What first-time buyers really need is lower house prices

It’s been a grim week for anyone who wants high house prices.

On Monday, property website Rightmove reported that asking prices fell by 1.1% in September. That’s the third decline in a row. Meanwhile, in August, gross mortgage lending fell to £11.4bn, down 14% on the month, and the worst total for the month of August seen in ten years.

On the other hand, it’s been a great week for people who like the idea of paying more money for their clothes and food. Cotton hit a new high, at a time when retailers are already warning of rising clothing prices. And of course, we’ve all heard about surging grain prices.

Does that sound daft? It is. But it makes no more sense to cheer rising shelter costs than it does to be pleased about rising food or clothing prices.

And yet, we still can’t seem to get our heads around the idea that falling house prices might actually be a good thing.

New FSA rules are a little late arriving

The property market is in a pretty unhealthy state. The Bank of England’s slashing of the bank rate (what we all used to call the base rate) to 0.5% has helped to prop the market up. But the number of sales is running at about half the rate it did before the credit crunch.

And now the Council of Mortgage Lenders (CML) is fretting that new rules from the Financial Services Authority (FSA) will make things even worse.

“The golden age of home-ownership is over, for the moment,” declared Michael Coogan, director general of the CML, yesterday. “New conduct rules for… lenders will not help borrowers meet their aspirations to become home owners.”

The FSA wants to control things like self-certification loans (also known as ‘liars’ loans’) and interest-only mortgages, and all the other things that allowed people to buy homes they couldn’t otherwise afford.

At heart, the FSA wants borrowers and lenders to work within a housing finance model that isn’t dependent on ever-rising property prices to remain sustainable. In other words, it wants to stop the housing market from being the legalised pyramid scheme that it was before the credit crunch. And the FSA wants to do this because it clearly thinks that banks can’t be trusted to do it themselves.

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It’s a bit late for all this, you might think. And you’d be right. Imposing such controls, now that house prices are historically hugely overvalued, would make it a lot harder to get a mortgage. And chances are house prices would fall as a result. Indeed, the FSA admits as much in its Mortgage Market Review.

But the FSA also points out that introducing these rules during a downturn is actually better than doing it when the market begins to recover. Because lenders are already being cautious because of the overall economic climate, the impact of putting the new rules into practice will be less severe.

Of course, the vested interests don’t like this idea. And why would they? Boom and bust is a very pleasant economic model, if you get to take the profits during the boom, and hand the taxpayer and, more explicitly, savers, the consequences during the bust.

“We do not want to sleepwalk into a housing finance market which is sustainable, but meets almost nobody’s aspirations because it is so risk averse,” warns Coogan.

Banks don’t exist to meet people’s aspirations

But wouldn’t a sustainable housing market be rather nice? We like stable prices in most other areas of our lives. And perhaps if lending patterns were more stable, we could get a better handle on exactly how much of a problem the physical supply and demand side really is. Rising prices would signal genuine shortages of property, rather than gluts of credit.

As for ‘aspirations’ – since when did banks and building societies exist to meet people’s aspirations? As small business owners might be painfully aware, they technically exist to direct depositors’ capital towards enterprises that will produce a decent return, with a bit on the side to cover the bank’s costs. That’s why we want them to be careful with who they lend money to.

They’re not there to give you whatever amount of ready cash you need to meet your ‘aspiration’ to open a café in a street that already has ten of them. Or your ‘aspiration’ to leverage your £30,000-a-year income into a £200,000 mortgage. And before the bust, banks were only happy to help people with their ‘aspirations’ because they thought they were offloading the risk to some other stupid chump.

First-time buyers need lower house prices

Here’s what will help first-time buyers meet their aspirations: lower house prices. It’s much easier to save up a 25% deposit if property prices are actually affordable.

Now, we can have a debate about the wider economic damage a further fall in house prices would have right now. It probably wouldn’t be pretty. But let’s not pretend that this is all about helping the poor huddled masses of first-time buyers, condemned to rent (as if that were a bad thing in itself). This is about lobbying to keep propping up banks and homeowners at the expense of savers and long-term economic stability.

Of course, with the Bank of England rate already as low as it can go, and inflation surprisingly sticky, there might not be any way to prevent house prices from falling. In which case, why not take steps right now to prevent the next boom and bust cycle from kicking off?

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