Jeff Salway: Plenty reasons not be cheerful over house price trends

THE evidence has been building slowly but it now seems that all the signs in the housing market are pointing in only one direction - downwards.

Significantly, the Royal Institution of Chartered Surveyors reported on Monday that buyer demand reached its lowest point for two years in June, despite improved affordability and the raising of the first-time buyer stamp duty threshold to 250,000 in March. Firm evidence that buyers are staying away at a time when sellers are growing in confidence means the imbalance in supply and demand that drove prices up last year has now been redressed and set to have the reverse effect.

The result is stalled house prices, probably followed by a gradual decline over the remainder of 2010. That slump will be prolonged, according to a Price- waterhouseCoopers report also published on Monday, claiming there is a 70 per cent chance it will take until 2020 for the market to rise above its previous peak.

In Scotland specifically, the mood in Edinburgh remains relatively upbeat, but the general picture is murkier. Scottish property values have climbed 9.12 per cent over the past 16 months, but that was on the back of an 18 per cent fall in the prior 16-month period, according to property valuations website Zoopla.

And now the Financial Services Authority (FSA) has added to the gloom with proposals forcing lenders to check every borrower's income in a move that will bring an end to the practice of self-certification and fast-track mortgages. Self-cert mortgages are designed to allow self-employed workers without sufficient earnings detail to state their own income, but their widespread abuse means they are also known as "liar's loans". These loans are at the heart of mortgage fraud, allowing mortgage brokers to inflate income levels to secure mortgages that would otherwise been out of reach. The FSA's clampdown on this started, typically, after the horse had bolted and the number of brokers banned for mortgage fraud is likely to soon hit the 100 mark.

No-one disputes that, to some extent, lenders dug their own credit-crunch grave with preposterously lax lending practices and their protests against affordability guidelines could easily be dismissed as blatant self-interest. Indeed, it's astonishing that rules governing such fundamentals as affordability are only now close to being implemented - but lenders warning of unintended consequences for borrowers happen to be right.

The Council of Mortgage Lenders is a formidable mouthpiece for the industry but it also does a good line in reality.

Its response to the FSA proposals was a valid one, pointing out that the vast majority of arrears and repossession cases are down to a change in circumstances, such as unemployment, rather than problems with the affordability assessment.

The end of self-certification mortgages comes when more people are contracting, freelancing or working on another self-employed basis and will freeze many out of the market regardless of their affordability situation. The problem with self-cert mortgages was not the concept itself but the policing of the mortgages at the market peak by lenders and brokers no longer adhering to the most basic fundamentals of lending. With demand from buyers now falling and lenders likely to once again tighten their criteria in months to come, ending self-certification lending next year will slam the housing market door shut on even more potential new entrants.

Of more concern is that the FSA is also effectively outlawing fast-track loans, which are typically given to low-risk borrowers with large deposits or with at least 50 per cent equity in their property. The level of defaults on fast-track loans is lower than on conventional mortgages, but lenders will from next year be required to follow the same income verification rules in such cases, depriving them of vital flexibility where once they had too much. It makes complete sense for lenders to be more circumspect in lending to those where affordability is not clear, but to apply the rules across the whole market is excessive. The increased costs to lenders will exacerbate a looming funding crisis as they begin repaying government assistance before access to wholesale funding improves. Not only will the increased costs be passed on to borrowers, but lenders will once more retreat from the front line, abandoning first-time buyers and consigning the housing market to years of stagnation..