A house divided

28 January 2011 12:00 pm | By Rachael Adams

Prime Minister David Cameron and housing minister Grant Shapps are in a tug-of-war over mortgage policy.

Shapps is focusing is on long-term stability in the property market and a gradual reduction of house prices in relation to wages while Cameron has called for a return to “respectable lending” from banks to get the market moving again.

Cameron said: “If you are a single person and you are earning a decent salary, you go to the bank or building society, you are actually quite a good risk but they will not give you 80 per cent of the value, they will not give you four times your salary.

“You need a housing market where people are able to sell and move. The housing market has become very stuck and we have got to get it moving again.”

In an apparent contrast, Shapps says he wants to see house prices lowered to help first-time buyers. He has proposed a rational market with house prices rising at a slower rate of 2 per cent each year, allowing wages to catch up. Shapps also says he wants to see more central regulation of the banks to avoid a repeat of the out-of-control lending that led to the credit crunch.

Private Finance director of communications Melanie Bien says: “David Cameron is totally contradicting Shapps.”

The housing market difficulties are unlikely to ease any time soon as banks are having to be conservative with their capital to repay £130bn of emergency funds borrowed from the special liquidity scheme. The lack of available funding may also be compounded by the imminent withdrawal of the banks’ minimum lending targets in February.

Both Cameron and Shapps have come in for criticism on their standpoints, Cameron for his lack of clarity about how to achieve increased lending in particular.

Bien says: “We have heard it all before. The last Government talked about lending more but banks are commercial enterprises and are separate from the Government. They do not have to listen to it.”

London & Country head of communications David Hollingworth says: “The problem with what Cameron is saying is there is nothing you can do to force the banks to lend more. It is the language of politics that Cameron’s using. Obviously, it is welcome to have pressure put on the banks but I won’t hold my breath.”

Jonathan Cornell Consulting director Jonathan Cornell says: “You cannot just say to the banks that they need to lend. They don’t have much money, so they are restricted. People with high credit scores are going to be the best candidates.”

Coreco communications director Andrew Montlake says: “At the moment, the banks are very risk-averse. Cameron is right, we do need to increase lending for people who need it but it would be crazy to start lending to first-time buyers, who are the riskiest people.”

However, Montlake has a suggestion for Cameron. “As long as banks have enough capital to lend more freely, then he is right, they should. But it is not as simple as that. We have to take the correct pricing of risk into account.”

Shapps has been criticised by brokers who say he is being overly cautious and that his push for house price control could have a negative impact.

Bien says: “It will be difficult for the Government to implement this without introducing some kind of tax and that would be pretty unwelcome.”

Hollingworth sees similar difficulties in achieving the price stability that Shapps has called for. “Shapps says he will use certain ’levers’ to achieve that but what levers the Government uses are another matter.”

There is speculation that among the devices being considered by Shapps are increasing council tax and stamp duty. There is also the route of building more houses, although Shapps’ replacement of Labour’s regional housing targets with the new homes bonus incentive has been criticised as nowhere near enough.

Another potential option is using regulation to restrict the amount that banks can lend.

Cornell says: “Although there is no doubt that the banks are to blame - they lent too much, they created a bubble, the bubble burst and now here we are - going too hard on the mortgage market will make things worse.”

Montlake says despite their apparent contradictions, Shapps and Cameron’s approaches are not necessarily at odds with each other.

“Are their housing policies really inconsistent? It seems like they both want the same thing - a stable market, realistic house prices and a lending system that works.”

In general, it seems brokers have more sympathy for Cameron’s approach to boost mortgage lending.

Cornell says: “Shapps is looking at a long-term sustainable industry. We are looking at it from a short-term, grim survival point of view.”

But despite favouring the Prime Minister’s rhetoric, brokers do not hold out much hope of either policy having much effect.

Montlake says: “It is all very well for the Government to say these things but there will not be any huge changes this year.”

Cornell is even more blunt about their ability to make any difference: “Cameron is doing his usual politicking whereas Shapps just talks for the sake of it.”

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