By Marcus Leach
Mortgages should be capped at 90 per cent of property values and at a maximum of three-and-a-half times household income, according to a new report published today by Institute for Public Policy Research (IPPR).
The new report recommends caps on ‘loan-to-value’ and ‘loan-to-income’ ratios to help stop another housing bubble building up in the future. The UK has had four housing bubbles in the last 40 years, causing widespread damage to the economy.
IPPR’s report shows the UK has had the highest loan-to-value ratio of any OECD country before the crisis other than the Netherlands and says this was one of the main causes of the credit crunch. The report argues that the UK's 'addiction to house price inflation' is bad for the economy and that a central plank of government economic policy should be to ensure that there is greater stability in house prices.
IPPR's report identifies loose mortgage lending as the primary cause of Britain's recent house price boom. The report argues that although the UK has a long term undersupply of houses, and needs to build more homes at a much higher rate, the availability of cheap credit exacerbated the damaging volatility in the housing market.
IPPR says the government and regulators should hold firm against lobbying by the financial services sector, and that the Financial Services Authority (FSA) should recommend ‘loan to value’ and ‘loan to income’ caps in its current Mortgage Market Review.
The report also argues that deposit requirements on buy-to-let mortgages should be raised and that lenders should ensure that rents cover repayments. IPPR wants to deter small-time speculators from seeking excessive capital gains from the buy-to-let market, since this activity feeds housing bubbles.
The report also calls for tighter control on residential lending from non-banks and says they should only be allowed to operate in the UK mortgage market if they meet comparable reserve requirements to those demanded of banks.
Nick Pearce, IPPR Director, said:
"Britain has suffered four housing bubbles in the last 40 years, each of which contributed to major economic and social problems. We must learn the lessons from this economic history. A central plank of economic policy should be to target moderate increases in house prices, rather than allowing runaway house price inflation which is always damaging in the long run.
"The Housing Minister, Grant Shapps, has tentatively floated the idea of aiming for house price stability but he and George Osborne should go further and make it an explicit policy objective. We need tougher mortgage market regulation from the FSA, especially caps on ‘loan-to-value’ and ‘loan-to-income’ ratios.
"The UK has the lowest level of institutional investment in private rented housing in Europe. We should be encouraging institutional investors to ‘build-to-let’ while discouraging individual property speculators using buy-to-let mortgages which can artificially inflate our housing market."
The report shows that UK households have more mortgage debt, relative to their income, than households in any other major economy. The report says mortgage finance is the major component of UK household debt. It shows that almost all of the increase in household indebtedness in the UK has been as a result of more mortgage borrowing. At the end of 2009, the UK household sector had debts totalling £1.53 trillion, of which £1.19 trillion (78 per cent) was secured on dwellings.
Ten per cent of UK owner-occupier mortgages — 1 million UK households - were in negative equity in the spring of 2009, when house prices were around 20 per cent below their peak.
The UK has the highest levels of mortgage lending as a percentage of GDP — 81 per cent — higher than the United States (73 per cent), Canada (49 per cent) and Western Europe (44 per cent) — as well as the highest levels of household and business debt relative to GDP.
The report shows that there have been four housing bubbles in the last 40 years: one in the early 1970s, a smaller one in the late 1970s, and those in the late 1980s and in the mid-2000s. It shows that house prices trebled between 1996 and 2006, rising 12 per cent a year. Even over the last decade, the average house price has risen from £84,000 to £162,000, representing a 7 per cent annual increase between 2000—2010.