April 29, 2008 | posted by Michael Baxter in Banking, House prices |

This is why we have business cycles.

The Nationwide, who for so long talked up house prices, has doubled the size of the deposit required from mortgage applicants to 10 per cent of a property’s value.

Meanwhile, Abbey is now only to offer interest-only mortgages for loans of less than 50 per cent of a property’s value.

In truth, you can’t blame either of the lenders.   Take the example of Nationwide’s decision to limit mortgages to 10 per cent of a property’s value.   Now suppose house prices fall by 11 percent from the date the property is purchased.  The mortgage owner will then be sitting on 1 per cent negative equity.

Think of it in those terms, and all of a sudden it feels as if Nationwide is being too generous.      

So maybe, despite all the criticism levelled at the banks in recent months, the Nationwide is trying to do its bit to try and stop a full blown crash.   

Even so, the fact is that the moves announced yesterday, along with all the other decisions we have seen in recent weeks to scrap 125 per cent mortgages, then 100 per cent, came about two years too late.

It was the easy supply of credit that drove house prices too high in the first place.  Now they are falling, all that will be achieved by tougher lending conditions is even faster falls.

As for Abbey’s decision regarding interest-only mortgages – the whole concept of interest-only mortgages was always highly dangerous.

Banks don’t lend money to individuals like you and me so that they can speculate – or so they say.  If you want a bank loan for a business, you have to demonstrate it is a banking proposition – and that usually means showing your sales projections are based on what you have done in the past.  Banks don’t like it if you say, “By spending more here, we should get more sales.”   That is called speculation.

Yet they have been more than willing to provide mortgages on massive loan-to-value ratios, presumably because they were assuming the asset would rise in value.  In other words they were speculating.

That is what drove house prices too high.    

And now the lenders are pulling back.

It has a feeling of symmetry about it, doesn’t it?