Forget ‘mortgage wars’, there’s only one way to make houses affordable

The government’s big plan for the economy seems to hinge on one thing.

Get the banks lending again. If the banks lend again, house prices will go up again. Everything will be hunky-dory and people will vote for the incumbents come 2015.

The latest crafty idea to encourage this was the ‘Funding for Lending’ scheme launched back in the summer by the Treasury and the Bank of England.

Judging by all the ‘mortgage war’ headlines you’ll have seen in the papers recently, it might seem that it’s worked.

But it’s a little more complicated than that…

The problem with banks

The business of banking is pretty simple at heart.

You borrow money at one rate. You lend this money to someone else at a higher rate. You pocket the difference.

As long as the person you lend the money to pays you back, and the person you are borrowing from doesn’t demand their money back unexpectedly, you’re laughing.

Right now though, the banks certainly aren’t laughing. On the one hand, there are a lot of potential bad loans on their books. They are rightly nervous that a lot of the households they’ve lent money to would be unable to pay them back if interest rates were anywhere near ‘normal’ levels.

No wonder. As we’ve noted before, the economy is infested with zombies.

One in three commercial property loans is subject to some sort of forbearance, reports The Guardian. One in 12 companies can only pay the interest, not the capital, on its debt. As many as one in 12 mortgages is in forbearance too. So the quality of the loans written by banks remains poor.

On the other hand, it’s become more expensive for them to borrow money themselves. The ‘wholesale’ money markets have never really recovered from the 2008 financial crisis. So there are fewer avenues for funding for the banks. And that makes their cost of borrowing more expensive.

So you can see why they are reluctant to lend. Their own supply of money has become more expensive. The people they lend to have become less reliable. As a result, they feel a bit over-extended and vulnerable. They’d rather have fewer loans outstanding, and more funds available to back them for when things turn bad.

It won’t help that the Bank of England has just warned that banks need to be more honest about the state of their balance sheets. The Bank reckons there’s still a potential £60bn hole in the banking sector’s finances, that lenders will have to fill at some point.

The funding for lending scheme is a gift to bankers

That’s a pretty daunting set of problems. So how is funding for lending meant to help with all this?

In effect, the scheme allows banks to borrow money from the Bank of England at dirt-cheap rates. In return, the banks must not allow their lending levels to shrink between now and the end of 2013. On top of this, the more they lend, the more they can borrow, and the cheaper the rate.

So the deal is: don’t shrink your loan books, as you are itching to do. In return, we’ll give you cheap funding, which means you’ll make more of a profit on the loans you write.

How’s it worked? Well, just as you’d expect.

Because banks now have access to cheap lending, they’re not under as much pressure to raise money from other sources. That includes ordinary savers. So savings rates are lower than they otherwise would be. In other words, savers are being done over by the Bank of England yet again, in favour of the indebted and the banks.

According to comparison site Moneyfacts, the average savings rate for a fixed-rate Isa for example, is down from 2.82% to 2.42%. Similar falls have been seen across the board.

So what about all those poor deprived first-time buyers out there and others desperate to get hold of a home loan? Well, again, as you’d expect, they’ve not had a look in.

Banks aren’t stupid. They’ve instead used the cheap money to ramp up the competition to secure customers who are the very best credit risks.

As Sylvia Waycot at Moneyfacts points out, before the scheme was launched, there were 389 mortgages available for people with a 40% deposit. Now there are 498 – an increase of more than a quarter.

I don’t know about you, but while I’m a property bear, I think even I’d be happy to lend to someone who had already put down 40% of the property price, if I knew I had ownership of their home as security.

What about mortgages requiring a 10% deposit: the riskier end of the spectrum? There were 263 available before Funding for Lending came out. Now there are another 21.

In other words, funding for lending is good for bank profits. They can get cheap money and use it to write very safe loans. In the long run, that might enable them to mend their balance sheets that bit quicker.

But if you’re a struggling small business owner or a would-be first-time buyer, don’t expect it to make your life easier. And if you’re a saver – well, you should be used to getting a raw deal from the Bank of England by now.

There’s one way to make the housing market really pick up, at least in terms of sales activity – and that’s to let prices fall, by raising interest rates. The Bank will refuse to let that happen for as long as it can. But it’s an inevitability. The big question is just ‘when?’

Meanwhile, looking through the Halifax house price data, something struck me. According to the lender, the average house price across the UK – as of October – is now around £158,000 (seasonally adjusted). In April 2009, the bottom of the post-crisis crash, the price was around £154,000.

