The newly risk averse banks and their newly vigilant regulators now agree that high loan to value mortgages represent ‘irresponsible’ lending. But their caution, while understandable in the circumstances, risks creating a fundamental change in the property market that most people would regard as unwelcome and regressive.
In short, the requirement for a large deposit threatens to widen the divide between the ‘haves’ and the ‘have nots’.
The deposit, normally in the region of 20% of the purchase price, represents a significant hurdle to buying for first time buyers and for anyone without enough equity in their current home. Moreover, the relatively high cost of renting means that many would-be buyers are struggling to build up a deposit.
As property prices recover in the medium term, the leap to home ownership will become ever more challenging for those who don’t already own, while those who do will see their equity, and thus their ability to borrow, improve.
The result, in the long term, could be a nation divided between owners and tenants. Home owners would have access to credit that would enable them to remain on the property ladder and fund the purchase of the next generation. Barclays revealed today that 38% of parents are planning to help their children buy a home. Those who don’t will struggle to acquire a deposit and home ownership will steadily slip further away.
You can see evidence of how this might happen in the buy-to-let market.
There are 77,000 more buy-to-let mortgages today than there were at this time last year. After a brief lull in the aftermath of the credit crunch, interest in property as a letting investment has recovered sharply – albeit from a low base.
There are good reasons for that recovery. Low interest rates and lower house prices have cut costs while strong demand for rental accommodation (largely from those who can’t buy), has boosted returns on investment, creating ideal conditions for some landlords to expand their portfolios.
Of course, buy-to-let still represents a relatively small proportion of the total market – just under 13% of all loans according to the Council of Mortgage Lenders. Nevertheless, the dynamics that are underpinning buy-to-let are the same forces that could lead to a growing gap between owners and renters.
That’s not what most of us say we want. A YouGov survey for the CML this June concluded that three quarters of us want to be owner occupiers. Even among the under 35s, over half hope to become home owners in the next two years.
For that to happen, incomes will have to rise faster than rents (so that tenants can save) and the deposit required to get a mortgage will have to fall.
Traditionally, the property market recovers because incomes outpace house prices, making property more affordable. And once house prices start to rise again, lenders are happier to lend with smaller deposits.
But, if strict rules on lending keep deposits high and if rents keep pace with incomes, the hurdle that tenants will have to leap to become home owners will not become easier as it has in past property market cycles. The risk is that we return to the days when the majority of us rented and home ownership was the preserve of the wealthy.
Does that really matter? Yes, I think it does. Firstly, we should respect the aspiration of so many people to own their own home. Secondly, widespread home ownership ensures that the great majority of us share in the fortunes of an asset class that has traditionally been seen as an effective hedge against inflation.
Home ownership can be a leveller – provided that access is open to those without the backing of the bank of mum and dad. That’s why 95% loan to value mortgages are good for us.