It says that claims that the FSA’s responsible lending proposals will do lasting damage to the size and structure of the mortgage market assume that the historically high gap between house prices and incomes is here to stay.
But it says these claims seem overstated and referred to housing minister Grant Shapps’ comments that the MMR was “a step too far”.
In Its UK Housing MArket Focus for December it also highlights the Council of Mortgage Lenders’ figures that 50% of loans would have been blocked since April 2005 under the MMR.
He says: “Assessing the impact of the proposed new rules on loans made during the boom is not a fair test. After all, over that period, looser lending criteria were a key factor driving house prices to record highs in relation to incomes.
“Such calculations also assume that the correction has finished. But what if house price falls and/or rising incomes mean that, in due course, a mortgage of three times income is once again adequate for most borrowers?
“Under such a scenario, the FSA’s affordability rules would only bite once base rates reached 7% or more, a level seen only once since the end of the 1990s recession.”
Capital Economics also says the FSA is right to limit interest-only loans.
It says it is not sustainable for large numbers of borrowers to be able to pay the interest, but not the capital repayments on their loan. Borrowers cannot always rely on house price gains to pay off their debt.
The report adds: “Our view that the house price correction is not over means that we believe that the FSA’s responsible lending proposals will not do anything like the damage to the size and structure of the mortgage market that has been claimed by some commentators.
“In fact, over the medium term, lending volumes could well benefit from the proposals if they help to dampen the house price cycle and keep home ownership within the reach of more people.”