Weird, just weird

Sir James Crosby, a former chief executive of HBOS, told ministers that for the first time since records began, banks and building societies are likely to take in more in mortgage repayments next year than they give out in new loans. Such negative net lending could push house prices into a new “self-feeding” downward phase, he said.

This development is said to warrant even the possible nationalisation of all the banks. Certainly, it\’s being used as an argument that banks must open up their books to the Government.

However, I\’m not sure that there\’s actually anything odd here at all.

Imagine that the banks were funding exactly the same number of mortgages this year as they were last (they\’re not, we know, but just imagine). House prices are steeply down this year from last. Imagine that this drop was 10%.

OK, so last year the banks financed (imagine) 100,000 transactions at £100,000 each. That\’s £10 billion isn\’t it? (or is it 100 billion….not very mathematical this morning). Prices have fallen so now they\’re financing 100,000 transactions at £90,000….meaning that there\’s been a fall in mortgage lending but no fall in market activity.

No, I know this isn\’t what is actually happening….but it is part of what is happening. The volume of money lent on mortgages has, in part, fallen simply because house prices hjave fallen.


14 thoughts on “Weird, just weird”

  1. What Crosby is comparing is total value of mortgages issued in a given period to the total value of existing mortgage repayments made in the same period.

    For easy reckoning assume a maximum mortgage life of 25 years. In any given year you’ve got 25 year’s worth of mortgages in various stages of being repaid but only one year’s worth of mortgages being issued. If banks aim to be paying interest, making a profit on lending and paying dividends shouldn’t income being larger than outgoings be the case more often than not?

    Or is lending a loss leader and banks make profits on other business?

  2. It’s still pushing a piece of string.

    Banks aren’t lending because First Time Buyers don’t want to borrow!

    Ye Olde Traditional banking model has gone into reverse. Banks are now collecting money from borrowers and paying money back to investors.

    According to BoE statistics, banks are collecting about £136 billion per annum in interest and capital repayments from existing borrowers. It is quite possible to imagine a scenario where there are no first time buyers whatsoever. So there you go.

  3. If I were a banker I would feel very confused.

    First, they are told they lent too recklessly – to too many of the wrong kind of people, at too low a price. They were accused of being greedy, but in my book their biggest crime if there was one was being too generous (a result of a brutally competitive mortgage market with lots to choose from).

    Now the banks are cutting back, the government is complaining. It seems the government wants the old drunken party to continue going, at least until the next election. It has no real desire to change behaviour much at all.

  4. I think you’ve missed the point as Gareth says. It’s not that new lending is falling, everyone knows that, in fact it’s halved or worse I think. It’s repayments on existing mortgages are outpacing new mortgage advances, and so net mortgage issuance is declining.

    This is all of course rather besides the point, which is as Willem Buiter said this morning, there no longer is a financial system to talk about.

  5. Banks aren’t lending because First Time Buyers don’t want to borrow

    Only in part. First time buyers are still interested in many cases, but banks aren’t lending to them because a 20%+ deposit is demanded; the high loan to value products which are now withdrawn were the means by which first-timers got in…..

    Whether they should buy (or not) is of course a quite different matter.

  6. If would-be first time buyers are being frustrated by lack of a deposit, grannies all over the country are at risk.

  7. This is all perfectly fine and expected. When there is overinvestment in a sector eventually it goes into reverse.

    The net of loan payments and credit granted has gone into reverse in many markets over history. It might not have happened in UK mortgages before, but it isn’t unknown.

    Mark, you have your explanation wrong. Banks do create money. Read about fractional reserve banking on the internet.

    Or read “The Theory of Money and Credit” by Ludvig Von Mises. That’s available free as a PDF at

  8. I have given this more thought and came up with a convoluted means to explain why Crosby thought it important, which hinged on defining ‘mortgage repayments’ as just the repayment portion of mortgage payments, and accounting for the move to more interest only mortgages.

    Then I had a moment of clarity.

    Crosby uses a phrase we should all be wary of (particularly when it comes to climate science…): “Since records began”.

    If the information comes from something like this by the British Bankers’ Association then records began in…

    September 1997.

    They’ve got to go further back than that surely. Perhaps just not been put on computer yet. Surely. They wouldn’t be that short-rose tinted-sighted would they?

  9. AntiCitizenOne

    In the current financial system some sorts of credit are effectively money.

    The “money” in our bank checking account is credit. But, it behaves effectively like money, so for practical purposes it is the same thing. Some call this “credit money”.

  10. When I was a first time buyer in 1981 I had to find a 20% deposit and pay an interest rate of 18%.

    Is there ever really a good time to buy?

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