Jeff Salway: Ad hoc pronouncements that threaten housing recovery

THE Bank of England appears to have picked up the previous government's often haphazard habit of making policy on the hoof - with potentially disastrous consequences for the housing market.

New Labour frequently introduced far-reaching measures apparently without consultation, only making the necessary tweaks after the inevitable backlash. It could be effective, but it was a very public way of honing policy.

The Bank of England is unfortunately showing signs of taking a similar approach, however, judging by its deputy governor's comments on mortgage lending reform. Deputy governor Charlie Bean said at the weekend that he wants lenders to be take an even more conservative approach to lending than they do now, possibly with a cap on loan-to-value (LTV) levels.

Bean has succeeded in identifying the single-biggest problem facing the mortgage market - restricted lending - and hit on a policy that is absolutely guaranteed to make matters worse.

This is clearly born of a desire to prevent a return to the largesse of the years leading up to the credit crunch, when there was easy access to loans of up to 25 per cent more than the property value. There were also hundreds of mortgages available for those without deposits and thousands for borrowers with 10 per cent or less.

Such profligate lending practices are popularly cited as a key cause of the credit crunch. It's a line that Bean has clearly bought hook, line and sinker even though it's essentially inaccurate - while lenders were too lax, there's no suggestion that borrowers who took advantage are now stranded in arrears. Low interest rates are part of the reason, but the link between over-generous lending and the banking crisis remains a tenuous one.

Capping LTVs has been mentioned before as a response to the banking crisis but won very little support. Even the Financial Services Authority recognises that a cap on lending would do far more harm than good, which is why it moved instead towards a greater emphasis on affordability.

The banking crisis owed more to the shutdown in money markets, lenders over-investing in commercial property and financial institutions losing sight of the idea that they lend only what they generate in savings.

Nevertheless, first-time buyers are paying the price of the dramatic contraction in mortgage criteria over the past two years and the Bank - set to take over the regulation of the banking market over the coming months - now wants to tighten the screw even more. New data from Rightmove shows that first-time buyers account for just 20 per cent of the property market, around half the level that a fully functional market needs.

There has been an improvement in the mortgages available to first-time buyers in recent months, with 26 fixed-rate mortgages at 95 per cent LTV and 188 at 90 per cent currently on the market, significantly more than at the outset of the year.But these deals are far more expensive than those for borrowers with a 20 or 25 per cent deposit, and there's a widening gap compared to mortgages at 60 per cent LTV.

However, while lenders are promoting 90 per cent loan-to-value mortgages, some are rejecting up to nine-in-ten applications, effectively meaning that for a buyer to be confident of securing a loan they would need to stump up a deposit of 20 per cent or more.

Even putting down a 10 per cent deposit means first-time buyers have to stump up almost 16,000 for the average Scottish property (worth 159,217, according to the latest Lloyds TSB Scottish House Price Monitor). If the 10 per cent deposit wasn't too steep for anyone on average earnings, providing twice as much certainly is.

One hope in such circumstances would normally be that first-time buyer earnings will rise sufficiently to improve their affordability, but clearly this is not on the cards in the foreseeable future.

So if prices don't fall significantly and the regulators proceed with measures that will further restrict the availability of mortgages to the average first-time buyer, the only possible result is a moribund property market. One where transactions remain around the current low levels, lenders remain nervous and house builders struggle to justify the outlay needed to invest in new starts. Not the ingredients for a housing market or indeed a wider economic recovery.