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FSA warning on income multiples

Britain's borrowers are in danger of financially overstretching themselves, according to Howard Davies, Chairman of the Financial Services Authority.

Speaking yesterday at a Council of Mortgage Lenders conference, he warned lenders against encouraging practices that could lead to overdebtedness - a problem that the government and the financial services watchdog is becoming increasingly nervous about, following the endowments and pensions scandals that have been doggin gthe industry in recent months.

He argued that London house prices have now reached a historically high premium over prices in the rest of the country. On the Halifax index, this ratio peaked at 1.75 at the beginning of 1988 shortly before prices in the market collapsed. The ratio was back up to this level again in the third quarter of this year.

He said, "I am not in the prediction business", but nonetheless predicted that "one cannot exclude the possibility of a fall in London house prices, which could put very high loan-to-value loans into the danger zone."

"One particularly worrying trend is the continuing rise in loans at high income multiples, by which I mean above 3 for a single person or2.5 for joint borrowers. The proportion of loans in this category has increased sharply, and has represented as much as a third of new lending in recent quarters," Howard Davies said.

For first-time buyers the income multiple now stands at 2.3, with almost 20% of new loans exceeding multiples of 3 for single borrowers and 2 and a half for joint borrowers.

Meanwhile, the Halifax somewhat dismissed the warning, with it's own statement, pointing out that at the peak of the 1980s housing boom mortgage repayments were often reponsible for around 40% of a person's gross monthly income. Their own statistics put the current level closer to 25%, with the average house price as a multiple of average earnings now at roughly 3.6.

The spokesperson argued that although prices have recently become more expensive in relation to earnings, this multiple is not extraordinary when compared to levels over the last 20 years and is in fact much lower than the 5.0 peak recorded in May 1989 just before prices spiralled downwards.