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Did government covertly restrict mortgage availability?

by | Jun 19, 2019

The Historian

Did government covertly restrict mortgage availability?

by | Jun 19, 2019

Post war British economic policy and house-building

Macroeconomic policy frameworks followed by governments have definite impacts on all sectors of the economy including the housing sector. Post Second World War the British government was still recovering from the aftermath of the war and was dealing with recurrent political and economic failures. The government responded to these crises by following a ‘stop-go’ policy of demand management. The policy entailed raising taxes, cutting government expenditure, and reducing demand in order to slow down the growth of the economy – the ‘stop’phase.It was felt that as soon as economic activity had fallen to a particular level and the balance of payments had improved, the entire process could be reversed by cutting taxes and stimulating demand – the ‘go’ phase. 

What were the crucial elements in the implementation of this policy and what was the impact? A recent paper published in May 2019 in the Economic History Reviewby Peter. M. Scott and James. T. Walker finds that a crucial but covert element of the ‘stop-go’ policy was the policy of restricting private and public-sector house-building.

The ‘stop-go’ policy in terms of private British housebuilding entailed restricting mortgage availability from the mid 1950s to the 1980s. This was achieved through keeping building society interest rates low relative to other interest rates, thus starving them of mortgage funds. Building societies were then a crucial element in Britain’s house mortgage market. In 1973, gross advances disbursed by building societies stood at £3.5 billion compared to £319 million by banks. Interestingly, mortgage restriction was never publicly discussed and ironically sometimes even operated alongside ambitious housing targets and well-publicised policy initiatives to boost housing demand. 

The paper evaluates the impact of this policy on the wider economy. The authors find that the policy restricted private house-building to varying extents over most of the quarter century from 1955. Building societies reacted to the shortage of funds by raising minimum deposit ratios to well above the 5 per cent typically required for new houses in the 1930s, while tightening criteria for lenders regarded as good risks.This also had the impact in reducing the available quantity of housing stock and impeded changes to its geographical mix through a period of significant regional shifts in employment thus reducing the mobility of labour.

This paper makes an important contribution to the wider post-war economic management literature by highlighting a crucial element of demand management through mortgage rationing in the housing market. The authors find that this policy had a disproportionate impact on working class and lower middle-class households byreducing their access to the mortgage market. Moreover, it had a detrimental impact in reducing homelessness, overcrowding, and poor housing standards. The authors assess that the policy also had intergenerational impacts in reducing the proportion of families passing housing assets to their children. Hence it was the lower and middle-income households who had to bear the brunt of sterling convertibility and financial liberalisation in the 1950s and 1960s, and macroeconomic stabilisation in the 1970s. Further research is needed to evaluate the impact of stop-go restrictions in depressing investment in other sectors such as infrastructure, nationalised industries, education and training.  

About Tehreem Husain

About Tehreem Husain

Tehreem Husain is a doctoral candidate at the UCL Bartlett School of Construction and Project Management. She is a regular columnist for the business pages of Pakistan's English daily newspaper, The Express Tribune, and is a blogger for Huffington Post UK. Before moving to the UK, she worked as an economic analyst at the Monetary Policy department of the State Bank of Pakistan, the country's central bank.

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