Over the last few months we have seen the US government and the UK government coming under intense pressure to ease banking restrictions. These restrictions were dramatically increased in light of the 2007/8 economic downturn which brought down the worldwide economy. While there is no doubt they have assisted in stabilising worldwide money markets, is now the right time to ease these restrictions?
Greater deposits required
One restriction which has had a significant impact is the need to put down a greater deposit when acquiring a home. Gone are the days of 100% mortgages which were so popular in the UK amongst companies such as the failed Northern Rock. There is now a need in many case to put down a minimum deposit of 20% which makes sense because it gives banks headroom between a property value and the financial liability attached to it. However, there are serious concerns that this level of deposit is far too restrictive and having a major impact upon the first-time buyer market.
First-time buyers
First-time buyers are the lifeblood of any housing market because not only do they add liquidity but they also allow existing homeowners to up size their properties. It would be incorrect to suggest this has stopped every homeowner from upsizing their property but it has certainly removed many of the options traditionally available. When you also take into account the fact wages are rising at a rate which is nowhere near that of house prices, and in many cases inflation, we can only see this problem getting worse in the short term.
Buyers drying up
In the foreseeable future it is highly likely, bearing in mind both economic and political issues in the US and the UK, that buyers in general will revert to the sidelines. This will mean more competition in the mortgage market for less business and a probable reduction in headline interest rates to attract customers. This will ultimately slash profit margins and could place the future of many mortgage businesses in serious jeopardy.
In the UK for example there is a significant difference between the buy to let mortgage rate for individuals and companies. The company buy to let mortgage sector has not really attracted the attention of traditional banking companies, at least until now. As profit margins are reduced in the individual buy to let mortgage market they will no doubt divert some of their focus to the company buy to let mortgage market where rates are significantly higher – yet availability is lower. This will quite likely lead to a “race to the bottom” placing yet more pressure on small financial companies leaving the traditional banks to mop up the lion’s share of business.
Easing restrictions
The easing of restrictions in the mortgage market, and the financial sector in general, will make more finance available and reduce competition to a certain extent. The issue of capital reserves for financial institutions is also holding back many companies from increasing the amount of finance they can make available to customers.
Donald Trump has already expressed concerns about restrictions brought in after the 2007/8 economic downturn suggesting they are now “out of date”. Will he get his way? Will the UK government succumbed to pressure from the banking industry and ease UK banking regulations? Would this be a mistake and leave the money markets in danger of another financial crisis?