How To Stop House Prices Exploding Again

[bobed]

http://www.guardian.co.uk/money/blog/2009/...limit-mortgages

How to stop house prices exploding again

The cap on income multiples hinted at in the Turner Review is not enough to halt the property boom-bust cycle

Nearly 12 years after coming to power, Labour's leaders now recognise unfettered property lending and a free market in mortgage products is simply too dangerous to be left in the hands of banks and building societies. Yet just two years ago the government thought it fine and dandy for households to buy over-priced houses by borrowing loans equal to five or even six times' joint income. It sanctioned 100%-plus mortgages worth more than the inflated properties they were used to acquire. And it turned a blind eye to a giant and socially damaging experiment in buy-to-let lending financed through the global wholesale markets.

The result? Unemployment this morning surged through 2 million, GDP will fall by 3-4% this year says the IMF and pensions have been shredded by the stockmarket. It can't all, of course, be blamed on reckless mortgage lending. But Britain and American's debt culture was always unsustainable and was the root cause of the worst economic downturn since the Great Depression.

Today, Lord Turner acknowledges the imprudent lending practices that have helped wreck Britain's economy. He suggests a number of ways in which the quantity of credit can be limited in future. Income multiples could be capped. Borrowers could be prevented from taking loans of more than 90%. Banks could face lending restrictions. Unfortunately he has bounced these proposals into a paper the Financial Services Authority will publish in September. Having gorged on borrowing, we are still terrified about turning the tap off.

A cap on income multiples will inevitably be criticised as a blunt and unsophisticated instrument. So what? Can someone explain what societal damage will be incurred if someone is prevented from taking a home loan worth five times their income? The FSA should also consider imposing tight controls on how couples, married or not, are assessed for borrowing. It is not fashionable to say this, but the cruel reality of the entry of many more women into the labour market over the last three decades is that much of the additional income earned has simply gone into servicing giant loans to buy over-priced properties.

When families were limited to borrowing three times the first income plus one times the second income, it effectively placed a ceiling on property prices. But after controls were lifted in the 1970s and 1980s, some lenders allowed both earners to borrow three times their earnings, pushing up borrowing capacity to five or six times' family income. This cash has simply pushed up prices - and forced other families and couples to do the same in a pointless bidding war for decent homes.

But a simple cap on income multiples won't be enough. It could perhaps include a "dynamic" element that acts as a deflationary force when house prices start to accelerate too rapidly. For example, a limit of three times income could be reduced to, say, two-and-a-half times income once average house prices rise above certain levels. Restrictions such as these could then act as an automatic stabiliser to prevent future booms.

Perhaps what's most extraordinary about Turner's proposals today is that none of them are particularly new. Maximum loan-to-value and loan-to-income ratios are already in place in Germany, Austria and Hong Kong. In Britain consumer credit was controlled tightly until the mid 1970s. Restoring many of those regulations, and imposing controls on mortgage "product development" will be vital to ensure that house prices never again return to the absurd levels of 2007. Banks need to start lending to businesses again if we are to kickstart the economy back into life. But in the mortgage market, we should be thinking about when and how we turn the tap off rather than on.

[bobthe~]

Hmm, I wonder what they were saying in 2006/7.

Maybe the "dynamic" element they mention could be something new and innivative, like increasing Interest Rates.

[Umiapik]

I've heard so many stable doors being slammed recently that I'm worried I might go deaf...

[Gone baby gone]

It is not fashionable to say this, but the cruel reality of the entry of many more women into the labour market over the last three decades is that much of the additional income earned has simply gone into servicing giant loans to buy over-priced properties.

What's that you say? "The emperor has no clothes on".. really?

Sensible article, but about 7 years late.

[ChrisM]

Hmm, I wonder what they were saying in 2006/7.

Exactly! Where were all these clowns while all this was in full swing? I'm getting peed of all these suggestions AFTER it was needed!

All this 'Oh we should put multiple caps in' and 'reasonable LTVs' and you know at some point in the future it'll all be repealed or never implemented so the tragedy can start again.

