Are all mortgages now wicked?

Today a leading mortgage company has announced it is withdrawing for the time being from making any new mortgage advances. This follows hard on the heels of the government’s decision to halve the amount Northern Rock has lent on mortgage over the next couple of years in order to repay the money owing to taxpayers.

In recent days mortgage rates have been rising, even though the Bank of England’s message on interest rates has been to keep them the same. As one or two mortgage companies find they are offering the lowest mortgage rates, so they are inundated with people seeking a good value mortgage. They are forced by the rush into putting up their rates, only to leave another mortgage company exposed to the rush. It is going to be a difficult time for people seeking a mortgage, and a more difficult time for those with a variable rate mortgage, facing higher interest payments as a result.

Today Parliament will be debating mortgages on a Liberal Democrat motion. The LDs have been saying for some time that people in the UK have borrowed too much, and have been urging action to curb private sector borrowings. Presumably they wanted higher interest rates sooner, to choke off some of the mortgage demand, and probably want tougher regulations to make it more difficult for people on low incomes or with few assets to borrow.

I certainly opposed Gordon Brown’s decision to tinker with monetary policy by changing targets for inflation from the RPI to the CPI. It meant the Bank of England had to set lower rates in the run up to the 2005 election than if they had kept the old target, and did mean more credit was extended. If the government had stuck with the RPI, and had kept a better control over its own borrowings, we would be better placed to weather the current financial storm.

I do not, however, share the LD view that things should be made a lot tougher for those on low incomes or with no cash for a deposit to buy a home. Home ownership is rightly much sought after, and is an important part of an English person’s liberty. Once someone owns a home they make decisions about their private space in a way tenants cannot, and they have an asset which usually goes up in price which brings them greater financial independence as the years progress. There can be little worse financially than facing old age with no home that you own – it means you pay the highest rents of your life at the end of your life when you have least income.

So what should the authorities do about the move from boom to bust in the mortgage market? They should not rush to regulate to dictate terms to mortgage companies., Saying now people cannot in future borrow 125% of the value of their property, or saying to those without deposits they have to save for one first would be seeking to bolt the stable door long after the horse has gone. Yesterday’s problem was too much borrowing. Today’s may easily become too little if the government is not careful.

The Bank should cut interest rates, to offset some of the unplanned increase in rates we have seen in recent weeks. It needs to try to get control back over the general level of rates in the markets. The authorities should not introduce new and more mortgage regulation. In a global market it is difficult for such regulation to bite if done nationally, whilst the consequences will be harmful to those seeking UK based loans, making them still scarcer and dearer.

It is probably necessary to cut Northern Rock’s mortgage book because the bank is now nationalised and must not be seen to competing successfully to lend more money. It is certainly necessary to get the taxpayers money back in reasonable time. This will place a continuing strain on the mortgage market, as other lenders find the £50 billion to replace the Northern mortgages destined to be repaid. In these conditions the Bank needs to do all it can to keep the mortgage market reasonably liquid, without putting more taxpayers money at risk without more than adequate collateral and protection. The Bank should also be sympathetic to the idea that the banking sector should not have to write down all their good quality shorter term paper every time some financial institution has to dump some of it at distressed prices to raise cash, for that way leads to a race to the bottom with continuing dangers for some financial institutions.

It is important amidst all the puritan commentary telling us it serves people right, that they have borrowed too much and the financial sector has been greedy and irresponsible, to remember that people still need homes and home ownership is the best way of organising and financing that. The important task is to get rid of the froth in the market without causing a slump, for that would just put more people into misery and prevent the rising generation buying a home as soon as they would like.

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12 Comments

  1. tim holden
    Posted April 2, 2008 at 10:20 am | Permalink

    The entire Blair period was characterised by easily available credit. That credit was not cheap, and banks profited significantly during that time. The collapse that we now experience is what happens when a pyramid scheme falls apart: anger, acrimony, and moralising.

    Banks should not be compensated for the losses they now incur. Nationalisation actually entrenches and endorses the pyramid process. The current loss of confidence, by definition, exposes the previous phenomenon for what it was: literally a confidence trick.

