Why every little will not help much

The launches of Tesco mortgages and the Funding for Lending scheme have led to some hope at last for the dysfunctional housing market. Here’s why I don’t think they will make much difference.

In the short term at least, most of the benefits look like going (yet again) to existing owners rather than frustrated first-time buyers.

Even Tesco is not making a big deal out of Monday’s launch. Its move into the mortgage market may be long-awaited but scheduling it for a time when most people are more interested in beach volleyball and hockey is the softest of soft launches. It will mean slightly more competition in a market dominated by the big banks plus the Nationwide but none of Tesco’s rates are especially cheaper than those now available elsewhere.

None of the best deals so far are available at the sort of high loan-to-value ratios that most first-time buyers needed. Tesco will only deal with you if you have a deposit of at least 20 per cent and all of the headline-grabbing fixed-rate deals of below 3 per cent require a deposit of at least 40 per cent.

In the medium term, it’s argued that banks will have to increase their lending if they want to benefit from the Funding for Lending scheme and that sooner or later this must begin to open things up at higher loan to values. However, the Bank of England’s latest brainwave is just the latest in a series of attempts to get the banks to lend. Yes, the rules are meant to be different this time but that’s what they said the time before and the time before that.

The desperation within government is such that there was even talk this week of nationalisation of the Royal Bank of Scotland by buying the 18 per cent of the company that the taxpayer does not already own. Why not swallow an extra share of Sir Fred’s multi-billion pound gift to the nation and use it as a vehicle to kick-start lending? Any move like that by a Conservative-led government really would be desperate (nationalisation of the commanding depths of the economy) but would it really make much difference to the mortgage market? Figures published last week by the Council of Mortgage Lenders (CML) do show that RBS and Lloyds – the two banks part-owned by the taxpayer – did cut their mortgage lending by £3.6 billion between 2010 and 2011 and their combined market share from 34.2 per cent to 30.3 per cent.

The top 20 mortgage lenders did increase their gross lending by 6 per cent to £139.9 billion but if you compare that with the £356 billion they lent in 2007 you begin to see the scale of the problem. In 2007 HBOS and Lloyds TSB (now both Lloyds) lent £102.5 billion between them and had 28.2 per cent of the market – by 2011 they were lending £28 billion with 19.9 per cent of the market. In contrast, RBS has actually increased its market share from 6.2 per cent (with £22.6 billion) in 2007 to 10.4 per cent (with £14.6 billion) in 2011.

However, in the longer term none of these developments in the mortgage market will do much to resolve the structural problems that remain in the wider housing market.

First, house prices are too high. Depending on which index you look at they are rising slightly or falling slightly but real wages are also falling and house prices will have to flat-line for years before they become affordable again. The emergency action taken by the Treasury and Bank of England after the credit crunch may have rescued the economy and prevented an avalanche of repossessions but cutting interest rates to a record low has channelled billions of pounds into the pockets of people with mortgages and put a floor under house prices by reducing any pressure to sell. In the meantime, the supply of new homes is running at about half the 240,000 a year that are estimated to be needed to meet demand. And in London, where the pressure is greatest, that demand is being swollen by purchases by international investors.

Second, I believe that what we have just gone through is not just a temporary dislocation in the housing market but a phase shift – the third in the last century. The first big expansion in home ownership came in the 1920s and 1930s when demand from middle-class home buyers and met with supply by a new wave of housebuilders. The second came in the 1970s and 1980s when an expansion in the availability of mortgage finance and the introduction of the right to buy. Building societies were crucial to both of those expansions but while they still accounted for six of the top 20 lenders in 2011 all of the major players apart from the Nationwide became banks in the 1990s and early 2000s and lost their independence completely after the credit crunch. That betrayal of a tradition of financial institutions dedicated to savings and mortgages was arguably a key factor in the disastrous expansion of lending up to 2007 and the equally disastrous contraction since then.

Which brings me to the third big phase shift: the expansion of buy to let in the 2000s. No matter how much its apologists argue that this had no effect on first-time buyers, this was a fundamental change. Where traditional mortgages were about borrowing against your future earnings to buy a home, by allowing people to borrow against rental income buy to let effectively meant that they could borrow against their tenants’ future earnings. By 2007 there were almost a million buy-to-let mortgages outstanding. By the first quarter of 2012 there were more than 1.4 million – an increase of more than 40 per cent – so not much sign of a credit crunch in that particular market.

From the banks’ point of view, it makes sense to devolve the risk to the buy-to-let landlord rather than deal with first-time buyers on 95 per cent mortgages. From existing home owners’ point of view, why stop at just owning one home when you can buy another? The logic seems clear from this letter in the Mail yesterday. However, multiply that individual decision by 100,000 or a million times and you have the explanation for the phase shift that has created Generation Rent.

Not even mortgages with extra Clubcard points can do much about that.