Housing activity fall probably temporary - Bank's Miles

Published 31st Mar 2011

Tighter lending conditions in the mortgage market since the financial crisis are only likely to cause a temporary drop in housing market activity, Bank of England policymaker David Miles said on Thursday.

Requirements for larger mortgage deposits from first-time buyers were likely to lead to low transaction levels for several years, but this should recover once purchasers got used to saving more for a deposit, Miles said.

In a speech to the Home Builders Federation, Miles largely steered clear of monetary policy issues, though he did say that the Bank would need to work out afresh the link between changes in its interest rate and borrowers' mortgage costs.

"In practice such calibration is tricky and that spread between the rate we on the Monetary Policy Committee set and the average cost of mortgage debt is likely to take time to change. So it is not a simple, one-off re-calibration," he said.

Monthly mortgage approvals in Britain have hovered just below 50,000 since the financial crisis, compared to levels of 80,000-90,000 during the previous decade.

House prices are still 20 percent below their peak in real terms, and would probably be even lower if the fall in mortgage approvals was thought to be permanent, Miles said.

A rise in deposits required from buyers would lead to a permanent rise in the average age of first-time buyers and a fall in the home-ownership rate -- neither of which Miles said should make people worse off.

An increase in average deposits to 10 percent from 5 percent would cause a four-year hiatus in housing market activity and a similar rise in the average age of first-time buyers, assuming they did not save at a faster rate, Miles estimated.

Miles said that the cheap mortgage finance on offer in the years running up to 2007 had been unsustainable, as it relied on banks using less risky long-standing borrowers to subsidise new, more risky ones.

"But eventually you run out of road -- in terms of cross subsidisation from the back book you run out of suckers," he said.

In future, he added that a good source of mortgage finance could be from pension funds and insurers seeking assets that provided a long-term sterling interest stream -- rather than the short-term overseas investors who had funded much of the residential mortgage-backed securities market before the crisis.

Source: ' Reuters '

View All Latest News