Goldman Sachs says ring-fencing regulations imposed after the 2008 Global Financial Crisis are driving up housing prices in England by promoting business practices that have resulted in super-low interest rates for homebuyers able to make big down-payments, the Daily Mail reported Saturday (Aug. 7).
Ring-fencing is the practice of separating business activities within a company so problems in one area can’t bleed into other areas. Those areas can be business lines, geographies or a combination of the two. In the U.K. application at issue, ring-fencing required after the 2008 global financial crisis has prevented big investment banks from deploying some of the capital they have been amassing into traditional investment banking deals. They are, however, allowed to use the deposits to write mortgages — and have been doing so at a pace brisk enough to drive down rates and even push some traditional lenders out of the mortgage market.
The bankers argue that potential new buyers are being forced out of the market by giving existing homeowners who have amassed equity the power to bid up prices.
For the most part, the loans at issue offer fixed rates for between two and five years and variable rates thereafter.
One lender cited by the Daily Mail, Halifax, is poised to begin offering loans with a 0.83 percent fixed rate for the first two years for borrowers who put 40 percent down. Another lender, according to the paper, will offer mortgages with rates fixed for the five years at 0.99 percent.
The Daily Mail quoted U.K. mortgage expert Ray Boulger saying the five-year rate below 1 percent is the first he’s ever seen.
“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,” an unnamed banker told the Daily Mail.
According to the newspaper, the downward pressure on rates has driven lenders Sainsbury’s Bank and Tesco Bank out of the mortgage market. Anticipating the effect on bank profitability, senior analysts at Goldman Sachs lowered share price forecasts for Barclays, Lloyds, NatWest and Virgin Money, the paper reported.
Ring-fencing has become especially significant of late because customers have deposited hundreds of billions of dollars into U.K. accounts since the beginning of 2020, according to Goldman Sachs data cited by the Daily Mail; at the same time, lending has only grown by 25 percent of that figure.
“This has resulted in a substantial increase in excess deposits trapped in the ring-fences of major banks,” a Goldman report cited by the Daily Mail states. “This in our view is the key reason for mortgage pricing having fallen. The decline in pricing occurred faster than we expected.”
One lender, Hampshire, U.K.-based Fleet Mortgages, announced in July that it was being acquired in part to gain access to a pile of deposits the buyer, Starling Bank of London, had amassed over the past two years.