F****ts! :angry:

[symo]

Hmmm so the Zanu-labor paper of choice is espousing prudence, higher interest rates for savers next perhaps and a cap on salary multiples for mortgages? Too little too late.

[Leonard Hatred]

• Shutting down the Daily Express?
  
• Gag orders for Kirstie and Phil?
  

[grizzly bear]

The dynamic element could be something like the deposit needed should increase once prices go above a certain amount - in other words banks can only lend the same amount against a property regardless of what the "valuation" is. Anyone wanting to bid over that amount should have to have the money as hard ££££

[mikthe20]

Exactly! Where were all these clowns while all this was in full swing? I'm getting peed of all these suggestions AFTER it was needed!

All this 'Oh we should put multiple caps in' and 'reasonable LTVs' and you know at some point in the future it'll all be repealed or never implemented so the tragedy can start again.

F****ts! :angry:

This is typical. I am constantly amazed about how this crash is just like the other ones. Stable doors being bolted usually leads to overreaction and over-regulation. The when boom begins VIs say "it's different this time" so regulations no longer needed, and then on to a massive bubble and bust.

In the same way, stockmarket has a bear rally, pound tanking, green shoots in the property market, people calling the end of the recession when it's bearly begun, unemployment forecasts way way short of what will come.

It's pretty much an action replay of the last recession - but much, much bigger. ANger stage to come, then true capitulation. It's a cliche, but true.

[bobthe~]

This is typical. I am constantly amazed about how this crash is just like the other ones. Stable doors being bolted usually leads to overreaction and over-regulation. The when boom begins VIs say "it's different this time" so regulations no longer needed, and then on to a massive bubble and bust.

In the same way, stockmarket has a bear rally, pound tanking, green shoots in the property market, people calling the end of the recession when it's bearly begun, unemployment forecasts way way short of what will come.

It's pretty much an action replay of the last recession - but much, much bigger. ANger stage to come, then true capitulation. It's a cliche, but true.

Yup, it is like re-living my mid 20s all over again, only without the sex.

And with little chance of a recovery in 5 years time.

[Shao Kahn]

"How To Stop House Prices Exploding Again?"

Perhaps a contributing factor could be to make it illegal for estate agencies etc to pay towards funding property "supplements" in newspapers...

[Stars]

This is typical. I am constantly amazed about how this crash is just like the other ones. Stable doors being bolted usually leads to overreaction and over-regulation. The when boom begins VIs say "it's different this time" so regulations no longer needed, and then on to a massive bubble and bust.

Regulation of the banks is not the solution to the problem

The political reason regulation is eventually removed is because it can (believe it or not) impact working people quite badly by reducing their opportunity to own their own home. As real estate prices start to rise, working people find themselves more and more restricted to renting and when the situation is examined it becomes clear that the banks would loan for these people to buy houses if there were not constrained by regulation. So now either the government is going to free up the banks to allow such loans, or the working people who are affected are going to vote for someone else. Regulating the finance sector simply creates other problems that can only be solved by deregulating the finance sector - It's a nice little merry go round.

[Gone baby gone]

The political reason regulation is eventually removed is because it can (believe it or not) impact working people quite badly by reducing their opportunity to own their own home.

But what if the only reason that working people cannot afford their own home is because some people have taken a gamble and borrowed 5 or 6 times their income, presuming that property prices would continue to rise indefinitely?

At the point the average salary cannot buy the average house, alarm bells should be ringing loudly. Either restrictions on loans need to be put into action, to reduce demand and keep prices level / falling or social housing needs to be built. Of course, the land tax would be a better option, but I fear the influential (not to mention filthy rich) landowners will try to stop this.

[bobthe~]

Regulation of the banks is not the solution to the problem

The political reason regulation is eventually removed is because it can (believe it or not) impact working people quite badly by reducing their opportunity to own their own home. As real estate prices start to rise, working people find themselves more and more restricted to renting and when the situation is examined it becomes clear that the banks would loan for these people to buy houses if there were not constrained by regulation. So now either the government is going to free up the banks to allow such loans, or the working people who are affected are going to vote for someone else. Regulating the finance sector simply creates other problems that can only be solved by deregulating the finance sector - It's a nice little merry go round.

