This is an addition to my previous post really about how we get ‘generation rent’ into homeownership, if indeed we should. There’s a paradox that the measures you take to ensure ‘responsible’ lending from banks are the measures which prevent more first-time buyers form getting a property. Opening easy credit again could be seen as one answer to the problem of younger people being unable to buy.
That would be the wrong lesson to draw from the financial crisis and its aftermath.
There are some people at the moment who can sustain a mortgage but to whom banks won’t lend. But that’s not really the issue. Looser lending may help in the short term, allowing some more people to buy a home. But in the long term, it’s cheap credit which fuelled the housing boom, drove up prices and locked most first-time buyers out. It’s not something we want to repeat.
As a colleague put it to me once: ‘house prices in Britain rise to the level of available credit in the economy’. More lending means higher prices.
That’s why the IPPR are right to say that there should be limits which ensure lenders act responsibly. I don’t know whether that’s a certain loan to value ratio as they suggest or something else. But, I do think the timing’s important. If limits like this are going to prevent another bubble, they need to be imposed before their effects bite, during a slack period. Once the housing market begins racing away, it’ll be difficult and unpopular to draw it back again with borrowing limits. Better that when it grows again, it does so under more sustainable rules.