In other words, we’re just a kick in the backside away from the low. That’s quite an eye-opener for anyone who thinks the property market has been flat or even rising over the last few years.

What’ll happen next? Well, we’ve just had our annual property Roundtable in the office. It was as heated as ever – you can find out what our experts had to say in next week’s issue of MoneyWeek, out next Friday. (If you’re not already a subscriber, you can subscribe to MoneyWeek magazine.)

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  • Neil

    In addition, I wonder if eliminating mortgage interest relief on buy-to-let mortgages over, say, a five year period would encourage/nudge amateur landlords to start selling their letted properties (typically first time buyer properties). This would increase the price competitition at the lower end of the ladder.

  • PhilipCarer

    If you look at the Nationwide quarterly data from 1952 it is clear that whenever the house price/income multiplier rose above around 4 there was a problem shortly afterwards. Until mortgage interest rates rise to around 5% and the multiplier falls to around 3.5 there will be a problem. Once we get down to this level householders will have a little more to spend on improving their property which should improve growth elsewhere.

  • Roger

    Higher interest rate will get house price down, but in terms of real cost (mortgage etc), it may be a different story. It really isn’t that simple. High interest rate, low prices will favour cash rich people, the otherway round is more favour poorer people.

  • Roger

    There is a saddle point somewhere, too mathematical to explain.

  • Rick

    How does our situation compare to that of the Japanese after the late eighties? They adopted a Zero Interest Rate Policy (ZIRP) like us and have yet to raise their rates, I’ve heard that Tokyo property dropped massively (not sure about other areas of Japan), so how did that come about and why hasn’t the UK property market dropped as much yet?

  • GFL


    Low interest rates do not favour the poor; they MASSIVELY favour the wealthy. In a system that is based purely on credit, those with that the deemed the lowest risk (wealthy organizations and individuals) have the greatest access to money (and at the cheapest rate), which in turn drives up asset prices and creates big barriers to market for the average folk. Not to mention low interest rates can eventually cause inflation, which absolutely hits the poorest the hardest.

    The government is stuck between a rock and a hard place – major structural reform will be extremely painful and almost certainly seal the government’s fate for the next couple of elections. While on the other hand there is so much debt and misallocation of wealth it has become a huge drag on the economy.

  • Lumino

    On the one hand you’re saying that house prices have not done the desired thing by decreasing, and on the other hand you’re saying that anyone who thinks house prices haven’t decreased is wrong. Uh?

    I think the point you’ve unwittingly made is that house prices have done exactly what one would have wished for in the circumstances – slowly drifted down in real terms. I guess writing that wouldn’t draw many readers though, eh?

    MoneyWeek seems to have, at least for now, given up on the gleeful predictions of house price collapse (though one might take that as a contrarian indicator they’re about to). Whatever happens they’ll give us the old “I told you so” anyway…

  • Esmerelda

    The average house price may be similar to 2009, post crash, but the size of the average new house, has shrunk, so the comparison of “averages” is not comparing “like with like”.

  • GFL

    On a side note, anyone that is remotely bullish about the British economy should invest in housing in my opinion. Not many other investment classes can give you a yield of about 8% – plus a leveraged play on capital gain (you only need a price increase of 0.5%, if inflation is running at 2%). Not to mention the full backing of the UK government, since they cannot/will not allow house prices to fall (to keep the banking sector solvent), to the point money will always be allocated away from more productive endeavours to keep housing propped up.

    Although I’m a BTL landlord, I fully appreciate the destructive nature of low interest rates, which has fuelled this non-productive economic drag. I’m in the process of deleveraging, and do not plan to plough any more money into housing for the foreseeable future. But that’s just me!

  • Roger

    I just said it is a very mathematical issue, when interest is low, price is high, it COULD be that the over all cost of housing is DOWN compared to low price, high interest rate. I am checking an acturial table for a publishing house a few weeks back, they raise the issue, I explained the mathematical reasons behind it. It is really a saddle point. I do not want to get into the maths formula.

  • Mike W

    the average price of housing on her accession to the throne with the price today. It was then I believe something like £45,000 after adjusting for inflation. Given that the general standard of living has increased since then it would, I suppose, be reasonable for the average price to be say £75,000. The present price is still totally absurd. Back then a skilled blue collar worker could afford to buy a house. Now two professional people cannot afford to buy unless someone can give them a substantial deposit. This country’s economy is crazy.

