Will new mortgage rules bring down house prices?

Will new mortgage rules bring down house prices?


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Economists are predicting new rules from the Financial Services Authority (FSA) aimed at tightening lending criteria and preventing borrowers from getting in over their heads will bring down house prices.

The financial watchdog has unveiled a raft of new measures - including proposals to ban self-certified mortgages, and imposing new affordability tests on would-be buyers - in an effort to create a more stable property market, as well as protect vulnerable consumers.

The plans put forward are still in the consultation phase, and some proposals would likely be altered to a degree before being implemented by the FSA, but housing market experts have said they would negatively affect demand if implemented, thus bringing down house prices.

Seema Shah, economist at macroeconomic research group Capital Economics, said there would be a clear impact on demand if the rules were bought in.

She said: 'Clearly it would make it harder to get a mortgage so it would dampen mortgage demand.'

Looking more specifically at the plans to ban self-certification mortgages, Shah added that the move to ban self-certification mortgages would be another obstacle to a sustained house price recovery. She said: 'The closure of the self-certification mortgage market would spell yet more bad news for house prices.'

Chief economist at Henderson New Star, Simon Ward, added that the proposals would help prevent another house price bubble such as the one seen recently which led to a crash in prices in 2008.

However he said that currently calls for tighter regulation were effectively meaningless as lenders are offering very few deals to those without sizeable deposits.

Alex Solomon, head of products at property website Rightmove, agreed with Ward that in the near term the proposals would not have a major impact on the mortgage market.

He said: 'The current state of the market means banks and building societies are conservative of their own volition, with the best rates only available with a 40% deposit.'

Solomon said taking a longer term view, he expected to see an impact if the reforms were made law, particularly with an election happening next year which would likely cause further uncertainty and put-off would-be buyers.

Other economists also expect house prices to be constrained over the next few years, with consumers more cautious with their spending as a result of the weak economic outlook meaning they are less likely to risk spending vast sums on properties.

With these factors weighing, the influential Ernst & Young ITEM club today said that total transactions would struggle to reach one million next year - well below the peak of 1.7 million seen before the credit crunch.

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