The Chancellor Rachel Reeves has, as is well known, committed to growing the UK economy. To achieve this goal, and after consultation with industry and business leaders, one of her suggested plans is to scale back or scrap entirely the rules and protections brought in after the 2008 financial crash. The changes to the rules and regulations then introduced restricted how much of their balance sheets banks and building societies could lend as mortgages and constrained lending criteria. Additionally, stress testing was introduced to ensure that borrowers would be able to manage higher monthly mortgage repayments should interest rates rise. The idea was to help break the cycle of boom and bust in the British economy recognising that our love affair with property in part fuelled this destructive cycle.

It is now being mooted that these protections could also be scrapped or watered down to help boost the economy and promote growth in GDP. If these checks and balances are scrapped what might be the effect on the economy in general and the Scottish housing market in particular? What are the risks and what are the benefits of the Chancellor’s proposed strategy? Would such measures really boost the economy and if so how in what manner would they do so?

Potential Benefits

Let’s start on a positive note and look at the upside. Reducing restrictions on lending could boost the economy by increasing access to credit. By allowing banks and building societies to lend more, individuals and businesses may experience greater liquidity and have greater spending power. In the housing market, more relaxed lending rules could enable more people, especially first-time buyer, to purchase homes as opposed to paying rising rental costs.

In Scotland, where housing demand is high in urban areas right across the Central Belt, the loosening of mortgage restrictions could encourage more first-time buyers and investors into the market. This may alleviate some stagnation in the housing sector and provide a boost to regional economic activity.

As first-time buyers are the life blood of the market being the first domino that needs to topple to get all sectors of the market moving there is merit in the strategy of relaxing restrictions. By increasing demand and stimulating construction and associated industries the economy benefits. So called “big-ticket” purchases such as new kitchens, expensive white goods, new bathrooms, new windows, doors etc all increase when more homes are being bought and sold. Increased sales would hopefully start a ripple effect and lead to the hiring of new staff to meet the greater demand. More people in work reduces the benefits bill and increases the income tax take. Better sales would it is assumed mean greater profits and hence a greater corporation and VAT tax take for the Government allowing investment in the NHS and our other depleted public services.

Risks to the Economy

Sadly, however there are also not insubstantial risks to the strategy the Chancellor is considering. The scrapping of checks and balances like stress testing introduces systemic risks. Stress tests, which assess borrowers’ ability to withstand interest rate increases, were designed to prevent the type of mass defaults seen in 2008. If these protections are removed, borrowers may overextend themselves, taking on mortgages they cannot afford if interest rates rise further. This could lead to a surge in defaults, potentially destabilizing financial markets as well as the property market should a wave of repossessed homes then flood the market swamping what would likely be dwindling demand in a then faltering economy.

For the broader economy, excessive lending could lead to inflated asset prices, including house prices themselves. Such a scenario might create a housing bubble, where prices rise beyond sustainable levels and the purchasing power of buyers increasing the risk of a sharp correction. If a bubble bursts, it could result in widespread negative equity for homeowners as we have seen in recessions previously, reducing consumer spending and undermining economic confidence.

Implications for the Scottish Housing Market

In Scotland, these policy changes could also have distinct regional effects. In more urban areas like Dunfermline and West Fife where we have strong housing demand we could see a surge in property prices, exacerbating affordability issues for low- and middle-income buyers. Meanwhile, rural and less economically vibrant areas might not experience the same benefits, leading to uneven development across the country.

Moreover, removing stress testing might encourage speculative buying, where investors purchase properties expecting rapid price increases. This could further inflate prices, making homeownership increasingly unattainable for average Scots, particularly in high-demand areas.

Long-Term Risks

If Rachel Reeves does decide to relax lending rules to boost UK growth the longer-term risks of this strategy are again potentially far reaching. If it works, the UK could become a wealthier society at all levels with public services fit for purpose. If the gamble backfires then excessive borrowing and unsustainable house price growth could undermine financial stability. If there were to be a housing market downturn and banks and building societies were holding large amounts of mortgage debt, they could experience significant losses if repossessed homes sold for less than the outstanding mortgages. In a worst-case scenario – think Northern Rock – lenders could end up requiring government bailouts. This scenario would then place still further strain on public finances and diminish trust in the financial system.

Would the Measures Boost the Economy?

In the short term, easing mortgage rules would quite likely provide a stimulus by increasing home purchases, construction activity and consumer spending as explained. The broader benefits however may be limited and short lived if these changes were to lead to financial instability or exacerbate regional inequalities. For sustainable growth, the government must balance boosting lending with maintaining financial safeguards and that is a tight rope to walk. Given the mess of our public services and the public finances, let’s hope that the Chancellor has some of the skills of the former Chancellor and Prime Minister John Major whom some may recall had a family background in circus performing!

Conclusion

While the proposed relaxation of mortgage regulations does undoubtedly offer immediate economic benefits, the long-term risks to financial stability and housing market are real and need to be considered carefully. If, to return to the circus analogy, Rachel Reeves can juggle these risks and find a measured and balanced approach, maintaining key protections while supporting targeted economic growth initiatives, then the UK and Scotland’s economic future may very well be a brighter one.