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UK Considers Divisive Home Loan Revolution to Rival Thatcher
(Bloomberg) -- The UK could be on the brink of a housing revolution to rival Margaret Thatcher’s council house sell-off in the 1980s. It may prove just as divisive.
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Plans by the ruling Conservative Party, including possible 40-year fixed-rate mortgages, are the latest part of the “property-owning democracy” idea championed by generations of UK politicians. About two thirds of households are occupied by their owners, with the ratio barely budging over the past decade as prices soared while wage growth and new homes lagged behind.
The latest push, announced by Boris Johnson in June, for more affordable ways to buy a home will still go ahead despite the turmoil gripping the government as the prime minister departs, according to people close to the matter. The candidates to replace Johnson have offered glimpses of their housing policies so far: Rishi Sunak has pledged to make it harder to build homes on the green belt, while Liz Truss thinks banks should look at a borrower’s rental payments to decide if they can afford a mortgage.
Over half of people renting their homes could afford monthly repayments on a mortgage, but only 6% could easily access a typical first-time buyer loan, according to government calculations. Banks’ high deposit requirements and strict affordability checks, which were tightened after the 2008 financial crisis, stand in their way.
Officials at the Treasury and the Department for Levelling Up, Housing and Communities are exploring savings products to allow renters to build deposits, as well as insurance programs to cover riskier borrowers. Thatcher’s “right to buy” that privatized almost two million social houses could be extended to housing association tenants, while loans lasting as long as 50 years could be passed down from parents to children. Lower down the agenda are ideas to build more affordable homes.
The policy at the heart of the work, and stirring some of the strongest feelings, is an embryonic plan to move away from the UK’s churn-dominated market. Currently, banks compete fiercely to offer loans with rates fixed for just two or five years, meaning borrowers regularly switch products.
Instead, multiple-decade fixed-rate loans could be made mainstream, following countries such as the US and the Netherlands. The Treasury has shown no interest in copying Fannie Mae and Freddie Mac, America’s government-owned entities that transfer the interest rate risk of long-term mortgages from lenders to taxpayers. Insurers could be used to shoulder some of the risk.
Mortgage Shake-Up
The UK has almost 3.6 million “resentful renters,” according to Graham Edwards, co-founder of property group Telereal Trillium and a board member at the Centre for Policy Studies think tank. If home loan applications focused on whether they could afford monthly repayments instead of the overall value of the property, about 2 million more could become homeowners, Edwards argued in a 2019 CPS paper.
What Bloomberg Intelligence Says
UK housing market dynamics are changing fast, with mortgage price increases likely to continue as the Bank of England raises interest rates and banks use pricing to lock in borrowers with five-year deals.
Jonathan Tyce, BI banking analyst
Edwards is among a group of housing experts and economists pushing mortgage reform over building new homes, which they say would be too expensive, time consuming and impossible on a big enough scale to solve the problem. The ideas have been gaining traction with senior figures in the Conservative government, who are perhaps mindful that 57% of people who own their homes voted Tory in the last general election, according to Global Counsel, a think tank.
After the Help to Buy policies that did little to boost overall home-buying rates, and the Covid-19 outbreak that shifted other policy work to the backburner, Edwards believes the housing issue is now back in the spotlight, irrespective of the coming change in prime minister.
“Given how central home ownership is to Conservative core values, how much progress is being made in this area, and the manifesto commitment, it would be somewhat surprising if this project wasn’t encouraged to continue by any new Conservative leadership team,” Edwards said.
Debt Warnings
Not everyone agrees that the changes would help. The overhaul would mean relaxing lending standards at a time of rising interest rates, inflation pain, and potentially falling house prices, which could saddle new owners with loans worth more than their homes, also known as negative equity.
Mortgages lasting 50 years would be a “political gimmick” that could push up demand and therefore prices even further, according to Kevin Dowd, professor of finance and economics and Durham University Business School. “These are not the solution to any sensible problem. We need more supply of housing,” Dowd said.
Yet simply building more houses would not significantly change who can afford them, according to Ian Mulheirn, executive director and chief economist at the Tony Blair Institute for Global Change. It would not address the fact that “many more families have been trapped in the private rented sector, including three times as many families with children as in the mid-2000s,” Mulheirn said in a recent paper.
Some senior bankers, who asked not to be named discussing potential government policy, fear that their industry will end up on the hook for compensation if interest rates later fall, leaving people angry that they are trapped on relatively expensive deals. The specter of the last financial crisis, which was fueled by cheap and easy home loans, looms in the background.
Read Bloomberg Intelligence’s research about the UK housing market
Regulators including Bank of England Governor Andrew Bailey have said they would be willing to look at mortgage innovations. However, market observers believe liberalization plans could still meet regulatory resistance.
The Bank’s Financial Policy Committee -- which scans for potential risks on the horizon --has scrapped a requirement for borrowers to prove they can repay loans even after their fixed deal expires. But it’s retaining another cautionary measure that limits how many loans can be issued to customers borrowing more than 4.5 times their income, which effectively caps very long-term mortgages.
Action Needed
While major banks are unable or reluctant to take on riskier debts, specialist lenders have already started to offer 30 and 40 year loans.
Kensington Mortgages Ltd. started offering mortgages from 11 to 40 years on fixed rates in November, aimed at people with unpredictable income streams such as the self-employed, and those who can’t afford a shorter term loan. The specialist lender is keeping the UK Treasury updated, Vicki Harris, the firm’s chief commercial officer, said in an interview.
The firm offers 4.15% rates on a 30-year mortgage at 60% loan to value and 5.02% on 95% loan to value deals. By comparison, the current lowest rate available in the UK is 3.24% on a 2-year fix and 3.21% on a 5-year fix, according to Ray Boulger, a senior technical manager at mortgage broker John Charcol.
Kensington and fintech Molo Finance are working with Rothesay Life Plc, a pensions insurer that can use reliable long-term income streams to pay the pensioners of the future. More insurers are keen to strike their own deals to finance mortgages, opening up a potentially huge new market, but some argue that regulatory reforms are needed to make it possible.
New Market
This embryonic interest from the industry could get the government off the hook on long-term risk. The Treasury is looking to the examples of France and Denmark, where banks sell bonds covered by mortgages to life insurers and pension funds.
“This is a very, very large market in Europe, whereas here in the UK most mortgages remain on banks’ balance sheets,” said Geoffrey Yu of Bank of New York Mellon Corp. A covered bond market “would be a very good way for banks to de-risk and increase their lending elsewhere or lower the cost of credit.”
But he added a note of caution: intergenerational loans could mean different levels of risk. “It is perhaps possible to structure a mortgage with different tranches to take into account different credit profiles, but this starts to sound a bit like CDOs and we all know how that turned out,” Yu said.
One factor is whether reformers win the argument to put the new loans outside regulators’ 15% cap on bigger mortgages on the grounds that their risk profile is different. This would mean lenders have to hold less capital against them, in turn making them cheaper to offer to customers.
Thatcher Legacy
Just as Thatcher’s council houses won new votes in the 1980s, a modern homeownership shake-up could boost the Conservative party as it struggles with unrest triggered by the cost of living squeeze along with a bruising contest to replace a leader ousted by scandal.
But there are no easy fixes in the housing market. “The council house sale screwed every generation after for years to come but it worked politically at the time for that one cohort,” said Emma Burnell, a political consultant and former editor of Labour List, a news website supportive of the opposition Labour Party.
The current policy is shaping up to be a different sort of giveaway, she said. “‘Here, have a cheap council house’ or ‘here, have some really expensive long-term debt’ is not the same offer.”
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