No one in their right mind wants to see the return of mortgage lending of the sort we witnessed in the years before the property bubble burst, with borrowers being offered instant negative equity by certain irresponsible banks.
And if the Government’s plan to inject £14bn of new money to kick-start the mortgage market were an attempt to reflate that bubble, it would certainly be a mistake. In 2007 prices were a third higher than the long-term trend. Houses were massively over-valued, a phenomenon exacerbated by the fashion for speculative buy-to-let investments. A correction was inevitable.
But what has been undesirable is the speed with which this correction has been taking place. That is why Alistair Darling’s announcement yesterday that Britain’s nationalised mortgage lender, Northern Rock, will begin mortgage lending again is not the folly it might initially seem.
It is important to bear in mind that this new lending will represent a relatively small proportion of the wider – and still contracting – mortgage market. It should not stoke demand so much as cushion the housing downturn.
There is a case for the intervention on social equity grounds too. It has become particularly difficult for young people to buy homes because banks now routinely demand 25 per cent deposits. Yet there is no good reason why first-time buyers in stable jobs should be shut out of the housing market simply because the banks are intent on shrinking their balance sheets.
Because Northern Rock is a nationalised lender, it has the leeway to offer deals which suit first-time buyers better than those on offer from the big banks. By providing mortgages worth 80 or 90 per cent of the value of the houses being bought, it might fill a gap in the market.
Of course a 90 per cent mortgage is hardly risk-free at a time when the bottom of the market may still be some way off. But for buyers in safer jobs, on a 25-year deal, the risk will seem manageable enough – unless, of course, they have had their confidence knocked to such an extent that they will not take up the financing that is now on offer. If that is the case, no Government intervention will slow this painful housing correction.