The Financial Services Authority risks driving the UK into a second housing crash if it fails to properly stress test proposals in its Mortgage Market Review, a report warns.
David Steven, policy analyst at risk and international affairs specialist Global Dashboard, says a new housing crisis might be closer than the FSA believes in his report Time To Stop Betting The House.
Steven says: “The FSA is quick to lecture others on the use of stress tests and the need to consider worst case scenarios yet perplexingly fails to follow its own prescription.
“Unfortunately, a new housing crisis may be closer than the FSA believes, with signs that the housing bubble is only partially deflated.”
After falling in 2008 house prices have bounced back, driven by the lowest interest rates in the UK’s history, and now stand at just 8% below their peak.
Steven adds: “With cheap money propping up the price of assets a second housing crash is possible after the general ele ction, prompted either by higher interest rates, economic stagnation or an external shock.”
He believes that instead of looking at these factors the FSA has focussed on trying to protect the industry’s reputation rather than the interests of borrowers or society more widely.
Steven says: “At worst, the FSA is guilty of fig leaf regulation. In good times mortgages in the UK are among the most profitable in Europe for banks and the most expensive for borrowers. “In bad times the size of housing debt and the propor-tion of debt held at variable rates could cause macroeconomic damage.”
The report recommends that a Royal Commission be formed to look at the future of the mortgage market.
It calls for the regulator to implement proposals in the MMR on a temporary basis and consider implementing a more far-reaching debate on the future of the sector.