FSA to Destroy the Housing Market

Apparently, potential homebuyers will be banned from borrowing more than three times their annual salary, under new rules to be announced this week. And they'll have to stump up at least a 5% deposit.

The Telegraph reports that the tough new rules are part of a move by the Financial Services Authority (FSA) to change its regulation of the financial industry.

I'm not sure if anyone's told the FSA, but I think the new rules might have come a little bit on the late side…

The latest move to regulate the housing market shows the limitations of regulation. The FSA is talking about asking for minimum deposits of 5% when someone buys a house. But these days, most banks are asking for at least 10% minimum, and 40% if you want the best deals. And that's assuming they don't then find an excuse to get out of lending at all.

Why regulators waited until the bust came along

So why introduce the rules now? After all, during the good times, it was clear that housing was in a bubble. It should have been clear to anyone that lending at six times salary, the widespread use of interest-only mortgages, and 100% or higher loans, were a recipe for disaster when combined with historically high house prices.

And the truth is, it was clear to most people. They might be speaking with the benefit of hindsight, but when you talk to City workers, they all knew that the good times couldn't last forever. But while the music was on, they just kept on dancing.

So why not introduce the rules then? Well, like everything else in markets, it all comes down to human behaviour. During the good times, everyone gets swept up in the bubble mentality. The political pressure to allow bubbles to keep expanding is irresistible. Can you imagine the carnage if the FSA had introduced these rules a couple of years ago?

Mortgage lending would have dried up overnight. The housing market would have collapsed. And the FSA (and by extension, the government) would have been hit with the blame. It doesn't matter that popping the housing bubble prematurely may have left us in better shape for today's big crisis. No one would have won any popularity contests by being the ones to stand up and call a halt to the party.

So that's why regulators tend to wait until the bust comes along. They then try to cram in as much regulation as possible while everyone is still shell-shocked and not thinking straight.


New regulations are useless now

But the trouble with this is that you then end up with completely useless regulations. As we pointed out banning 100% mortgages is pointless now, because you can't get them anymore. The market has already done everything the FSA might want to happen, and more.

So the regulations made today will make life more difficult for tomorrow's mortgage borrowers and lenders. But they won't stop the next bubble. Because that'll inflate in a different area, one that the regulators haven't paid as much attention to. And when that bubble looks like it's getting out of hand, the regulators will just ignore it, because everyone's having fun, and they don't want to be seen as the party poopers.

Then it'll pop, and they'll make up a load of rules to try to prevent it from ever happening again, as always happens.

Of course, the other thing to ponder is how this chimes with the government's mission to "get the banks lending again". I have no problem with the principle of sensible lending – I just think it should be up to the lender to decide what that consists of – but if you're going to restrict loans to three times salary, then we'd really better get used to sharply lower house prices.

Property bargain-hunters look set to be disappointed

Rightmove reports that asking prices in England and Wales rose for the second month in a row over the last four weeks. Sellers are apparently having difficulty adjusting to reality, says the group's commercial director Miles Shipside.

Prices are still down 9% on last year, but with the average price sitting at £218,000-odd, that's well out of the range of your average worker, given that the average salary in the UK is around £25,000 (and I realise a lot of people outside London will think that's overstating it somewhat).

Bulls have tried to point to the fact that Rightmove has seen a 120% rise in the number of enquiries to its site compared with this time last year. However, it's no surprise that people are more interested in looking at properties – with all this talk of a crash, they're probably hoping to find some bargains.

But with sellers "still pricing wishfully high" as Shipside puts it, it looks like they'll be disappointed. Prices still have a good way to come down – Numis Securities reckons as much as 55%, as we noted last week (Read: Will Britain go bankrupt?). And by the time houses are genuinely cheap, we'll no doubt be obsessing over some other asset bubble.