New lending rules may change housing market forever

New lending rules may change housing market forever

15:58 PM, 20th January 2011, About 13 years ago 17

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Poor mortgage market management by governments and greedy lenders is blamed for triggering the global financial crisis and hindering recovery  in a blistering study.

Lenders giving easy access to credit fuelled rising house prices – and irresponsible banks were aided in pushing the economy to the brink by the lack of financial regulation from governments.

The solution, says the Organisation for Economic Co-operation and Development (OECD), a think tank sponsored by all the world’s major economies, is a combination of reforms overhauling tax, rental market rules and financial sector regulation.

The OECD has issued a roadmap for governments to follow for promoting sounder housing policies.

“OECD countries have seen the damage caused by badly designed policies through their effects on housing markets,” said OECD Secretary-General Angel Gurria.

“As we search for new sources of growth, as we seek to restore trust in our financial sectors, as we try to green our economies, policies related to housing can have a huge impact on our future”.

Lenders in bitter battle against mortgage reform

The OECD says that easy credit over the past two decades amplified price volatility, with real housing price jumps of 90% or more in Australia, Belgium, Finland, Ireland, Netherlands, New Zealand, Norway, Spain and the UK.

At the same time, deregulation and innovation in mortgage markets – coupled with inadequate supervisory frameworks – contributed to a significant relaxation in lending standards, an increase in non-performing loans and the sub-prime crisis.

The OECD recommends tighter controls over mortgage lenders and  the availability of mortgages.

The UK’s Financial Services Authority is already moving towards this against bitter arguments from banks that claim home loans will be restricted to only a few borrowers if the rules are imposed on them.

The FSA’S mortgage market review includes proposals to scrap interest only loans, to restrict borrowing limits to  75% of a home’s value and to force lenders to make sure customers can afford to repay a loan.

The FSA proposals are backed by an EC mortgage directive containing many similar proposals that will soon come in to force in the UK.

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15:54 PM, 27th January 2011, About 13 years ago

If these rules are adopted it will cause a catastrophic market crash. There are a good many interest only mortgages out there who's equity content will now fall short of these deposit requirements. Most are relatively short term. These rules will prevent the owners remortgaging, force reposession and potentially flood the market at the same time as purchase funds are no longer available to all but a few. If the original financial crisis was caused by an over valued property market, the next one is going to come from an undervalued market. Do these geniuses ever get out of their offices into the real world?

Mark Alexander - Founder of Property118

16:12 PM, 27th January 2011, About 13 years ago

Let's hope they take a reality check. Fortunately these ideas have been well reported. It's the feedback that makes the difference though.

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0:08 AM, 28th January 2011, About 13 years ago

why would they avaricious bankers pay themselves outrageous sums of money extorted from families barely surviving whilst politicians turn a blind eye with promises of directorships and backhanders
as one cynical politician famously said never underestimate the stupidity
of the british people the dimwited fools will stand for anything

8:31 AM, 28th January 2011, About 13 years ago

oh S#@?

9:10 AM, 28th January 2011, About 13 years ago

Many would argue (me too) that a return to sanity is just what is required to get Western economies moving again. Of course, if you have followed "dangerous" investment advice (i.e. you are highly leveraged) then you will probably suffer when the return to sanity occurs... your leverage collateral was only ever based by unsustainable bank lending right?

Mark Alexander - Founder of Property118

9:30 AM, 28th January 2011, About 13 years ago

Hi Richard

Thank you for sharing your thoughts.

The phrase "highly leveraged" means many different things to different people. Some would say don't borrow at all, some would say borrow as much as you can. Therefore, for me to gain an understanding of your use of the phrase I would like to ask you the following. Let's assume that a property portfolio is worth £1 million and is producing £80,000 rental income per annum. Let's also assume a lifetime (minimum 25 years) ownership strategy, that BoE hit their 2% per annum inflation taget over the period, that property values and rental growth matche inflation and that the neutral interest rate is 5%.

1) What level of debt would you feel comfortable with to maximise your returns (i.e. leverage them). Remember, if the answer is zero, then you will only make £1 for every pound of capital appreciation. With gearing of 50% you will make £2 for every £1 of growth etc.

