Lending curbs may settle house prices

26 July 2010

Reading the Financial Services Authority’s responsible lending paper you get a sense of the importance it places on rapid house price inflation -driven by the availability of mortgage credit - as one of the drivers of the financial crisis.

In the section that relates to non-deposit-taking lenders the FSA sets great store by findings from the National Institute of Economic and Social Research which identify “an acceleration in house price growth as the most important factor contributing to the crisis”.

And in the affordability assessment section the FSA says lenders have relied too much on house prices when it comes to assessing borrowers’ ability to pay their mortgage. It’s pretty rich that non-deposit-taking lenders are being blamed for a problem that only reached epidemic proportions with high street banks.

I believe the FSA’s proposals will curtail the 10% to 20% fluctuations in house prices we have seen in the past few decades. In the new world we are likely to see annual rises of around 2%.

So with a lack of funding, impending curbs on lending and a more intense paper trail to assess affordability it’s unlikely that house price inflation will rocket.

I’d like to think this is a well thought through strategy to curb excessive price growth but I’m not convinced. That said, it should deliver a sounder footing for the economy and provide greater accessibility for those looking to get on the housing ladder.