  • Clive

    I don’t see this as an easy one to solve. Higher interest rates will cause more people to default, hence more problems for banks. Building more houses also lowers prices, but then banks would be sitting on mortgage books when the value of the properties may be less than the value of their loan book.

    @PhilipCarer – in the 1950s, I expect most households had one income, today I expect the majority have two. Simply restricting loan multiples isn’t going to take us back to the 1950s. Anyway, the “4 times salary” was only a rule-of-thumb based on typical mortgage rates at the time. Loans should be based on ability to repay, with an eye to what happens if rates go up, not some arbitrary multiple.

  • jrj90620

    10% down?Here in the U.S.,FHA is lending with 3.5% down.Of course, there are warnings of looming financial problems at the FHA,but who cares,when the Fed can create fiat currency to bail them out.

  • Jack

    If we get deflation and falling prices, the RPI will go negative and that will mean that real interest rates go up.

  • Boris MacDonut

    Houses are affordable. It’s just that people lack confidence due to misjudged articles like this one bombarding them on a daily basis. Houses are only slightly more expensive relative to incomes now than they were in either 2002 or 1982.

  • Nickl

    That all depends which houses and which income you’re looking at Boris, and of course how carefully you choose your years.

    In 1998 I could pick up a 2 bed red brick terrace in a cheap suburb of Nottingham for £15k. The same houses are now going for £75k. £15k in 1998 was about an average “blue collar” annual salary. £75k is not one now.

  • Ellen

    @ 15. Boris … yawn zzzzzzzzz

  • Nickl

    @9 I agree that the Government is doing it’s damnedest to keep house prices where they are in nominal terms; by far the best and quickest way to lose an election is to make half the electorate think they’ve lost tens of thousands of pounds. (For good reason was the last one described as a good one to lose).

    However they don’t have half as much control as one might be led to believe. Despite all the fudging of the figures official inflation has started rising again and even Mervyn admits it’s going to keep rising for the forseeable. It’s inevitable as we devalue our currency to make us more competitive internationally and yet import almost everything we consume.

    When the inflation figures start nudging up against 6% the BoE is going to have no choice but to put interest rates up if it wants to continue to be taken seriously. That could happen a lot quicker than everyone thinks; production costs in the far east are rocketing, transport from there likewise.

  • Boris MacDonut

    #16 Houses were very cheap in 1998 and Nottingham has always been cheap…….for housing that is.
    #17 Ellen. The truth hurts doesn’t it?

  • Phil Smith

    Houses are only slightly more expensive relative to incomes now than they were in either 2002 or 1982.

    But houses were already too expensive in 2002.

  • Prince Charles

    @ 15 Boris
    Average house prices always settle back to 3-4 times average salaries, even after massive price bubbles we’ve witnessed in recent years. Average London salaries in 2012 are about £35k. So average house price would be between £105k and £140k when the bubble bursts fully. I suspect your skewed calculations are simply based on your desire to see your own property portfolio rise. Time to wake up to post-bubble Britain…

  • Boris MacDonut

    #21 P Charles. What? Have you been asleep for a decade or more? Ther last time house prices were anywhere between 3 and 4 times INCOME (not salaries, only 45% of houses are bought with salaries) was 1997. That is almost 16 years ago. Welcome to the new normal, the bubble burst 5 years ago. When 3 to 4 times income pertianed interest rates were between 7 and 14% and until they return to that range (not expected until 2020 or later) they will stay “artificially high” as the doom mongers like to call reality. In 1997 the cost of a house was about 14% lower than today relative to incomes.

  • Prince Charles

    @22 Boris – To believe that ‘in 1997 the cost of a house was about 14% lower than today relative to incomes’ is very silly. You’re so obviously trying to talk house prices up.Britain and London too have had their boom years. London is no longer a safe haven for foreign investors. The exploited majority will make life so unpleasant for them that they’ll fly off to Monaco or Switzerland. Perhaps you slept through the strikes and violence of the 1970’s.

  • Boris Macdonut

    #23 Not silly at all. How impudent of you. In 1997 the average HP was £77,000 and the typical mortgage was £48,500. At the prevailing interest rate of 8% one would expect to pay £125,000 over say 25 years. Average income was under £20,o00pa. So a cost to income ratio of 6.3 to 1. Today the average HP on the same basis is £194k ,mortgage £11ok (at 4.2%). The expected payment is £251k with income at £33,000…… a ratio of 7.6.
    I find my maths have proven my “gut reaction” wrong. In 1997 houses were 17% cheaper not 14%.