2) What level of liquidity (cash) would feel comfortable retaining in relation to your debt?

I look forward to reading your response.

By the way, I have been very conservative regarding interest rates, inflation, growth etc. and used the figures that the government and the Bank of England seem to be aiming to achieve. This is not my prediction and I'm not asking for you to share your predictions at this stage. I am, however, very curious as to how you will answer the specific question raised above.


Mark Alexander

kher khulpateea

10:04 AM, 28th January 2011, About 13 years ago

Assuming the British system of home loans gets restructured into a more regulated and a stringents rules comes into place just like those explained above eg Lower LTV and no interest only loans etcetera.

My concern is what will happen to those existing loans /mortgages that was intially taken out on those basis and we are referring to a significant amount here which is in the system? This is a great source of anxiety especially if the mortgage is approaching the end of the fixed term and is in negative equity.

This will mean that the maintenance aspect of the financial system will be out and destroy faith and lliquidity

10:04 AM, 28th January 2011, About 13 years ago

Hello Mark,

many thanks for your reply - interesting as always. I am a very small & very conservative Landlord, and my approach to risk & return was established in the days of banking sanity ie the old rules banks used to follow when lending (income multiples, rent to mortgage ratio etc etc).

I have not bought any properties since 2004. In my opinion, overpriced due to easy credit. However, I do not condone those that did as by following certain strategies much profit etc could still be made & portfolio's expanded.

The level of debt I feel comfortable with is - the amount that can be covered by the rent! (and have the capital reduced - never believed in interest-only mortgages, and in fact the OECD is now trying to get them banned as per your article.)

Mine is obviously a very unsophisticated strategy and I make no great claims about it - except that hopefully I'm minimising risks. Perhaps if I owned a larger portfolio then I would follow a riskier strategy?

I'm quite happy to make a prediction - a return to the normal lending criteria based on income multiples etc, and forcing banks to have "sound" as opposed to "unsound" assets to back up their lending will eventually force house prices down to their levels when those old rules applied, approximately. There might also be some "undershoot" caused by economic recessions and even "sheep mentality" (sell sell sell).

It would also be foolish not to consider the effects of globalisation, which are holding down wages for many people in the West (bankers, politicians and lawyers aside!)

I'm not sure if this has answered the question!


10:07 AM, 28th January 2011, About 13 years ago

For lenders to ascertain affordability for long term mortgage repayments is to ask for a mission impossible. A lender can only check on their clients position at a moment in time. No one can foresee what will happen in the future. Ability to make repayments now is not ability to make repayments at a later date.

If the ability to make interest only repayments was removed from Residential or Buy to Let mortgages, the results will have a massive ongoing ripple effect.

For residential mortgages there will be no safety net in times of crisis to switch to interest only is the easiest way of reducing monthly outgoings. Leading to more distressed sellers or repossessions.

Buy to Let investors will stop investing as the pool of properties that can fund loan repayments and interest will be very small. This will lead to rent rises and more inflation, possibly a further crash in the housing market.

Hopefully this will not happen as it is hard to believe that they could be this short sighted.

10:12 AM, 28th January 2011, About 13 years ago

We have seen this argument over and over again since I bought my first home in 1980, of course. At that time we had to have a saving account with a building society to get a mortgage. My first house was a one bed bungalow near Chesham in Bucks, one of the few affordable places for my friends, whose parents lived in very expensive places like the Chalfonts and Gerrards Cross, to buy our first homes. The going rate for such homes at that time was £25k, give or take a few grand, which seemed a collossal sum when the normal graduate starting salary was £5k.

We were lucky - my dad was in a position to lend us the £25k on an interest-only basis without a deposit and only charged us the rate of interest he was getting from the bank. A bargain at 10%!!

I recall my father saying that when we as a family moved up to that area in the late 60s the house we bought (a nice, 3 bed detached in decent part of Chalfont St Peter), had cost us just over £10k. Just checked with Land Registry and it sold for £500k in September 2010.

Their first house, a 4 storey Edwardian semi in the St Andrews area of Bristol cost them £1500 in 1950 when they bought it - it too is probably worth £500k or so now. This is in the same road:

So, you see, house price inflation has been there on-and off for at least the last 60 years. I wonder what wages have done in that time.

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