Relaxation of lending rules raises some real concerns

The Chancellor, desperate to encourage growth in any part of the economy, recently announced the “Leeds Reforms” which while largely focused on the financial markets also aimed to kick start the housing market. This included measures such as more relaxed loan-toincome (LTI) caps, simplified mortgage lending rules to make it easier for existing borrowers to remortgage, and a permanent government-backed Mortgage Guarantee Scheme to secure the availability of high loan-to-value mortgage products in times of economic uncertainty.

The laudable intention is to help many buyers who struggle to buy their first home as well as existing buyers who feel priced out of the housing market and need a hand.

There is little doubt that a relaxation of the mortgage market will be seen as a boost at a time when housing growth is slowing. However, this needs to be implemented with caution as there is the potential to create a rapid house price boom which will invariably be followed by a bust.

The risk is that this is potentially repeating the fairly lax lending criteria that occurred in the run-up to the 2008 housing crash where excessive income multiples were approved, financial checks were less robust, and individuals were encouraged to borrow too much which resulted in a price crash which, for many parts of the country, took years to recover from.

Without increasing housing supply the danger will be that more people will be able to access greater funding simply to pay inflated prices for a limited number of properties resulting in prices rising rapidly, and a cycle of higher borrowing, greater payments, but no real resolution of the underlying causes of affordability issues. It could actually make affordability worse rather than better.

The permanent mortgage guarantee scheme does have the potential to be positive. By supporting high loanto-value lending during economic downturns, this may provide greater stability at a time when growth is absent. But success will depend on how this is implemented and whether it is appropriately monitored.

The recent Property Market Report 2024-25 from Registers of Scotland (ROS) reveals just how damaging the 2007-08 crash was and how long the Scottish housing sector took to recover. The report states: “The total market value of residential sales was £22.7 billion in 2024-25, and despite sustained increases in prices over the past 20 years, the market value has not eclipsed the peak of £23.2bn in 2007-08.”

In fact, average house prices in Scotland peaked in May 2008 at £140,152, fell £23,719 in just nine months, and didn’t return to over £140,000 until July 2017. It took over nine years for the Scottish housing market to recover from the boom so we must approach any relaxation of lending with caution. It can be very easy to turn the lending taps on but much harder to turn them off. Interfering in markets is always fraught with unintended consequences and the risk is that by encouraging higher lending you end up creating an inflated market which benefits no-one, increases debt, and ultimately results in more individuals experiencing negative equity.