Even if they wanted to

The health of housebuilders is directly dependent on the willingness of banks to lend. Despite growing optimism, a continuing complaint is that lenders are not advancing mortgages, or perhaps are agreeing too few. Is it that they don’t want to lend or that they can’t lend?

Not wanting to lend is understandable. A tightening economy and a falling housing market have increased risk significantly and lenders are reluctant to take on more risk. So, logically, they minimise risk by making fewer loans.

The issue of not being able to lend is far more interesting but less well understood. The problem is that when the housing market was running at full tilt there were four broad groups of lenders: UK clearing banks, building societies, overseas banks and specialist mortgage lenders.

Today only the banks are lending to any great extent, so keeping up the number of loans falls on one set of shoulders rather than four. Are the banks in a position to take up the slack and provide the 1 million or so loans the market needs each year? Almost certainly not.

The mortgage market in 2007 appeared to have ample capacity to offer a loan to anyone who wanted one. Debt was cheap, house prices were rising and the perception was that there was little risk. There was also a mass of money in the system. In actual fact, there wasn’t enough money available, at least not money from the lenders’ own resources.

A lot of the money being lent was only available thanks to something called “mortgage securitisation”. At the peak of the market in 2007, about half of all new mortgages were destined to be securitised, that is, bundled with thousands of others and sold off to external investors.

Assuming there were always buyers for the bundles, a lender could continue to lend, almost without limit. But with the banking crisis in 2008, demand for securitisations dried up. Any lender wanting to remain active could now do so only if it had resources of its own.

In 2007, banks made 800,000 mortgage approvals, but only 400,000 were made from their own resources. Banks today are already offering mortgages at an annualised rate of about 375,000 approvals – nearly as much as at the peak of the market.

So, how much more can banks realistically do? Perhaps they can lend another 20%, to reach a total of 450,000 mortgages. Add in the struggling building societies at 100,000 loans (a third of their peak) and 20,000 from specialist lenders (down 75%) and the total may be just 570,000 a year.

What does this mean for house prices? History suggests the balance point lies at about 900,000 approvals; below this, prices fall and above it prices rise. So, there may not be enough money in the system to keep house prices rising.