This week Boris Johnson boasted that his government would “turn generation rent into generation buy” via a return to 95% mortgages for first-time buyers. In other words, easier credit to help more people buy houses.
To say we have been here before would be an understatement of epic proportions. Since the days of Margaret Thatcher, every UK government has sought to cut through the housing affordability problem with the easy and politically popular option of subsidising the demand for homeownership. Generally, this has taken the form of liberalising mortgage regulation or providing direct government subsidies for first-time buyers, most recently the various help-to-buy schemes. All have failed to bring down the price of homes.
More demand for homeownership leads to more more credit flowing into an inherently limited supply of homes. Most housing in the UK is provided at market rates by private landlords and private sector developers. These groups have no incentive to increase the supply of housing to match this increase in demand, since they generate their profits from increasing, not decreasing, prices.
The result, inevitably, is house price inflation. As result, homeownership for younger adults on middle incomes has halved in the UK in the last two decades. Similar outcomes have been seen in other advanced economies – more mortgage credit does not stimulate supply when the provision of housing is left to the market.
British politicians and policymakers seem unable to recognise these simple facts. Indeed, it took a massive financial crisis over a decade ago for politicians to allow the tightening of mortgage regulation in any significant way. Johnson may not be aware of the fact that there were quite a few 95% mortgages around leading up to the housing bubble that precipitated the UK’s 2007-9 banking crisis. The resulting economic catastrophe led to them being phased out. Along with other restrictions on borrowing, these policies helped dampen the growth of UK house prices and household debt (currently around 85% of GDP, down from a record 95% in 2009), although it has been increasing again in recent years.
One can only imagine the Bank of England’s reaction to Johnson’s announcement. The Bank has been carefully nurturing its post-crisis financial stability mandate and delicately implementing “macroprudential policy” powers to stifle excessive lending in the domestic and corporate real estate sector. Johnson clearly doesn’t see much value in such an approach when there are votes to be won.
The UK remains locked in a self-defeating “doom loop”: falling levels of homeownership lead governments to loosen mortgage regulation, resulting in increasing household debt and house prices, leading to a housing bubble and eventually a financial crisis, leading to stricter mortgage regulation, which is then blamed for falling homeownership and so on.
What then is the solution? Do the opposite of current policy. Reduce, rather than increase, the demand for homeownership, and in particular the demand for housing as a financial asset. Implement higher and fairer property or land value taxes that reduce unearned capital gains that generally