The coronavirus economic shock has already caused UK house prices to wobble – and they may yet tumble if the narrative worsens. As the virus changes society and the way we live, it will inevitably change the factors that drive the demand and supply of the UK housing market. But, let’s assume/hope the UK wriggles out of the coronavirus crisis largely intact and there is still a housing market to address in coming years!
It’s long been recognised that the UK’s housing market suffers from huge inefficiencies in terms of the of supply-side dynamics; the failure to build enough homes, the blunderings of the planning process, and the absence of effective policy. However, the demand side of the UK housing market equation is equally incoherent.
Everyone would like a home, but fewer and fewer purchasers can buy them. In an economy where the number of households is increasing, often the only viable option is to rent. It’s sub-optimal for many individuals; putting money into someone else’s pocket, with none of the benefits of home ownership and greater tenure insecurity.
The problem is not that people can’t afford to borrow money to buy homes – interest rates have never been so low. The issue is the severely limited availability of finance. I’d argue the lack of readily available finance is as much a problem as the lack of housing supply.
The supply of mortgages is massively constrained. A single black mark on their credit history makes a borrower unfinanceable – no matter what the cause or how trifling it may be. Banks are still applying the same ‘three times salary’ tests and demanding 20% LTV down-payments they put in place decades ago – tests which made some sense when interest rates were 10% but are just a block to activity when rates are now 1%.
The problem is banks just don’t want to lend money. That may seem a perverse statement, but years of regulatory and capital overkill since the last financial crisis have taught bankers a simple lesson: it’s easier, generates less compliance issues, and uses up less capital if you simply don’t lend. Banks are risk adverse and set such strict lending parameters as to effectively choke off the supply of home finance. They are the wrong firms to be financing the housing market.
We need new sources of home finance – and they are emerging.
How many young Millennial or Gen-Z employees earn the six-digit salary required to afford a mortgage on even the proverbial shoe-box in middle of road? How many of them can pony up the £60k deposit on a tiny two-bed flat in London’s most unpopular and least accessible suburb? They are likely to miss out completely on home ownership – unless the Bank of Mum and Dad is behind them – which is becoming increasingly difficult as the formerly affluent middle classes discover their pension savings are rendered worthless by financial asset inflation. (Financial asset stagflation: a £1 million pension pot would provide a £80,000 pension a few years ago… today it may provide less than £10,000.)
The other side of that equation is that it’s cheaper to borrow. Ultra-low interest rates means a mortgage on a £300,000 home is now more affordable today than ever. After all, 1% of £300 is the same as 10% of £30! In order to open the demand side of the housing market we need to ease access to home financing.
There are a number of approaches to make finance more available. One of the most interesting is to bypass banks and the mortgage market entirely. Co-ownership, where a borrower buys a small share of a house and then rents the rest is a form of quasi-ownership. The buyer can choose any home, and effectively rents the part they don’t own. They can increase their share, or sell up and share pro-rata in the upside. The lender, the co-owner, has security on the home and regular rental income.
This kind of lending allows a proper analysis of the affordability of the home. If a renter can afford to rent a home, it’s likely that rent will be covering the underlying mortgage. If a tenant is expected to pay the rent to cover the mortgage, why not part own the home also?
Such an approach makes co-ownership affordable. If young workers are spending two thirds of their salaries renting, and they could spend the same to part-own a house with full security, then that’s got to be more encouraging for the market than the locked mortgage market.