You know, I thought I was going to disagree with you at the start of that main paragraph, but that is spot on.

"LEAVE OUR HOUSE PRICES ALONE!!" if anyone remembers that thread.

[Stars]

But what if the only reason that working people cannot afford their own home is because some people have taken a gamble and borrowed 5 or 6 times their income, presuming that property prices would continue to rise indefinitely?

The ability of working people to get loans to speculate isn't the *only* reason real estate prices rise. If working people cannot get loans, speculation will still continue at least partially with the funds they now provide others in rent that would have before gone to a bank in mortgage payments. You will still have the same amount of ability and need to buy real estate sloshing around in the market; it will just be held by fewer people. The only way to stop the real estate market behaving the way it does with bank regulation is to screw up the entire economy so much, there is no longer any future growth for real estate speculators to steal.

At the point the average salary cannot buy the average house, alarm bells should be ringing loudly.

I absolutely agree, the process of real estate inflation enslaves people.

When people are bent double working all their lives just to buy the right to be allowed to hang pictures up and decide if THEY want a pet or not, alarm bells should be ringing very loudly

Alarm bells should have been ringing continuously in the uk for the last 250 years at least

Of course, the land tax would be a better option, but I fear the influential (not to mention filthy rich) landowners will try to stop this.

Darn, i'm preaching to choir again...sorry

Imo Financial regulation is a sop to make you think something is being done to rein in the problem..it simply wont work.

[SarahBell]

I don't like the idea of them worrying about "house prices exploding again" when they haven't imploded enough to make up for the recent explosion.

[bobthe~]

Imo Financial regulation is a sop to make you think something is being done to rein in the problem..it simply wont work.

Galbraith pointed out that when all the regulations were introduced in 1932, they were pointless anyway, because the disaster was still in the memory of the participants.

And of course once it is no longer in the memory of the participants, everyone forgets (like the last few years).

And then they remember that everyone forgot and remember again, like they are just about doing now.

Until they forget again. (in about 80 years).

[Sybil13]

Of course everything this article is saying IS SPOT ON but after this week's fiasco with leaked FSA 3x's income as if it was a done deal, only to frighten people into thinking "oh my god I will never afford a house" and then the FSA actually using regulation more like a threat, with Lord Turner saying something like "if we regulate it will make it hard for first time buyers to get on the property ladder and they might take out credit card loans to make up the difference", and then within minutes the FT saying PEOPLE WANTING TO GET ON THE LADDER HAD BETTER GET ON NOW OTHERWISE YOU MIGHT NOT BE ABLE TO AFFORD TO LATER.... SPIN SPIN SPIN SPIN .......To be honest this has to be the most depressing week for me since this all began, I honestly thought a line might get drawn under the past today, instead just more of the same with more articles seeming to say that the credit crunch had NOTHING to do with the irrepsonsible overlending due to the inflated property prices in the UK BUT CAME ABOUT ONLY BECAUSE OF THE US SUB-PRIME!! I am seriously thinking about taking vows and entering a convent, I am not sure how much more of this rubbish I can take.

US property prices only inflated 75% UK prices inflated 190% in less than a decade.

In 2001 UK had to borrow 6 billion to prop up the mortgage market by 2007 it 750 billion.

Because of the inflating prices lenders had to start lending irrepsonsibly otherwise most people

could not afford to buy. Yet today we have Beckett saying the government are looking for ways to "stablise"the property market. DID ANYONE TRY TO STABILISE IT WHEN IT WAS ALLOWED TO INFLATE 190%? DID ANYONE SAY IT WOULD BE SUICIDAL TO ALLOW IT TO INFLATE BEYOND MOST PEOPLE'S MEANS?

I am not sure how much more of this I can take to be honest, the total dishonesty, the spin, the DENIAL that property prices have anything to do with the country going broke.

[eric pebble]

I've heard so many stable doors being slammed recently that I'm worried I might go deaf...

Me too..... But that article says it all --- and will be buried like a putrifying dead body asap.