  • Julian


    I admire the way you defend your corner. But this point of yours about incomes rather than wages puzzles me. It’s true that things like investment income and welfare benefits provide decent chunks of income to people, but does it help them buy houses or pay mortgages?

    People who get welfare payments tend to be poor and can’t afford to buy houses anyway. Those with decent investment incomes are already on the ladder or have paid their mortgages off. What about the people who have neither? The people in the middle who rely on wages. They find it difficult to buy because the banks won’t lend them money. What about the 8% or so of mortgages that are s.t to some sort of forgiveness. If houses were as affordable as you say the banks would be lending and people wouldn’t be struggling despite low rates.

  • Julian

    So 55% of houses are bought with cash according to Boris. Well that’s 55% of a lot lower number than five years ago. Who are these cash buyers? Me thinks it’s people like my parents who bought their houses for peanuts in the 60’s and 70’s who are trading down.

    On your maths Boris, houses on a total mortgage cost to income (not wages) are more expensive than in 1997 at half the mortgage rate. Your arguments are no different to the mortgage brokers who were on the telly a few years ago – buy houses because interest rates are low. Interest rates staying at 1% until 2018? Who knows? But let’s see what banks have to pay for all the new money they need according to the B of E. My bet is that they’ll have to pay higher rates and that will be passed on to mortgage holders. Let’s see what happens then.

  • Boris Macdonut

    #25&26 Julian The numbers are as follows.
    UK households 25.6million. Private homes 21.4 million (4.2million council etc). Number of mortgages 11.2 million (including 1.2million buy to let).
    True, only 17 million are owner occupied ,but many are as you say owned outright and downsizers do cash buy as do many others. Salaries and wages make up only 65% of UK Income.

  • PV70

    I just looked at rightmove after a break of three months or so. Pretty much the same properties in my North London area were still there, many had been reduced by up to 10%.

    As for the rental market, Bairstow Eves in North Finchley is now advertising rental properties @ first month’s rent half price. Are they really doing it to celebrate the festive season? I doubt it.

  • Boris MacDonut

    #28 “pretty much”!Can we have less of the American and the low brow please. I am sick of hearing this trite phrase. You are not Phoebe from Friends.

  • alec

    It’s good to see banks and building societies calling for 40% deposits on mortgages. This clearly indicates they think house prices will fall up to 30% and even more. This time they are not going to take another hit and it’s the punters who will end up with toxic debts (negative equity).

  • Phoebe

    @29 I guess you been pretty much rumbled dude. Upper-class twittery ain’t gonna save the uk housing market now. Get with the program and admit this property game is on a downhill ride and it ain’t coming up for quite a few years. Us good ol’ Americans control your little island – we let our property market crash-now we’re gonna let yours do the same.You should thank us for that, it’d be way worse than letting it be propped up for ever.

  • Boris MacDonut

    #31 How rude to refer to Great Britain as a small island. It is almost 100,000 sq miles with 63 million people and a GDP of $2.5 trillion.The World’s sixth largest economy ,largest financial sector and best armed forces.
    A little island would be Grand Cayman,where rich Yanks keep their ill gotten gains……..pretty much sums them up.

  • NeutronWarp9

    Perhaps the cost-to-income ratio is at or around 6 0r 7 but is this the key point? With QE eroding the value of sterling surely it won’t be too long before an income of £33,000 won’t amount to a hill of beans in this crazy world.

  • Paul

    #Boris a classic there, “houses are affordable”, if that is that case, why are sales volumes woefull? Surely if they were affordable, they would be flying off the shelf? Houses will only become more affordable when A. Wages increase substantially, or B. Lower property prices. In the current economic climate which is more likely to happen? Cue more copying and pasting off google……

  • Lupulco

    If sterling continues to fall, If the price inflation for Asian goods increases, plus the cost of transport.
    All our cheap imported goodies are going to be dear imported goodies along with imported food-stuffs.
    So inflation will rise because of the above.
    So UK % rates will have to rise, but
    How do we finance the Import/Export gap and pay down the UK’s debt?

  • Christopher

    Boris 15.
    Actually, people lack money which knocks their confidence. For years now, inflation and a devalued currency has caused all other meaningful UK household overheads to increase punishingly faster than total income growth. Many households are also paying off debt. The new normal is that property sales volumes remain woeful and transaction prices outside London continue to fall.

  • Ellen

    @ various – Boris. Vodafone are now saying they are having difficulty trying to persuade their executives to base themselves in their UK base in London. They cite the high costs of housing as the reason their executives do not want to live here. Vodafone even point out that if these highly paid executives are deterred by the costs of housing, London/ UK are probably on the verge of a housing crisis.

