David Prosser: Why a generation of first-time buyers are set to miss out

(BLOOMBERG)

Outlook So who is right about these instruments of financial disaster that we used to think of as boring old mortgages? Steve Morgan, the chairman of the house builder Redrow, thinks lenders' response to the financial crisis – to stop offering mortgages unless buyers have really chunky deposits – is way over the top. The Financial Services Authority, on the other hand, wants to introduce a bunch of fresh regulations to prevent lenders extending mortgages to those who might not stay on top of repayments. Yesterday, the regulator publicly rebuked the Council of Mortgage Lenders for daring to suggest it might be going too far.

Depending on who you believe then, the mortgage industry is either starving perfectly deserving would-be home buyers of credit, or continuing to sell unsuitably risky loans to people who ought to be protected from themselves. The CML reckons the FSA's proposed regulations, had they been in place since 2005, would have put a stop to more than half of all the mortgages granted during that time.

Can it really be that more than half of all the mortgages granted over the past five years were dangerously risky? The data on cases of repossessions does not appear to support that view: in fact, the number of people getting into mortgage difficulties has remained remarkably low. Lenders are set to repossess around 40,000 homes this year – that's less than half the peaks seen during the recession of the early Nineties.

On the other hand, interest rates have been at abnormally low levels in recent times: yesterday's Monetary Policy Committee meeting held the base rate at 0.5 per cent for the 19th month running. Also, while unemployment might be higher than we would all like, we have not seen anything like thelevels of joblessness that a recession of the severity which we have just endured might have been expected to produce. Higher unemployment would certainly have meant more repossessions.

It may be, in other words, that we have been lulled into a false sense of security. The FSA's research suggests millions of households are now so cash-strapped that even a small rise in interest rates could prompt a spike in cases of distress. And the prognosis for employment is hardly a happy one in the years ahead.

Even so, the FSA's approach looks heavy-handed. Its datasuggests that only 17 per cent of mortgages granted since 2005 would have fallen foul of its new rules, rather than the 50 per cent plus the CML claims. But the discrepancy seems to be explained by the fact the FSA's figures are based on just one of its proposed new rules, concerning the maximum amount of a borrower's disposable income that should go on a mortgage repayment each month. Using only that rule, the CML's figure is similar – it's once you add in the other requirements that the crackdown looks so draconian. As for Redrow, Mr Morgan surely has a point. The almost complete withdrawal of loans requiring a deposit of only 5 per cent of the purchase price, once a perfectly normal and uncontroversial product, has priced too many first-time buyers out of the market. Many of them would be perfectly capable of keeping up with their repayments on their mortgages if only they could raise the deposit to get a loan in the first place.