In the late 1980s, at the height of Japan’s economic bubble, it’s often claimed that the land under Tokyo’s Imperial Palace was worth more than all the real estate in California.
This was peak Japan: its property market was motoring, its stock market was the envy of the world and, for a while, many believed its economy would eclipse the US’.
With the benefit of hindsight, we now know that prediction was a tad overoptimistic. Instead of reaching the summit, the Japanese economy suffered three “lost decades” where it stagnated.
In that sense, the Japanese economy and the UK mortgage market have something in common.
Just as Japan’s economy flourished in the 1980s, the UK mortgage market grew rapidly in the run-up to the financial crisis, with lending peaking at £371bn in 2007.
However, like the Japanese economy, the UK’s mortgage market has languished for decades after hitting its peak.
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According to the trade body UK Finance, lending hit £235bn last year. While that was 4% up on the year before, the market remains at two-thirds of its pre-crisis high.
The primary reason for this, of course, is that the pre-financial crisis mortgage market was far less regulated than it is today.
While more relaxed regulation boosted volumes, it also led to the emergence of irresponsible lending practices.
In fact, regulatory data shows that 45% of all new loans were written on a self-certification basis between April 2005 and March 2010. Judged by today’s standards, that’s almost unfathomable – but it happened.
The Mortgage Market Review (MMR) stamped out these practices, effectively banning self-cert, making it much harder to get an interest-only loan – which were also popular with borrowers at the time – and introducing mandatory affordability tests.
It’s only right that the lending community is held to high standards. After all, this is the biggest purchase most people will ever make. However, there’s no doubt that they have had a dampening effect on activity.
So, too, have soaring house prices. In fact, the last time housing was deemed ‘affordable’ – property values of five times income – in England was 2001, according to the Office for National Statistics (ONS). Now, the average home in England costs 8.26 times income.
Given the headwinds, it begs the question: will the market ever return to its pre-crisis peak?
Mortgage market regulation changes will be ‘tweaks around the edges’
The Financial Conduct Authority (FCA) revealed that it plans to “begin simplifying responsible lending” after the government asked regulators to find ways to boost economic growth.
However, nobody is genuinely expecting a wide-ranging relaxation of the lending standards brought in post-crisis.
At best, we may see some tweaks around the edges, potentially loosening the strict limits on lending regarding how much high-LTV lending they can do, and similar measures. That will help, of course, but it won’t be a reopening of the floodgates.
The other big lever in the government’s toolbox is planning reform, which is high on its agenda. However, I don’t think this alone is the panacea many think it is.
Even if the government fixes planning, materials costs are high, there’s a shortage of skilled labour, and higher borrowing costs have curtailed demand.
Then we have the housebuilders. Do they have the capacity to significantly ramp up production? Would they even want to when it would erode their margins?
These are difficult questions to which the government needs to find answers – and fast. If not, it could be another decade before the mortgage market hits fresh highs.
