Two pieces of evidence have broken in the last few days to suggest house prices remain precarious. And we reveal these bits of evidence below. But we want you to consider this scenario, too. Suppose house prices just keep falling, but mortgage availability gets worse, too. What level would bottom be, and what would it mean?

Item number one: The FSA plans to make mortgage lending more responsible. The FSA’s plans are common sense. They want mortgage providers to assess mortgage applications on little things such as people’s ability to repay the mortgage, and not just meet the interest payments. They want mortgage lenders to take into account people’s income over the 25-year span of the mortgage. (Not sure how they can be expected to do that.) They are expected to look at borrowers’ ability to pay the mortgage in the event that interest rates go up by 2 per cent, and, finally, want mortgage providers to provide a buffer to borrowers with an impaired credit history.

That may all seem logical to you. But the Council of Mortgage Lenders has looked at the FSA’s ideas and concluded that no less than 51 per cent of all loans completed between Q2 2005 and Q1 2009 would not have been offered if the FSA’s proposals had been in force. In fact, it says that of the eight million mortgages granted during this period, around half would not have been granted, and yet says in practice, just 200,000 loans defaulted.

In other words, suggests the CML, the FSA’s proposals would cause havoc.

But let’s pause for a moment. What the FSA is saying is that over the last five years banks were too relaxed with their lending criteria. The CML is responding by saying “no they weren’t”, and suggests that we know this because default rates were so low. But surely the CML argument misses the point. Surging house prices meant lenders who got into difficulty could top up their mortgage. In times of rising house prices one would expect default rates to be low. And house prices went up precisely because mortgage criteria were so relaxed.

What we can say is this, if the FSA proposals are adopted, demand for houses will remain low for a very long time.

Item number two. Well, it’s not evidence as such, more hearsay, but the IMF has warned that house prices are still overvalued across much of the developed world including the UK. This is what it said: “What remains worrisome … is that house prices are still high based on traditional valuation yardsticks, and policy support may not be enough to prevent further correction.” The report also said that “If employment creation remains low, risks of a double dip in housing naturally increase.”

Okay, to be honest, it kind of amazes us that anyone takes much notice of the IMF. This is after all the organisation that back in 2006 said that the innovation known as mortgage securitisation had significantly reduced the chances of a banking crisis.

But just for the sake of argument, let’s assume house prices fall, and banks apply FSA lending criteria. Presumably if banks expect prices to fall, then they will expect even higher deposits and we will see a downwards spiral.

Now take an extreme scenario, and assume mortgage lending comes to an end altogether. All properties are paid for outright, using cash. Presumably, this would lead to a massive fall in prices, and in tandem rent would fall, too. This in turn would mean we all have more disposable income, because a smaller percentage of our salary would be eaten up by the cost of paying for our home.

Lower house prices would mean we are better off, not worse off.

Except that the UK is so geared that such a fall would have a devastating effect on consumer confidence. We would be better off in the long term, but the process of transformation would be agony.

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