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The practical difficulties in reviving the home-ownership dream

You would be forgiven for feeling a strong sense of déjà vu when the Government dangled the carrot of greater access to home ownership in front of the electorate last week. It was, after all, one of the key planks of Thatcherism, one which continues to play to the aspirations of younger generations to benefit from the perceived financial security of owning their own home.

Of course, what differs now compared to the early 1980s, is the ability to deliver on this particular policy promise.

BACK TO THE FUTURE

Through the 1980’s, the overriding obstacle to getting onto the housing ladder was the ability to afford monthly mortgage repayments, in what was a much higher interest rate environment. As interest rates fell and the policy of the age – MIRAS - provided tax relief on monthly mortgage payments, so home ownership levels and house prices rose (something we looked at in our Short History of the Housing Market 1952 to 2022).

Though mortgaged home ownership levels have now fallen back to 30% of all households in England, between 1981 and 1991 they shot up from 32% to 43%.


While the political desire to revive the home-ownership dream continues to burn bright, the scale of the task is much greater and the nature of it more complex.
 

DEPOSIT HURDLES

The biggest challenge now facing aspiring first time buyers is the ability to raise a deposit in order to secure a mortgage on competitive terms. This reflects both much higher house price to household income ratios and much stricter lending criteria than in the 1980s.

Our analysis of UK Finance data suggests that the average deposit for a first time buyer stood at over £61,750 in 2021; a sum a little above the average income of households taking their first step on the housing ladder.

The effectiveness of current policies to assist buyers to overcome this barrier varies considerably.


OPERATING AT THE FRINGES

The stamp duty relief available to first time buyers and the benefit enjoyed by those who have taken advantage of the Help to Buy ISA only reduce the height of the hurdle a little. The average tax saving for a first time buyer in England and Northern Ireland is just over £2,600. While 94,000 house purchases were supported by a government “top-up” from an accredited savings plan, the average amount of that bonus was only just north of £1,900.

And mortgage guarantee schemes have done little to support an increase in higher loan to value lending.
  
When the Help to Buy Mortgage Guarantee Scheme (as distinct from the Equity Loan Scheme which we discuss later) was launched in 2013 the aspiration was to provide £12bn of guarantees that might unlock £130bn of lending. When it ended in mid-2017, £3.1bn of guarantees had supported just £15.1bn of lending. Its most recent reincarnation currently shows no signs of gaining greater traction, supporting under 10,000 loans in the second half of 2021 and providing an average guarantee of just over £30,000 – less than half the current average first time buyer deposit.
 
Lending at a loan to value ratio of 90% or more (requiring a deposit of 10% of the purchase price or less) stood at just 4.2% of all sums lent in the mortgage market at the end of the first quarter of 2022, having peaked at 5.9% in the fourth quarter of 2019.

 

DIFFERENCES IN SCALE: HELP TO BUY V RIGHT TO BUY

By comparison, whatever its shortcomings, the Help to Buy equity loan scheme has more consistently bridged the deposit gap, having providing assistance to an average of 40,000 first time buyers in England each year over the past five years.  That scheme comes to an end shortly, leaving the government with a sizeable gap to fill, if it is to continue to arrest the decline in home ownership let alone send it back into growth territory.

Meanwhile the decision to extend the Right to Buy to housing association tenants and the proposal to allow those on housing benefit to use it towards servicing a mortgage have been treated with widespread scepticism across the industry.  Neither look like they have the potential to move the dial in the way Help to Buy has done.


PINNING HOPES ON A REVIEW OF THE MORTGAGE MARKET

Government hopes are therefore pinned on a planned review of the mortgage market with a view to unlocking more high loan to value lending (in line with their 2019 manifesto commitment). The challenge they face is coming up with proposals that lenders have an appetite for and Bank of England regulators are comfortable with.

In reality, achieving the former is of no use if you cannot achieve the latter. The Bank of England has a responsibility to ensure that the financial system is not put at risk by lending practices which it does not take lightly. 

 

THE ROLE OF MORTGAGE REGULATION

Currently there are three key planks to mortgage regulation to ensure this.

One of those planks – the requirement to stress test affordability at a lender’s standard variable rate plus 300 basis points where a borrower doesn’t lock into a fixed rate mortgage for at least five years - is currently under review by the Bank of England.

Were that measure to be dropped, lenders would still be bound by the second plank of regulation requiring them to abide by Responsible Lending Rules. These still require an affordability assessment, though with less stringent stress testing. Under these requirements affordability is considered against market expectations for interest rates over the next five years or a 100 basis point increase in the cost of lending, if higher.

The third plank of regulation is more blunt but simpler to administer. It prevents advances at a loan to income ratio of more than 4.5 times income from accounting for more than 15% of a mortgage provider’s new lending.

A CATCH-22At current property prices, it is difficult to see how lenders could increase loan to values to meet government aspirations without hitting up against these regulatory limits.

Taking the loan to income caps first. The current average loan to income ratio for a first time buyer is in the order of 3.5 – on the face of it leaving plenty of headroom for the majority of borrowers.  

However, this is on the basis of an average loan to value of just over 75%. Increase that to 85% and it approaches 4.0.  Increase it to 95% and, on the basis of the current average first time buyer income and purchase price, it would go above 4.4. And this is the average. In many cases resulting Loan to Incomes will be higher – particularly in London and the South East.

And from an affordability perspective, a 1.00% basis point increase in interest rates at these higher loan to value and loan to income ratios will soon cause affordability to look stretched to the point of being uncomfortable, something you would imagine the Bank of England regulators would struggle to endorse.

One way of reducing the exposure to the risk this creates, or so the theory goes, is to encourage lenders to offer more longer term fixed rate mortgages backed by government guarantees. But this comes with no guarantee of success. particularly when mortgages that are fixed for over five years have accounted for a tiny fraction of mortgage lending at a time when the rates on offer have never been more attractive.

 

WHERE NEXT?

Where then does that leave us? Without substantial government intervention, increasing the number of higher LTV lower deposit mortgages is going to be a very, very difficult trick to pull off. And if the government does manage to do it, there is still a risk that it could spur a further bout of house price growth unless it is accompanied by a supply side response, through higher levels of housebuilding in the areas of the country where buyer demand is greatest.  


The levelling up agenda has seemingly shifted policy focus away from housing delivery in areas where affordability is most stretched, with the risk that the dream of home-ownership could become less not more achievable across swathes of the country in coming years.All of this points to a need to increase housing supply across the full spectrum of tenures, doing whatever is practical to open up homeownership. But this should not be at the expense of those for whom that dream will remain difficult to realise.