    Our hapless government has been the last and biggest sucker to fall for that scam, an easy victim of its own propensity to deceive.

    And the public, in debt, rather sadly wandering through the Labour park so heavily populated with park-keepers now realises it has trodden in something – and the public is examining the sole of its shoe.

  2. Tony Makara
    Posted April 2, 2008 at 11:37 am | Permalink

    "the Bank of England had to set lower rates in the run up to the 2005 election than if they had kept the old target, and did mean more credit was extended"

    Absolutely true, once again a case of the Labour government putting its own political interests ahead of the economic health of the nation. I resent the way the government has also consciously encouraged people to get into debt through cheap credit in order to fuel consumer spending and make it appear that we have a healthy economy. It has all been an obscene confidence trick played on the people of our country. At the last election Labour's much repeated mantra at every interview was "The economy is good", during the next election the Conservative party should return the serve with the slogan "The economy is bad"

  3. Posted April 2, 2008 at 11:59 am | Permalink

    Builders should be allowed to build more homes. This would depress prices but that is not intrinsicly a bad thing.

    Most of the cost of housing is because of the regulations preventing building, or making it more expensive. It is a monopolistic price not a cost based one. All the lending institutions have known this for years & profited thereby so I have little sympathy for them.

  4. Mike Stallard
    Posted April 2, 2008 at 1:56 pm | Permalink

    This self satisfied and complacent government has just two reactions to its own mismanagement.
    With education, pensions, the Lisbon Treaty and inflation, it just fiddles the figures and hopes nobody is going to notice.
    With the Northern Rock fiasco and mortgages and public transport and drinking in the street and (misconduct by Labour individuals-ed) or clearing out the House of Lords to make room for more useless politicians, it sneers.
    Mortgages are moving from not being noticed to being sneered at.
    And as ever (prisons? railways?) nothing will be attempted at all.

  5. Posted April 2, 2008 at 2:52 pm | Permalink

    Average loan-to-salary ratios have shot up from about 2.5 times salary in the last few decades, to 3.5 times salary in the noughties (roughly, from CML figures). As a result house prices have gone up way beyond increase in cost due to lack of physical property.

    The consequence of what John is saying seems to be that young people buying houses should borrow many many times their salary. They should take a huge risk, so if they lose their job or interest rates soar up, they can no longer afford their house and it has to be repossessed.

    And everyone has to do this – even if you are risk averse, you have no choice, as house prices have increased now *assuming* people are borrowing crazy, unaffordable, risky amounts.

    It's not puritanism saying people shouldn't be forced to borrow excessive amounts, it's just sensible financial management. You're basically asking everyone to gamble that the economy will never go wrong, which is crazy. And you're asking them to do it for no reason – as no more people can buy houses when mortgages are permissive, since that very permission increases prices making houses unaffordable.

    Regarding your last paragraph – the rising generation don't own houses. Therefore they want a house price crash. And it's Labour's boom-and-bust housing policies which, tragically for many, are going to give them it.

    Meanwhile, let's stop it happening again by preventing crazy mortagages. And by building lots of new houses.

  6. Posted April 2, 2008 at 3:48 pm | Permalink

    I honestly think a good many commentators remember fondly the days when mortgages weren’t widely available and people had to go “cap in hand” for a council house. This reminds me of Trotsky when he observed. ''The old principle, 'Who does not work shall not eat,' has been replaced by a new one: 'Who does not obey shall not eat.' ''

    Delete food for accommodation and you start to see the agenda.

  7. James
    Posted April 2, 2008 at 4:28 pm | Permalink

    What is wrong with using Northern Rock as the lender to 'key workers' or those on low incomes, with affordable rates of interest. Use it as a tool for helping those who cannot obtain 100% mortgages or afford the ever increasing intest rates charged by the big banks and building societies.I certainly would have no objection to helping the rising generation get on the housing ladder in this way.

