Charlie Bean, Deputy Governor of the Bank of England, wants to cap mortgages to value. By the Bank’s diktat borrowers would have to put down a deposit of between 10% and 25% when they buy a house.
Perhaps this is to distract us from from the fact that both the Labour government and the Bank of England were directly responsible for the housing bubble? Following on from Alan Greenspan’s American policies (started under Clinton) both the Labour government and the Bank of England jointly caused the housing bubble. They increased the money supply twice; first by allowing a loosening of the inflation target, and then by switching from RPI to CPI – an inflation index whose basket does not include mortgage payments. The market was flush with cash – resulting in 125 % mortgages being offered by banks. And, presto, a bubble.
Banks have already become more careful in granting mortgages – in fact I wonder who out there nowadays receives a mortgage without forking out a 25 % deposit first. Mr. Bean’s measure is therefore unnecessary – the banks limit mortgages already, out of prudence. The 125 % mortgages were an aberration resulting from the Labour government’s money mirage.
Secondly, a loan to value ratio policy does not take into account other risk factors associated with the loan, such as the borrower's credit history and their other assets. That is downright silly. But then perhaps this is the thin end of the wedge and the Bank wants to regulate all aspects of a mortgage lending decision.
Thirdly, the measure is a cap on aspiration. It is especially first-time buyers who would suffer. Those who have owned property for several years are more likely to have built up positive equity. Not quite a policy I, as a Conservative, would want to be associated with. It was The Great Lady herself who abolished mortgage rationing the the eighties.
In fact the only parties which benefit from a compulsory deposit are the banks themselves. Ultimately when the borrower can’t pay back his mortgage the bank reposesses the property and sells to somebody else. If house prices have gone down in the meantime a 25 % cushion guarantees that the bank is far less likely to suffer any loss at all. For the mortgagee it makes no difference whatsoever. I bet the banks are thrilled with the proposals.
Before the Bank of England starts contemplating the rationing of house ownership, perhaps it should apologise for creating the housing boom in the first place.