There is going to be a lot of discussion tomorrow about the need to control house price growth – prompted by widely trailed new restrictions on mortgage lending proposed by Financial Policy Committee at the Bank of England.
At least as far as Scotland is concerned – and large swathes of the country south of the border – any further restrictions on mortgage lending are unnecessary and potentially damaging.
Take a look at the chart below. As you can see, house price growth in Scotland since the start of the recovery in the market in early 2012 has been much more muted than elsewhere in the UK.
Since April 2012, house price inflation (i.e. the change in prices compared to the same time a year ago) for the UK as a whole has been in positive territory. In contrast, the Office for National Statistics (ONS) reported that prices in Scotland were lower than the same time last year over almost half of that period.
It’s true, of course, that prices in Scotland have recovered somewhat in the last seven months, but they remain well below their peak in most areas. And it’s true that house price inflation across the UK at 10% seems high. But strip out London and you get a very different picture.
But what if we are seeing just the start of a house price boom? Would it not make sense to ‘nip it in the bud’ before it gets out of hand?
The truth is that has already happened – for two reasons.
Firstly, new and tougher rules on mortgage lending came in to force on the 26th April this year and it looks like they are already having an effect. Mortgage approvals have fallen for the last three months in a row (see graph below) and are nowhere near their long term average of around 90,000 a month (you can find more on average approval levels here). The BBA (British Bankers Association) whose members account for around two thirds of mortgage lending reported only yesterday that mortgage approvals had fallen in May for the fourth month in a row with their Chief Economist, Richard Woolhouse, saying that: ‘Our figures indicate that the heat appears to be coming out of the housing market’.
Secondly, there is growing awareness that interest rates are set to rise at some point relatively soon – possibly this November. While any increase is likely to be small, it will certainly remind borrowers that their mortgage costs could rise in the future and, in my experience, buyers have been very sensitive to the possibility that rates could rise in the future.
On that basis, the FPC should stay its hand tomorrow. It could, of course, outline changes that it might make in the future if necessary, but there is no immediate case for making more changes now.
And there is a very good argument for not making it even harder to get a mortgage. Effectively increasing the size of the deposit that a borrower needs to qualify for a mortgage (which is the likely outcome of any new rules) would mean that only borrowers backed by the bank of mum and dad could buy a house. There are plenty of hard working, responsible and solvent would-be buyers who can’t dip in to family funds to build a deposit. They should not be excluded from home ownership because the Bank is trying to quell house price rises in London driven – at least in part – by cash buyers who are not affected by mortgage rules in any event.