In the 1950’s and 60’s, the ‘rule of thumb’ criteria for Building Society lending were 2.5 to 2.75 times the head of household’s income. When the law changed in the mid 70’s to allow other financial institutions to enter the mortgage markets, they competed for business by making it easier and easier for people to borrow larger and larger amounts of money. By the time of the 1989/90 housing market ‘crash’ this ratio had risen to +/- 4 times the joint household income. Today this is even higher, with at least one lender considering offering 6 times this income if a parental guarantee is also given.
“Yet�, Dr Benfield points out, “inflation, bank lending rate, and variable interest mortgage rates today are remarkably similar to those of nearly 50 years ago.�
“It’s simple economics.� he told his audience, “As the law of supply and demand shows, if more money chases a limited supply of any goods, the price of those goods goes up.�
Before the law on mortgage lending changed, a buyer earning, say, £20,000 p.a. in today’s terms, could expect to borrow between £50,000 and £55,000. To do this the buyer would also have to find a deposit of between 10% and 20% of the purchase price of the house, meaning that they could pay between £55,000 and £68,500 for a house. .
When lenders initially began to add in 50% of the second income of, in today’s terms say, £15,000, then, using the same ratio, this immediately increased the amount the same borrowers on the same income could borrow to between £68,750 and £75,625. However, lenders also began to reduce the size of deposits required to between 5% and 10% and, in some cases, even no deposit at all. This allowed the same buyers to pay between £68,750 (no deposit) and £85,000 (10% deposit) for their home.
By 1989/90, at 4 times the same joint income, the amount these buyers could afford to pay for a house had increased to between £110,000 and £122,500 if they had a 10% deposit.
Today, if a lender allows a 5 times full joint income multiple, these ‘house affordability’ figures have risen to £175,000 and £195,000, respectively. Figures from the Halifax for 2002 show standard prices for the S. East being £167,900, Greater London £198,834, and the S. West as £133,367. “Given differences in incomes around the country these indicate a high correlation between the increase in the money available to borrowers, and the rise in both land and house prices.� Dr. Benfield pointed out.
“Instead of blaming planners and house-builders and setting them at one another’s throats to produce more ‘affordable’ homes, Government should be taking action to curb such inflationary lending� he said. Presenting his paper, “Tax and be Damned� to members of the Royal Town Planning Institute, Dr Benfield linked demands on builders to provide ‘affordable’ housing on new estates to increased prices, stating that these have effectively become a hidden tax on new home buyers. Since such demands force house builders to cross subsidise this form of social housing, this tax can be 20% or more of the cost of a new home.
Seeing Government plans to re-enforce the way land is taken from developers as a Tax on Development, or “Roof Tax�, he warned this will prove as unpopular as the Daylight Robbery of the 1695 Window Tax. He went on to predict that, as with Labour’s ill-fated Development Land Tax of the 1960’s, this will lead to the supply of land for development drying up, with the inevitable consequence that both land and house prices will rise even further.
“The best Christmas present the Government could give to home hunters is to make it possible for local planning authorities to double the amount of land available for housing AND get control of mortgage lenders – both IMMEDIATELY� he said.
