The mortgage industry are pressing the delete button on the housing bubble.
Today, two major lenders – the Abbey and the Nationwide – announced a further retreat from the high risk end of the mortgage business.
The Nationwide put a cap on the size of new loans. In future, borrowers will be limited to credit of just £500,000, which will not get you too far in many parts of London and the southeast. The Nationwide have also introduced tough new rules that effectively limit new loans with an LTV of 90 percent.
The Abbey is not far behind. In future, borrowers looking for interest-only loans will need to have equity worth at least 50 percent of the home value. The Abbey also tightened up the terms on their 95 percent LTV loans.
Everywhere, lenders are pulling back and the days of easy credit have all but disappeared. With credit gone, the bubble has burst. The euphoria of house price inflation is about to be replaced by the tyranny of negative equity.
I saw this coming, really, I did. In fact, I thought that a housing crash was so obvious that I could not understand why lenders could not see it too. Now, it seems they have seen the danger, and panic has taken hold. Loan conditions are tightening, rates are rising, and no one wants to hear about those it-can’t-lose buy to let investment opportunities.
Why did the banks react so late? Why didn’t the banks stop lending when house prices began to rise at double-digit rates, while incomes remained flat? Why didn’t they adopt a more cautious attitude when household sector debt began to accelerate?
Actually, there is not much point asking these questions anymore. The damage is done. The banks and their easy credit loans have created a bloated mess.
More important questions are now emerging. Will a major high street bank follow Northern Rock into insolvency? How much will it cost to clean up bank balance sheets once the default rate starts to rise and the sector drifts towards a systemic banking crisis? How far will house prices fall, and how long will it take?