Despite recent surveys showing house prices falling 17.6% in the 12 months to the end of February, two brokers now claim to have identified reasons for optimism. But that looks premature.
UBS and Goldman Sachs base their -- albeit guarded -- optimism on tentative evidence of a pick-up in activity in the market. Housing inquiries have risen for four months in a row, according to the Royal Institution of Chartered Surveyors, suggesting pent-up demand.
Banks are also being forced to increase lending to the U.K. housing market as the price of participating in the government's asset protection scheme. UBS expects mortgage lending to increase by 50% and mortgage approvals to rise from around 30,000 a month now to around 55,000 by the year end.
But that's still a long way below the long-term average of 95,000 mortgage approvals a month. And tighter lending criteria are still preventing first-time buyers -- crucial to any recovery -- from entering the market. The average deposit needed by first-time buyers has risen to 24% from 11%, according to the Council of Mortgage Lenders.
First-time buyers will certainly remain scarce if the Financial Services Authority imposes loan to value or loan to income caps on mortgages, as suggested by FSA Chairman Adair Tuner last week. Similar caps apply in a number of countries, including Hong Kong, where they have helped shield the banks despite property slumps.
But introducing lending limits in the U.K. now could have disastrous consequences for households and banks. Even after the recent falls, house prices still remain very high relative to income so any restrictions could trigger a further round of deleveraging. Alternatively, it could lead consumers to supplement their mortgages with alternative riskier and more expensive debt such as unsecured loans or extensive use of credit cards.
True, any changes to U.K. mortgage regulation remain a long way off -- the FSA plans to publish a discussion paper on the topic in September. But so long as they remain on the agenda, banks will be wary of relaxing their lending criteria, leaving those green shoots as elusive as ever.
Source: http://online.wsj.com/article