PM: Cautious banks hurt housing market

By ED MONK FOR THISISMONEY.CO.UK
Updated: 08:06 EST, 6 January 2011

David Cameron has claimed banks are being too cautious in restricting mortgage lending, as Bank of England figures showed borrowing falling sharply.

Too restrictive: The Prime Minister fears housing market may stall.

The PM said banks and building societies are to blame for becoming too stringent in their lending regulations, and that they were preventing the housing market from progressing.

Speaking to voters in Leicester, Mr Cameron said it was vital for the economy that Britain's housing market became more competitive.

His comments followed Housing Minister Grant Shapps recent statement that the Government did not want another housing boom.

Banks and building societies have introduced more restrictive mortgage rules since the global economic crash revealed millions had been sold mortgages beyond their means.

But the Prime Minister called on lenders to return to 'respectable' lending in order to stimulate growth.

'In a way the pendulum has now swung too far the other way,' he said. 'If you are a single person, you are earning a decent salary. You go to the bank or building society, you are actually quite a good risk - they won't give you 80% of the value, they won't give you four times your salary.'

He added: 'You need a housing market where people are able to sell and move. The housing market has become very stuck and we've got to get it moving again.'

But the task he faces was thrown into relief by Bank of England figures published today which showed that mortgage lending fell sharply in the final months of 2010, with buyers walking away in the face of the huge deposits demanded by banks.

Demand for mortgages from people buying a home fell sharply during the fourth quarter, according to the Bank of England's Credit Conditions Survey.

A balance of 41.5% of banks and building societies said borrowing for house purchase 'fell markedly' during the final three months of the year, with demand dropping at its fastest rate since the third quarter of 2008.

A combination of falling house prices and economic uncertainty caused by Government spending cuts caused people to delay decisions to move, and these factors are expected to continue to contribute to subdued lending.

But there was a feeling among lenders that the inability of would-be buyers to raise the huge deposits currently needed to secure a competitive rate was also constraining demand.

What's more, lenders thought they may tighten their affordability criteria further as interest rates rose, while some credit scoring criteria may also be tightened in response to new guidance from the Office of Fair Trading and the Financial Services Authority's mortgage market review.

The level of mortgages available remained broadly unchanged during the fourth quarter, and lenders are not predicting much improvement in the coming three months.

Instead, some reported that availability had been dampened by the outlook for the housing market, while slightly tighter wholesale funding conditions had reduced their own ability to borrow.

In late November, wider developments in the eurozone also spilled over into lenders' wholesale funding markets, with some banks saying long-term funding costs had risen, while the conditions for issuing bonds had become more difficult.

The only bright spot in the Bank's Credit Conditions Survey was that some groups thought a desire to increase market share would lead to some increase in mortgage availability.

But in a further blow to first-time buyers, banks said recent house price falls had led to a slight decrease in the availability of mortgages for people borrowing more than 75% of their home's value.