Call to curb home loans

The Liberal Democrats last night called for direct action from the government to rein in lending by mortgage providers, after a surge in house purchases in June saw demand for home loans rising to a record £6.5bn.

Vincent Cable, Treasury spokesman for the Lib Dems, said that the four increases in interest rates from the Bank of England since November had had made little impact, and it was time for Gordon Brown to impose curbs that would regulate borrowing.

Although some recent indicators suggested that the housing market is cooling in response to dearer borrowing costs, Mr Cable said home-buyers were ignoring warnings from the governor of the Bank of England, Mervyn King, about the risks of a crash.

"This continued trend underlines the importance of the government and the Bank of England having other mechanisms for moderating the growth in mortgage lending."

The Lib Dems are proposing that the government should introduce reserve requirements, an echo of the system in place until the arrival in Downing Street of Margaret Thatcher in 1979.

Under reserve requirements, lenders have to lodge a chunk of their assets with the Bank of England and by changing the size of the requirement the government can limit the ability of banks and building societies to offer new loans.

"An active policy of using bank reserve requirements would stop some of the excesses which threaten serious financial difficulty for many borrowers when the market goes into a downturn," Mr Cable said.

The strength of yesterday's mortgage lending figures took some analysts by surprise following the weakness of the monthly report from the Royal Institution of Chartered Surveyors, which had shown estate agents at their gloomiest this year.

George Buckley, UK economist at Deutsche Bank, said the surge in lending was at "the higher end of expectations", but there were signs that the level of house prices was taking its toll on the ability of first-time buyers to get on the housing ladder.

The percentage of home loans granted to first-time buyers fell from 31% to 27% in June, while those who did enter the market borrowed on average just over three times their earnings, which was a record high.