It is not surprising that families struggling with rising petrol prices, the VAT rise and other changes such as the impending three-year freeze on child benefit resent the level of bonuses being paid at the top of the banking industry, some of it to banks owned and only kept in existence by the taxpayer. If you’re struggling to pay the £70 it costs to fill a family car then a bonus of £2million will seem from another planet.
But the discussion over bonuses should not be the beginning and end of our engagement with the banking industry. There is a need for a much broader debate about what banks are for and what job we want them to do.
Most members of the public would want a banking system that kept their savings securely and, hopefully, allowed them to grow. They would want money to be lent for mortgages on a reasonable basis so that people could own their own home. And they would want business and industry to be supported by the banks so that it too could grow, turning new ideas into products or services and employing more people in the process.
Let us take just one of these examples, the mortgage market. It is widely accepted that the conditions for lending money for mortgages had become too loose in the run-up to the financial crash, with a rash of self-certified mortgages, few checks on earnings or affordability and a market where almost a third of new mortgages were interest only.
Although lenders argue it was the drying up of wholesale credit markets and not a rise in mortgage defaults that contributed to the mortgage market shuddering to a halt it is undoubtedly the case that these lending conditions – or the lack of them – encouraged people to take on mortgages who sometimes did not understand the risk and could not afford them.
But what now? Mortgage feast has been followed by lending famine. For 2010 net mortgage lending is estimated to be about a tenth of the level before the recession. New borrowers are typically being asked to come up with downpayments of 25 per cent, or, in cash terms, often over £30,000. A brief look at the ‘best buys’ in the financial pages of the Sunday Times shows the need for deposits of 35 and 40 per cent to access these deals. And the average age of first-time buyers unassisted by help from the bank of mum and dad has risen to 37.
As Ed Howker and Shiv Malik point out in their book, The Jilted Generation, these barriers have profound economic and social consequences. A generation of people who can’t afford to buy their own home has a knock-on effect on decisions to marry or start a family. It impacts on career choices and, of course, it impacts on the house building industry which is a crucial employer and contributor to wider economic growth.
It is, of course, right that people wanting to buy their own home should know about the responsibility they are taking on. And most people would accept that asking for a downpayment is reasonable as a sign of both commitment and financial means. But if the barriers become too high and a generation is effectively excluded from home ownership until middle age then this will affect both our economy and the course of life for thousands of young people for years to come.
And all of this is before the FSA’s mortgage market review comes into force.
The FSA, still smarting over accusations they were asleep on the job in 2006 and 2007, talks of adding a new set of restrictions to this already-tight market including a defined proportion of net income for payments, a buffer against interest rate rises and calculating affordability on the basis of 25-year loans (even if the actual loan is for longer). They argue that low interest rates are giving us all a false sense of security and that hikes could expose a new crisis of affordability which the industry needs to take measures to guard against in future.
The Council of Mortgage Lenders estimates that taking together all the new conditions being considered would have meant that up to 45 per cent of the loans granted in 2010 – not at the height of the boom – would have been refused.
All of this feeds into the wider calculation about risk and regulation following the recession. In a situation where risk is present, no one in public life gets credit for an under reaction so we shouldn’t be surprised if regulators want to take a rigid approach. The FSA say their proposals are not finalised. It is essential that we get this right and that while of course the mistakes of a few years ago should not be repeated but we should also not shut out a generation from home ownership. If we do we risk a housebuilding sector in prolonged stagnation and no adequate response to the lack of housing supply in the UK.
The critical questions facing governments and regulators now is not to fight the last war but to put in place a framework for the conditions of the future.
If recovery is to be sustained then we have to make sure that a legitimate desire not to repeat too loose lending in the past doesn’t result in a mortgage famine with all its consequences for years to come.
Discussions about the future of housing policy come to naught unless we are prepared to address the elephant in the room- namely Britain’s outdated, anti-development planning laws. If the only newbuilds on offer are brownfield rabbit hutches then home ownership will continue to be little more than a pipedream for the non-owning population who will have to settle for substandard privately rented accommodation and the ‘landlord’s knock’. For now it is probably too much for most of us to question whether the ‘idyllic’ countryside is really worth preserving no matter the social cost but at some point we will have to address the sacred cow known as the green belt as well as asking ourselves if heritage preservation and the ‘quaint’ 19th century cityscape are of such over-riding importance that all other human, social and economic issues must take a back seat. Scrapping planning permission in it’s present form is also something we will have to consider at some point – a rather large and bitter pill to swallow I admit but we simply can’t go on being held in thrall to the 1947 TCPA.