Why mortgages are about to get more expensive

As it becomes more expensive for consumers to borrow money from the banks, it simply won't be possible for house prices to keep rising. The big question is: will those buy-to-let investors bail out in time?

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There are plenty of debates over what drives the UK property market.

The bulls go on about supply and demand, and it's certainly the line that the government likes to ramp up, constantly talking about a lack of supply while conspicuously failing to actually do anything about it.

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Bears tend to believe that the housing boom has far more to do with how easy it's been to borrow money in recent years. More people have been allowed to borrow more money, with fewer restrictions. More money pumping into the market means higher prices.

Neither side will give an inch to the other. But it looks like we're about to find out who's right

The chief executive of HBOS, Britain's biggest mortgage lender, told a Merrill Lynch conference yesterday that banks were going to have to start choosing between profits and market share when it came to home loans, reports The Times this morning.

HBOS has 20% of the mortgage market, and has in the past had targets for net lending' in other words, the bank has to lend a certain amount of money out every year. Clearly, this incentivises grabbing market share from rivals, rather than profitability.

However, now he's predicting a "fundamental shift" in the UK mortgage market. He plans to scrap the net lending target, and now take "month-by-month decisions about the trade-off between volumes and margins.'" That's because there has been a "sharp reduction" in mortgage profitability.

Basically, it's becoming more expensive for banks to borrow money in the wholesale markets, and that means it's going to become more expensive for we the consumers to borrow money in turn from the banks. They can no longer afford to undercut one another with near-base-rate mortgage deals, as their own lenders are tightening the screws.

If people can't get access to the same levels of cash that they've been borrowing in recent years, then supply/demand imbalance or not, it simply won't be possible for house prices to keep rising. If someone who could borrow £100,000 yesterday suddenly can only borrow £80,000, or £50,000, then where's the extra money going to come from? Home buyers are already stretching themselves to record levels, as Council of Mortgage Lenders data shows. There's no extra give in the system to make up the difference.


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As for the buy-to-let investor, who has increasingly replaced the first-time buyer as the new blood in the market; it's already hard enough for newcomers to make the rent stretch to cover their mortgage bills. If there's no prospect of capital gains either, what's to keep them in the market?

In this week's issue of MoneyWeek (out on Friday), our RoundTable panel members get hot under the collar over this very topic. As Merryn mentioned in her editor's letter last week, it's probably one of the rowdiest RoundTable gatherings we've ever hosted. Nobody pulls any punches in defending their corner, and I think you'll find it more interesting than the usual dinner party debates on the housing market, to say the least. If you're not already a subscriber, you can sign up for a three-week free trial by clicking here: Sign up for a free three-week trial of MoneyWeek.

By the way, completely off the subject, but I do like to flag up if I've read anything decent in the papers, and if you want to read an exceptionally clear-headed analysis of the situation in Burma, I recommend you take a look at Carl Mortished's piece in The Times this morning.

Also, we have another web chat on the site today - this time it's on planning for long-term care. It's not something any of us really want to think about, but ultimately, it's important. If you've got a question you'd like answered, or just want an overview of the range of issues involved, it's well worth a look. The chat begins at 1pm this afternoon - click here to submit a question: Long term care funding webchat. Or you can always have a read of what was said afterwards.

Turning to the wider markets

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London's benchmark FTSE 100 index slipped into the red at the end of yesterday's session as Wall Street opened lower, ending the day down 5 points, at 6,500. Miners including Lonmin and BHP Billiton fell on weaker commodities prices. However, retailers Kingfisher and Tesco performed well on positive broker comment. For a full market report, see: London market close.

Across the Channel, the Paris CAC-40 ended the day 26 points higher, at 5,799 as banking sector stocks rallied. And the Frankfurt DAX-30 was up 24 points, at 7,946.

On Wall Street, stocks gave up some of Monday's strong gains as fresh economic data prompted renewed doubts as to the state of the US housing market. The National Association of Realtors' pending home sales index was down 6.5% in August to its lowest level since it began in 2001. This latest sign that the economy is slowing down hit energy stocks - such as Exxon Mobil Corp, which led the Dow Jones down 40 points to a close of 14,047. The S&P 500 was down a fraction of a point, at 1,546. However, the tech-heavy Nasdaq added 6 points to close at 2,747.

In Asia, financials - boosted by Citigroup's buyout of brokerage Nikko Cordial - led the Japanese Nikkei up to a close of 17,199, a 153-point gain. In Hong Kong, the Hang Seng had fallen from an intra-day peak of 28,871 on profit-taking to end the session at 27,476, an overall loss of 723 points.

Crude oil had risen to $80.22 a barrel this morning and Brent spot was little-changed at $77.83.

Spot gold dropped to an intra-day low of $724.35 yesterday as investors took profits on its recent multi-year highs. However, the yellow metal had risen again to $733.70 this morning. And silver had risen to $13.39.

In the currency markets, talk of a rescue package for Northern Rock (see below) saw the pound rise to a two-week high against a basket of currencies this morning. Sterling was last at 2.0398 against the dollar and 1.4392 against the euro. And the dollar was at 0.7053 against the euro and 115.96 against the Japanese yen.

And in London this morning, Northern Rock's shares leaped more than 14% on reports that a potential buyer has raised enough cash to make a takeover bid. Private equity group JC Flowers is said to have secured £15bn of funding and is due to meet Northern Rock for talks.

And our recommended articles for today...

After the credit crunch - here comes the contraction

- In due course, banks should begin to trust - and lend to - one another once more. But the shrinkage of the credit supply to small businesses shows no sign of a let-up. For more on what to expect from the credit markets next, click here: After the credit crunch - here comes the contraction

How to decide whether to board a float

- Just imagine if you'd bought Coca Cola shares back in 1919... Backing the right firm when it firsts lists on the stockmarket really could transform your portfolio. So click here to read Tim Bennett's top five tips for avoiding IPO trouble: How to decide whether to board a float

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.