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We’re not out of the woods yet

Despite recent optimism about the eurozone and government enticements for new-build buyers, it is still difficult to be hopeful about the prospects for mortgage growth in the next few years

One could be forgiven for thinking the worst is behind us, with many analysts and news reports searching for some positive news heralding the end of eurozone woes.

With such a positive turn of events, it can’t be long before banks start lending again, with prospective buyers able to access mortgages easily, just like in the good old days before Northern Rock and Lehman Brothers spoiled the party.

On paper, Greece is better off now than it was going into the restructuring. Yet, once the sweeteners, social security and bank recapitalisations have been factored in, the debt reduction to Greece is only €68bn, not over €100bn as initially touted.

Even the International Monetary Fund believes that for Greece to meet its targeted 120% debt to gross domestic product ratio by 2020, miracles will have to happen.

The market has already made its views clear as the new bonds trade at 15% to 20% yields. The next episode of the Great Greek Bailout may not be next week, but it won’t be far in the future.

And with banks having got European Union-guaranteed bonds in exchange for debt that is worth close to nothing, it is the perennial taxpayer who is on the hook – mostly the Germans in this case. The problem may be postponed for a short time, but it is certainly not dealt with.

Now consider the €530bn of European commercial real estate mortgages maturing over the next three years, add to that over €400bn of European leveraged buyout debt scheduled to mature from 2012 to 2016 and throw in over €1trillion of debt due in three years by European banks to the European Central Bank with the famous long-term refinancing operations.

With instability in the eurozone and a sparse funding market, excluding the ECB, it is hard to see any rational bank wanting to lend for anything but the shortest possible term to anyone but the safest possible credit.

So back to mortgages and their availability, or lack thereof. Given market conditions and the lack of active capital markets, it is hard to see substantial mortgage growth. The government and builders have figured this out and come up with NewBuy Guarantee – a scheme to entice prospective buyers back to the market. This might help, assuming lenders play ball, although why the government would want borrowers who can’t afford a reasonable downpayment to take on high LTV mortgages at a time when rates are at an all-time low is difficult to see.

It may be good for builders, but borrowers who need this kind of help ought to bet that property prices start increasing again and that salary raises allow them to cope with higher rates when they come. Unless the economy gets a boost from a yet-to-be determined source and the eurozone issues get fixed, it is hard to be optimistic about mortgage growth in the next few years.

According to figures from the Council of Mortgage Lenders, gross lending has risen for seven consecutive months, as lenders have taken advantage of ultra-dovish monetary policy to offer affordable finance to borrowers.

But as the economic future remains potentially cloudy, a show of governmental support, rather than apathy, is required to ensure the progress of the last 12 months is not squandered.

Stable property and mortgage markets are fundamental to the ongoing health of the economy. Achieving this deserves joined-up thinking that prioritises long-term stability for the many, rather than headline-grabbing tax raids on the few.

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