Some economists warn that the current weakness in the housing market is a worrying symptom that confidence in the economy continues to falter. Well, I agree up to a point. It is true that people are nervous about taking on new or bigger mortgages at a time when the economy remains relatively weak and their jobs may not be secure. I cannot seem to persuade myself that this is necessarily a bad thing. It would be better, of course, if the economic situation looked dazzling, but since it doesn’t, surely it is a good sign that consumers are no longer rushing to borrow money that they be unable to repay. After all this was one of the root causes of the current economic malaise.
I wrote last month that prices are likely to stay at their current lower levels for the remainder of this calendar year which is surely preferable to a sharp rally and I have seen nothing that would change that opinion. Since the credit crunch, banks have tightened their lending criteria, making mortgages more difficult to obtain. The Government has imposed tighter rules in these areas to prevent a return to previous patterns of behaviour once recent lessons are forgotten. If in these circumstances, house prices were to rise significantly, it would become even more difficult for first time buyers to enter the market making any new bubble inevitably burst.
In fact, mortgage affordability is, according to recent research, at a 12 year low as a result of lower prices. Typical mortgage payments as a percentage of earnings for new borrowers stood at 28 per cent in the second quarter of 2011, the lowest level since 1999. This is down almost a half from the peak of 48 percent in the third quarter of 2007. I know you will have noticed I have ommitted discussion surrounding the requirement for increased levels of deposit, but surely this is a step in the right direction.