[eric pebble]

Hmm, I wonder what they were saying in 2006/7.

Maybe the "dynamic" element they mention could be something new and innivative, like increasing Interest Rates.

Nearly 12 years after coming to power, Labour's leaders now recognise unfettered property lending and a free market in mortgage products is simply too dangerous to be left in the hands of banks and building societies.

REALLY??

[GrinAndBearIt]

It is not fashionable to say this, but the cruel reality of the entry of many more women into the labour market over the last three decades is that much of the additional income earned has simply gone into servicing giant loans to buy over-priced properties.

There you are girls, it's called 'Having It All'. Except when you decide to go off and have a baby, or hubby loses his job and your income falls along with your over-priced house's value. Then you're 'Having Bog All'.

[eric pebble]

It is not fashionable to say this, but the cruel reality of the entry of many more women into the labour market over the last three decades is that much of the additional income earned has simply gone into servicing giant loans to buy over-priced properties.

----------------------------

Sadly - this is spot on. It has to be one of the greatest cons of all time. It's unwitting on behalf of women, but the Moneylenders have used their labours simply as a house price pumping machine.

[Mikhail Liebenstein]

But what if the only reason that working people cannot afford their own home is because some people have taken a gamble and borrowed 5 or 6 times their income, presuming that property prices would continue to rise indefinitely?

At the point the average salary cannot buy the average house, alarm bells should be ringing loudly. Either restrictions on loans need to be put into action, to reduce demand and keep prices level / falling or social housing needs to be built. Of course, the land tax would be a better option, but I fear the influential (not to mention filthy rich) landowners will try to stop this.

Indeed at this point the average salary can't buy the average house.

The remedy I am afraid is bankruptcy for those that overstretch. Interest rates will need to go up soon as the Government will become unable to borrow, at which point there could be rather a lot of repossessions.

[babesagainstmachines]

Duh. Just include house prices in the inflation index. Duh.

Not until 2012 tho please.

[olliegog]

Of course everything this article is saying IS SPOT ON but after this week's fiasco with leaked FSA 3x's income as if it was a done deal, only to frighten people into thinking "oh my god I will never afford a house" and then the FSA actually using regulation more like a threat, with Lord Turner saying something like "if we regulate it will make it hard for first time buyers to get on the property ladder and they might take out credit card loans to make up the difference", and then within minutes the FT saying PEOPLE WANTING TO GET ON THE LADDER HAD BETTER GET ON NOW OTHERWISE YOU MIGHT NOT BE ABLE TO AFFORD TO LATER.... SPIN SPIN SPIN SPIN .......To be honest this has to be the most depressing week for me since this all began, I honestly thought a line might get drawn under the past today, instead just more of the same with more articles seeming to say that the credit crunch had NOTHING to do with the irrepsonsible overlending due to the inflated property prices in the UK BUT CAME ABOUT ONLY BECAUSE OF THE US SUB-PRIME!! I am seriously thinking about taking vows and entering a convent, I am not sure how much more of this rubbish I can take.

US property prices only inflated 75% UK prices inflated 190% in less than a decade.

In 2001 UK had to borrow 6 billion to prop up the mortgage market by 2007 it 750 billion.

Because of the inflating prices lenders had to start lending irrepsonsibly otherwise most people

could not afford to buy. Yet today we have Beckett saying the government are looking for ways to "stablise"the property market. DID ANYONE TRY TO STABILISE IT WHEN IT WAS ALLOWED TO INFLATE 190%? DID ANYONE SAY IT WOULD BE SUICIDAL TO ALLOW IT TO INFLATE BEYOND MOST PEOPLE'S MEANS?

I am not sure how much more of this I can take to be honest, the total dishonesty, the spin, the DENIAL that property prices have anything to do with the country going broke.

+1

could not agree more. Although I draw the line at the convent thing. I get the feeling that there is this idea that if the housing market (a market that must have ups and downs) is somehow stabilised and the world puts its financial system in order - Gordo will have saved the world and it will all be OK and don't worry, another HP explosion is just round the corner and you will make a killing if you can just hang on.