proportion of mortgages with loan-value ratios above 90% remained steady at about 15% of new advances even in the last two boom years, although the proportion of 100% mortgages rose to 7.4%. The Council of Mortgage Lenders (CML), meanwhile, found the median advance to first-time buyers was steady at 95% of property value from the mid1980s until 1997 and fell below 90% thereafter.

What happens next? Turner and his FSA colleagues, acknowledging that blanket limits would be a blunt instrument, will look at the arguments for imposing restrictions, including those that vary through the economic cycle. Its report, however, acknowledges that limits carry risks. Last week’s fear that limits will be imposed crudely, and in a way that will send the market down further, looks to have been misplaced.

Go figure

- The average cost of a detached house rose by 4.9% between December 2008 and January 2009, bucking the overall downward trend, according to the Department for Communities and Local Government. The price of a terraced house dropped by an average of 2.3% during the same period; flats fell by 1.8%, bungalows by 0.9% and semidetached houses by 0.4%. According to market analysts, the credit crunch is hitting the bottom of the market harder than the top.

- A total of 46,750 homes were repossessed last year after their owners failed to keep up mortgage payments: a 68% rise compared to 2007, the FSA says. The number of people in mortgage arrears at the end of 2008 was 377,000 – 31% more than 12 months earlier. The CML has forecast that repossessions could jump to 75,000 this year, a level not seen since the 1990s.

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