Tightening mortgage standards are ultimately useless at fighting a housing market bubble

2nd June 2014

UK Mortgage Approvals Data – 02/06/14

UK Mortgage Approvals fell for the third consecutive month in April, as the new macro-prudential measures tightened lending conditions for Britons.

The new stringent Mortgage Market Review conditions have seen wobbles in monthly house price gains, but annualised house price growth continues to march higher. Although declines in mortgage approvals will be taken as welcome news that authorities are reining in the UK’s runaway housing bubble, the reality is that a large part of the boom seen in the UK housing market – particularly in London – is based on cash buyers. This means tighter lending conditions are futile for tackling the root cause of the problem, constraining everyday UK borrowers, instead of foreign buyers stashing funds in London’s housing market. Tightening mortgage standards are ultimately useless at fighting a housing market bubble and will only temporarily slow down the sector, at the expense of ordinary borrowers.

A largely overlooked point in the Bank of England’s Money and Credit report was that M4 broad money supply growth slipped further into negative territory in April. This headline figure suggests that the UK is still in the grip of a credit crunch. Loans to corporates continue to outright fall, as corporate holding of broad money continue to rise. Companies are paying down debt and stashing cash on their balance sheet as the memory of the 2008 crisis means companies still fear the banking system. On the supply side of the equation, banks are shrinking loan books in an effort to meet new regulatory requirements. However, there is some good news as, despite overall rates remaining negative, contracting corporate lending growth appears to have bottomed out.