  8. APL
    Posted April 2, 2008 at 5:19 pm | Permalink

    Francis Irvine: "Regarding your last paragraph – the rising generation don’t own houses. Therefore they want a house price crash."

    Who knows? The Tories might do something sensible like abolishing inheritance tax. It's a Labour tax anyway originally intended to destroy the aristocracy, it has done that, now it is being turned on the middle class.

    Francis Irvine: "Meanwhile, let’s stop it happening again by preventing crazy mortagages. And by building lots of new houses."

    I believe the indigenious population is due to peak around now, and the result is that the population of the UK would go into a natural relitatively gentle decline – if we didn't have unfettered immigration. In future there would be a housing glut, which naturally would bring the price of houses down.

    *OFF TOPIC*
    By the way, I was very heartened to hear the tory policy on the BBC, I am in the 11% who think the policy doesn't go further enough, why can't you abolish the BBC licence fee and have the BBC stand on its own two feet like SKY by voluntary subscription?Quite possible using digital TV and smart cards, the BBC keeps telling us how wonderful it, it ought to be quite sanguine about the idea of a subscription based audience.

    But at least it is a step in the right policy direction.

  9. Posted April 2, 2008 at 7:07 pm | Permalink

    You may interested to know that a market in interest rate insurance has opened up following a clarification of the tax and regulatory rules in the recent Budget. The first products are expected to be available from next month. They will insure the policyholder against rises in their mortgage repayments, effectively the same as a capped mortgage but without the need to remortgage. One sensible decision that the Treasury did actually get round to taking (after much lobbying).

  10. Matthew Reynolds
    Posted April 2, 2008 at 7:34 pm | Permalink

    As I never tire of saying moving back to RPI-x as the official inflation target and giving the MPC five years to slash that inflation measure to 2% ( or they all get replaced ) would wring inflation out of the system . The rising interest rates lately are a free market response to the banks wanting money to meet their obligations & so they need a bigger return on debt and/or to lend less as a result . The Americans are trying to streamline their financial regulation to prevent the sub-prime tradegy happening again – why can we not do the same to prevent another Northern Rock style fiasco ? The FSA should be abolished & its powers given to the Bank of England . Our Central Bank should in the longer term have more independence & a fixed 2% RPI-x inflation target ( a two year one ) . Inflation threatens economic stability & if we want a sound economy it must be beaten off . Equally run-away public spending & a rising PSBR are unsustainable . If the Irish can grow public spending by less than their average GDP growth while having healthy public finances why can’t Britain ? A smaller state , a falling PSBR & low inflation are the keys to lower unemployment & the lasting tax cuts and growth . With £123 billion a year wasted on QUANGO’s there must be the scope to cut the public sector & reduce public borrowing ?

  11. Matthew Reynolds
    Posted April 2, 2008 at 6:34 pm | Permalink

    As I never tire of saying moving back to RPI-x as the official inflation target and giving the MPC five years to slash that inflation measure to 2% ( or they all get replaced ) would wring inflation out of the system . The rising interest rates lately are a free market response to the banks wanting money to meet their obligations & so they need a bigger return on debt and/or to lend less as a result . The Americans are trying to streamline their financial regulation to prevent the sub-prime tradegy happening again – why can we not do the same to prevent another Northern Rock style fiasco ? The FSA should be abolished & its powers given to the Bank of England . Our Central Bank should in the longer term have more independence & a fixed 2% RPI-x inflation target ( a two year one ) . Inflation threatens economic stability & if we want a sound economy it must be beaten off . Equally run-away public spending & a rising PSBR are unsustainable . If the Irish can grow public spending by less than their average GDP growth while having healthy public finances why can’t Britain ? A smaller state , a falling PSBR & low inflation are the keys to lower unemployment & the lasting tax cuts and growth . With £123 billion a year wasted on QUANGO’s there must be the scope to cut the public sector & reduce public borrowing ?

  12. Posted April 3, 2008 at 10:03 am | Permalink

    Well said APL, let the BBC stand or fall on voluntary subscription. I'm really not happy being forced to pay for the "genius" of Chris Moyles.

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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