No sooner had I finished my post on why the 2008 global financial crisis could happen all over again than I noticed this in the Guardian this morning:
Some couples applying for a Santander mortgage will see the maximum they can borrow increase by £130,000 overnight after the bank loosened its lending rules.
Santander is the latest in a line of lenders to allow some borrowers to access bigger mortgages after intervention by the City regulator and new guidelines from the Bank of England designed to help more people on to the housing ladder.
However, brokers said Santander was unusual in that it would now be allowing some higher earners with smaller deposits to borrow an extra 24% at a stroke.
The bank gave the example of a couple with an £80,000 deposit or the same amount of equity in their property, where one earns £75,000 a year and the other £50,000. On Monday they could borrow a maximum of £556,500, assuming a standard mortgage and a 25-year term, but on Tuesday this will rise to £687,500. That is 24% more than before.
I make no apologies for quoting at length: this issue is important.
As a consequence of Rachel Reeves' absurd desire to relax regulation in the City of London so that it might be reckless once more, coupled with bankers willingness to make loans that they know they will never have the responsibility for recovering, because the senior staff in these institutions will all (they hope) have retired before such eventuality arises, we are seeing a recklessness of the style seen from around 2005 onwards re-emerging in the UK mortgage market.
Just look at the figures in the example provided by the Guardian. Couples with earnings of £125,000, between them, will be able to borrow 5.5 times their combined earnings on a mortgage, with the annual cost of servicing this probably being at least £45,000, which will, in all likelihood, be near enough half of their likely net incomes per annum.
There are numerous very obvious risks here.
Firstly, by any definition, this is over gearing, i.e. this is borrowing too much in proportion to earnings. The capacity to cover possible additional mortgage repayment costs, should interest rates rise again —a scenario entirely possible given the current leadership at the Bank of England — is almost non-existent.
Secondly, whilst this morning's employment data suggests that earnings are still arising slightly above inflation, when that margin is just one percent there is little comfort for those taking mortgages of these scales that they will get any assistance from inflation over coming years to reduce the overall net value of their liabilities in a way that was commonplace in the past. In other words, these obligations are really onerous.
Thirdly, we do know that the UK employment market is getting tighter, and finding work is getting more difficult. We also know that the employment market is facing significant disruption as a consequence of AI. The potential for this to have serious consequences in the mortgage market is something that is not being talked about as yet, but should be, I think. This risk is not being factored into these loan offers, but it is very real.
Fourthly, we know that bankers have the capacity to mimic each other when it comes to making loans, so this type of offer from Santander is likely to be replicated elsewhere. But what we also know is that this will, almost certainly, give rise to further property price increases. It is a simple matter of fact that increased mortgage borrowing capacity has almost always given rise to property price rises. Whilst in the short term, bankers might love these because they appear to provide greater security for the loans that they have provided, in the long term, they very often are the indicators of a crash to come, and I think that will be the case in the environment that Rachel Reeves is now deliberately creating.
So, to return to the question that I asked in my first post on this subject this morning, is it possible that the conditions for another 2008-style global financial crisis are being put in place? The answer is that all the signs are that this is exactly what Rachel Reeves is trying to do in the UK. It would appear that she has learned nothing from the experience of Gordon Brown in the first decade of the century.
Foolhardiness is the order of the day again. I'm not saying when this crash will happen. What I am saying is it will happen. Everything to make it possible is being put in place.
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Its 1988 and 2008 all over again in the residential property market. Sure signs of an impending self induced UK recession.
….and if that market for over gearing is going to be incentivised by the financial services bonus systems, then I entirely agree with you.
So, someone has been guiding Rachel Reeves toward disaster.
In a word, “yes” there will be a repeat of the GFC (but no-one knows when). I believe in ‘reversion to the mean’, and ‘thinking in real financial terms.’ A good example might be UK residential property prices.
