UK lenders confront biggest mortgage test since 2008 crash

London

BRITISH mortgage providers, frustrated that sales volumes failed to match the highs before the last global financial crisis, spent the last two years cutting margins and taking on riskier buyers.

With the pandemic now hanging over house prices, they are about to find out whether their customers are as solid as they thought.

Values soared following the 2008 crunch, helped by government programmes to boost demand and lower borrowing costs. Then lenders relaxed standards in a scramble for business as Brexit deterred buyers, leading Sam Woods, chief executive officer of the Prudential Regulation Authority, to warn last May that regulators should be "watching them like a hawk".

Britain's economy has been upended by the coronavirus, with economists forecasting a recession in the first half of 2020.

The government and the banks have rushed to help homeowners affected by the crisis, offering mortgage holidays and income support, but home prices are still forecast to fall by as much as 10 per cent this year.

"We have got the overall stop in the economy, we've got the financial crash, and we have got people losing their jobs and their earnings," said Neal Hudson, an independent housing analyst.

"In normal times, any one of those would be enough to cause a correction in house prices. This time it's impossible to know what will happen."

The economic paralysis could cost as many as 700,000 jobs, taking the unemployment rate to six per cent, the highest in six years, said Dan Hanson and Jamie Rush of Bloomberg Economics.

The blow will fall hardest on those least able to afford it. The greatest proportion of lending against minimal deposits took place in the north of England, where about half of adults have under £2,000 (S$3,566) in cash savings, and three-quarters have no investments.

The economically-deprived region is already vulnerable to shocks like Brexit, backed by a majority of voters in the region despite its reliance on export-oriented manufacturing.

The north was swayed by election promises from Prime Minister Boris Johnson's Conservative Party to boost spending on public services and infrastructure.

Home values in northern England historically have been more volatile than in London, tending to fall further and stay down longer.

Residential prices in the northeast, the only region in England where prices remain below their 2007 peak, fell 2.6 per cent in January after a 0.5 per cent monthly gain in December, government data showed.

A key underpinning of the market after the financial crisis was Help to Buy, a loan programme that has advanced about £14.3 billion to buyers with small down payments.

It was called "moronic" by Societe Generale analyst Albert Edwards when it was introduced because it encouraged over-borrowing, and the regulator warned in February that users of the programme were potentially more exposed than others to any deterioration in the economy.

Under the plan, also disparaged as Help for Homebuilders because it boosts demand rather than supply, the state provides an interest-free loan of as much as 40 per cent of a new home's cost for five years, in return for a stake in any increase in value during that period. The home must cost £600,000 or less, and sales below the purchase price are allowed.

That leaves the government open to losses if prices fall and borrowers decide to move on, either because they can no longer make mortgage payments or because they opt for a similar property at a lower price in a slumping market. More than half of those who used Help to Buy had deposits of 5 per cent or less.

The programme might make a small loss after inflation, the Department of Housing said last year. That was before the pandemic threatened to push the housing market into turmoil. Losses could spiral if prices fall or interest rates increase, the former head of the Housing and Finance Institute, Mark Boleat, told a parliamentary watchdog committee.

Still, the loan programme is tiny, set against the hundreds of billions of pounds of coronavirus stimulus being offered by the government. BLOOMBERG