    Stupid Vodafone! Why don’t you call them and give them the maths lesson! It would be a shame to lose these international conglomerates because their executives don’t understand the historic averages!

  • Adam Smith

    Roundabout 1999 a paper (I think it was the Sunday Times) reported that since ‘New’ Labour had come to power (in 1997) the time it took for planning permission to be granted for a new housing estate had risen from 4 months to 1.5 years. Since then nothing has been done to reduce the planning burden and, meanwhile, the population has increased significantly. At the same time the phenomenon of the ‘KIPPER’ was reported – kids in parents pockets eroding retirement income, i.e. the 35 year old still living with mum and dad. We also had controls over building on Greenfield land – something that had been happening for 5000 years. PEOPLE NEED SOMEWHERE TO LIVE! Is that too difficult to grasp?

  • PV70

    Boris just can’t take the fact that property prices may also fall and have in fact done so in many areas, including London suburbs.

    Talking up the market no longer works. Supply and demand should actually read ‘supply, demand and availability of funds’. Money must come from somewhere.

  • Boris MacDonut

    #33 What? The cost/income ratio is the be all and end all. It is 7.2
    #34 Lack of confidence , not lack of money.
    #35 If….if….if. Try reality.
    #36 You compare to 2006/7.Why not 1996/7?
    #37. Ellen. Bizarre. Are you suggesting the senior Vodafone execs are some sort of latter day soothsayers, or a barometer for good/bad timmes? How wise. Or are they really just greedy, overpaid, lightwieghts like most such execs? Either they want to do business here or not. Either they need bosses here or ddon’t .Didn’t afect Tokyo or Hong Kong.

  • Paul

    #40 Dodged the question Boris, is there nothing on google regarding “lack of confidence”? Im sure you will find alot of info on the weak sales and transactions however……… People would buy if it was AFFORDABLE, which it is so clearly not at these prices. You continue to bury your head in the sand, the only market performing is prime central London due to foreign investment.

  • Boris MacDonut

    #41 Paul. Sales volumes do not dictate prices. Ferraris do not sell in large volumes. Lack of supply and sufficient demand are also important. Death, Divorce, Marriage,Childbirth,Immigration,Job moves…..Paul. If houses were a third as much to buy would everyone buy three?

  • PV70

    I know someone who refused a silly rent increase and is moving to parents for now. Who asks a silly price is not stupid but the one who pays is.

    It’s not ideal to move back with your parents but sometimes it makes sense. More people should take action rather than accept rent increases they can’t afford. The government should tax every empty property ten times the current council tax value. That would sort out the housing market in no time!

  • Fred Blogs

    It’s very simple: the long term average house price has been, for decades, 3 or 4 times average salary. That’s nature, and you’ve probably noticed natural diasters (tsunamis, hurricanes, frankenstorms, bursting bubbles etc) don’t care about details of this or that interest rate in a certain year. Today, average house prices are about 7 or 8 times average salaries. A perfect storm is coming. You can do nothing to avoid it. Sorry for those who’ve recently bought, but you need to learn how to read nature, not an estate agent’s property description.

  • Boris MacDonut

    #44. Prices to salary are a poor guide. Total cost compared to income is better. Either way you are wrong. Current prices are at about 5.5 times average salary while the historic trend is about 4.3 times. The rate is higher now because we are richer. Keynes said in 1930 that by 2030 we’d be 6 times as rich and we are indeed on track to do so.

  • youre all wrong

    number 44 fred bloggs is totally correct the crash will happen soon, but number 45 boris macdonut do you really believe what you preach?????? the rule is and always has been whatever goes up must come down, and thats what will happen and should happen as soon as the bank of england and the government stop propping the property market up artificially.

  • Boris MacDonut

    #46 I do not preach. You seem to have presupposed that prices are up. How do you know they are not down and due to rise?

  • Fred Bloggs

    @47 As we head towards the triple-dip recession, what’s keeping property prices up in the south-east are the super-rich buying prime London property. Why do they do it? It’s the tax breaks they get, as do Starbucks and Amazon. But as you’ve noticed, the general public can unite and change policies. A £20,000,000 bill for Starbucks and there’s more investigation to come. The super-rich non-doms will soon be leaving whether it’s due to policy or public outrage. When systems become so unbalanced, nasty surprises happen to the culprits…I wouldn’t want to be in their shoes now, however over-priced.

  • Fred Bloggs

    Tax Evasion Hotline – Information report form guide: