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Crash course

When the sub-prime crisis first broke in the US, there was an outbreak of collective smugness from the mortgage industry in this country.

Lenders were falling over each other to try to convince the public that such a thing could never happen here.

The Americans had allowed themselves to get caught up in a full-blown housing bubble, we were told. US mortgage lenders had been suckered into the rising house prices along with everyone else and had failed to anticipate the fallout that inevitably happens when consumer confidence drops out of the market. While this is an unpleasant problem for them to deal with, it was, we were reassured, very much their problem. Having been stung by a similar set of circumstances in the early 90s, UK mortgage lenders are much too smart to get caught up in that pattern again.

Even as the losses got worse and Ninja loans came to popular attention, the British mortgage market continued to look at the US housing market crash as if as passengers in a car driving past a nasty road accident. If you will drive on bald tyres in the rain, it is no one else’s fault when it all goes wrong.

Yet, a closer look at some of the lending practices that have, until recently, been seen as acceptable in the UK and we have not been too far away from some of the worst practices that has got the US housing market in to such trouble. The disappearance of 125 per cent loans and the incredible shrinking 100 per cent LTV mortgage market bare out the fact that many lenders are increasingly nervous of such loans in a flat or falling housing market.

Mortgage brokers have also seen a reduction in the availability of mortgages offering loans calculated on high multiples of income as lenders shy away from higher-risk borrowers.

So far, arrears and repossessions are still at low rates. According to the latest CML figures, 0.62 per cent of all mortgages are between three and six months in arrears and and those in the most serious trouble, with loans between six and 12 months in arrears, currently only account for 0.35 per cent, way below the 2 per cent that was experienced in the early 90s.

But this does not mean that the UK market is exempt from the risk of a severe property downturn.

The Halifax house price index for February reports that the average cost of a house is £196,649 while the average salary is £23,764, according to the Office for National Statistics. Although these very general averages hide a much more complicated story, house prices at an average eight times earnings look slightly bubble shaped, especially compared with the long-term average or 3.5 or four.

But if one upshot is that lenders pull back from more aggressive mortgages that have been available it might be doing the industry, not to mention housebuyers, a favour in the long term.

Gregor Watt is features editor of Money Marketing

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