Tough rules on banks sending house prices through roof: Goldman Sachs weighs in to row over ‘ring-fencing’ as cheapest ever loans launched
Battleground: Major banks are locked in a mortgage price war as they scramble to lend
Goldman Sachs has warned that strict banking rules have triggered a mortgage price war which experts say is driving the cheapest home loans on record and sending house prices through the roof.
The US investment bank believes the performance of high street banks is coming under mounting pressure as they scramble to lend to home buyers at ever lower rates.
Tough ‘ring-fencing’ rules imposed on banks after the financial crisis were aimed at ensuring that billions in customer savings could not be funnelled into ‘casino’ investment banking operations.
But this has made banks pile into the mortgage market – considered low-risk lending – which has forced down the interest rates that they charge to generate profits.
The warning comes after banks and building societies launched some of the cheapest mortgage deals on record. Halifax will tomorrow launch one of the cheapest two-year deals ever at 0.83 per cent for borrowers with a 40 per cent deposit.
Last month, Nationwide offered a five-year deal with a rate of 0.99 per cent. Ray Boulger, a mortgage expert at broker John Charcol, said this was the ‘first time the UK has seen a deal on five-year, fixed-rate mortgages below 1 per cent’.
Rival lenders including Lloyds Banking Group, Barclays, NatWest and TSB have followed suit. One bank chairman told The Mail on Sunday: ‘Ringfencing is fuelling house prices because mortgages are so cheap.
‘It’s another regulatory intervention that is driving cheap money, and this is making it even tougher for first time buyers to get on the ladder.’
The mortgage price war has already forced Sainsbury’s Bank and Tesco Bank out of the market. Senior analysts at Goldman Sachs have reduced their share price forecasts for Lloyds, NatWest, Barclays and Virgin Money ‘to reflect headwinds in UK mortgage pricing’.
Banks have seen £370billion of customer deposits flood in since the start of 2020, while lending has grown by just £100billion, which Goldman said has left a huge pool of savings dormant in the banks. Mortgages account for most of the £100billion figure.
Goldman said: ‘This has resulted in a substantial increase in excess deposits trapped in the ring-fences of major banks.’ The analysts said: ‘This in our view is the key reason for mortgage pricing having fallen. The decline in pricing occurred faster than we expected.’
Andy Golding, chief executive of OneSavings Bank, a specialist mortgage lender, said: ‘I think in the high street banking market it’s definitely having a downward impact on mortgage pricing. The big high street banks have got to do something with all the ringfenced cash they’re sitting on – and so they’re pumping it into residential mortgages at exceptionally low rates.
‘If that becomes the norm, the high street market will become absolutely dominated by the high street banks, meaning the smaller building societies won’t be able to compete at all.’
The fresh warning will fuel the debate over whether the ring-fencing rules are fit for purpose.
The Treasury has kicked off a review led by Keith Skeoch, the former boss of Standard Life Aberdeen, who will report the findings to Chancellor Rishi Sunak early next year.
The Mail on Sunday revealed last month that former Barclays boss Bob Diamond was lobbying for the end to ring-fencing rules.
It is understood that he hopes to unlock deals in the banking sector for his investment firm Atlas Merchant Capital. But some banking experts believe the ring-fencing rules are not solely to blame.
A source close to HSBC said the bank retreated from the mortgage market after it was burned by subprime mortgages during the financial crisis.
He said: ‘The big strategic shift was when HSBC went back into the broker market in 2015, before ringfencing even came into force.’
Mortgage brokers account for the lion’s share of the market, with only a small percentage of loans being dished out directly by the banks.
HSBC’s share of the mortgage market has nearly doubled to 10 per cent since 2015.
The biggest high street banks have said over the past few weeks that demand for cheap mortgages has been so high that they are struggling to keep up – even as the stamp duty holiday started to taper off at the end of June.
William Chalmers, chief financial officer of Lloyds Banking Group, the biggest mortgage lender, said the market is getting ‘more competitive’. He added the bank will keep an eye on mortgage lending to protect profits.