We bought our current home in 2010 and, ignoring taxes and fees, the price paid was £390,000. Although we are not interested in moving, a local estate agent ventured a current ‘valuation’ (i.e. a guess) of £775,000. Whoopee – a tax-free gain of £312,500 were some fool be prepared to pay so much! Except, according to the BoE Inflation Calculator, £390,000 in 2010 is now £603,722. So the tax-free, inflation-adjusted, ‘gain’ would be more like £213,722 – still nice, admittedly. I have always believed that, were we to sell, we would get back about what we paid for the house, adjusted for inflation.
Let’s assume my presumption comes to pass on the price we might get for the house ends up being just over £600,000.
Then, today, we would probably need to spend about £500,000 on a replacement (smaller) home.
Stamp duty of 5% (£25,000) would be payable and surveys, removals and legal fees would gobble up another £10,000 and more. So, adjusted for inflation, we might end up with an overall gain of £65,000 or so after forking out for a replacement property.
That is not £312,500, nor £240,000 after buying a new home, left over for other consumption (like utilities, council tax, food, etc.).
What I’m trying, very badly, to say is that people need to try and think in ‘real’ terms when dealing with finances, not nominal terms, and remember that any kind of assumed financial gain is entirely ephemeral.
Thanks
Stamp Duty thresholds need to be reviewed – they’ve remained pretty much the same despite house price inflation – its causing many people to become trapped where they are. Many “boomers” are not selling up as buying a replacements home often results in thousands in SDLT and Fees.
For June 2025, OOH was measured at 6.4%, down from 8.0% in January. Still way above CPI!
I find it quite astonishing that this government has swallowed the market rhetoric so completely and abandoned any responsibility for moderating markets which is the least they should be doing. Facilitating rising prices in an already bloated housing market is the height of irresponsibility but this seems to be the price of power in this reckless age.
People were warned about how dodgy this Labour government would be but many casually argued they’ve got to be better than the Tories. What a joke that turned out to be they are sponsoring ethnic cleansing and yet another potential financial crash. I do hope there are a lot of Labour MP’s who read your postings Richard!
I’m aware of a residential property transaction story inadvertently demonstrating ‘mean reversion’ in action in, of all places, Exeter. The individual involved has had an offer accepted at 10% lower on an already reduced price.
Apparently, the property was listed at £425,000 on October 2024. Then it was last listed in June at £350,000. £315,000 was offered and ‘left on the table’ – the owner refused. Three weeks later, the offer was accepted. (Source: “Moving Home With Charlie” on Twitter/X).
See?
Firstly I agree.
There were some other features in 2007-8, such as the US credit rating agencies failing to rate the US subprime mortgage debt accurately once packaged in amongst other AA mortgage debt…or indeed even rate it at all. Then there was the secondary market trading of these packaged assets…I use the term assets loosely of course…so it was not just about gearing per se, but also about quality of the ‘asset’…with the outcome we all know about involving QE and what was the largest wealth transfer from poor to rich of probably all time. Whilst the above in my mind is relevant as to the scale of a correction in housing then vs now, and the associated market impact, I agree the conditions are indeed being set. I would be very surprised if the banking community has not found some wheeze comparable to the 2008s scenario. On the point of Ms Reeves, she is being advised by the Treasury civil servants and on that basis I consider both to be incompetent based on pretty mych everything she has done to date. My opinion is also based on working in the city in the 80s as a registered representative and trader of the LSE. So indeed, relaxing the credit rules with an increased global tariff rate and the headwind that brings is likely to end badly..and not just here as housing is inflated in most markets including the US.
Relevant to the question of an over-geared housing market, and it’s back-story over the last few decades, Steve Keen has just published this. Suggesting that the exceptional rise in house prices ia largely down to the banks pouring too much money into the market, etc. https://profstevekeen.substack.com/p/the-housing-market-is-a-rigged-game
I agree with him
Negative equity is a horrible prison…Mortgages are usually recourse loans. Idea – ‘Non-recourse loans are a type of secured loan where the lender can only claim the collateral specified in the loan agreement if the borrower defaults. The borrower is not personally liable for any remaining debt beyond the collateral’s value.’
[…] that Murphy had a second post, Could 2008 happen again? Part 2, describing frothy real estate lending in the […]