The Conservative Party manifesto argued for the creation of a new market in long-term fixed rate mortgages, in order to open up a secure path to home ownership for first-time buyers in all parts of the United Kingdom.
A new Centre for Policy Studies report by Graham Edwards, ‘Resentful Renters’, explains precisely why such a market is so necessary.
Edwards is executive chairman, and previously CEO, of Telereal Trillium, one of Britain’s largest privately owned property companies. He has been working pro bono with the think tank as Chair of its Housing Policy Group to study the root causes of Britain’s housing problems.
The resulting report - ‘Resentful Renters: How Britain’s Housing Market Went Wrong, and What We Can Do to Fix it’ - finds that owner-occupation has been falling among young people even in areas where house prices have remained stable.
While the problems began before 2008, the financial crisis was an inflection point - because regulators responded by making it far harder to get a mortgage. Average Loan to Value rates have fallen from 95% to 85%, tripling the required deposit.
In addition, the Bank of England now imposes a mortgage ‘stress test’ which means that you need to be able to afford the standard variable rate plus 3%. This means that even though the average monthly mortgage payment is £633, you can only get a mortgage if you can afford to pay £1,075.
At the same time, the dramatic rise of buy-to-let meant that, on a net basis, every single new home built in the decade between 2005 and 2015 went to a landlord rather than a first-time buyer.
This has, Edwards shows, created 3.6 million ‘Resentful Renters’ - people with secure earnings and good prospects who would have been able to become homeowners before the financial crisis, but are currently either renting or living with their families.
Low interest rates mean that mortgage payments are now at a historic low as a share of income - but putting together the deposit to get a mortgage has become impossible for many.
As the Conservative manifesto argues, we need to rebalance the housing market in favour of owner-occupation.
Edwards says that rather than unwinding the regulatory changes since 2008, the Government and financial sector should instead promote long-term, fixed-rate mortgages - products which, because of the certainty they offer, do not need to be stress-tested and can be offered with the 95% LTV rates that were the norm before the financial crisis. This would bring affordable home ownership within reach of 1.9 million extra households.
While the Government can play a powerful role in supporting the emergence of this new market, it is the private sector that will fund these new mortgages. Edwards’s report contains detailed modelling of what such products might look like - and he has been consulting with a range of financial institutions about putting these ideas into practice.
Graham Edwards, Executive Chairman of Telereal Trillium and Chair of the CPS’s Housing Policy Group, said: “Owning your own home is a near universal aspiration in the UK, yet owner occupation has been declining in recent years. I think we have an obligation to try to help the younger generation get on the property ladder. I hope that my proposals will help many people to do just that.”
Robert Colvile, Director of the CPS, said: “The ownership crisis is one of the great economic and social challenges that we face. So it is hugely encouraging that the Conservative Party has backed the idea of fixed-rate, long-term, low-deposit mortgages as a way to help first time buyers to afford a home – and committed towards rebalancing the housing market towards ownership more broadly.”
Mark Versey, Chief Investment Officer, Real Assets, Aviva Investors, said: “As this report highlights, the last decade has seen an unwelcome deterioration in the affordability of housing in the UK, particular for many young people who have been priced out of the market. At the same time, institutional investors such as company pension schemes, who represent the interests of millions of individual workers saving for retirement, are crying out for suitable long-term investment opportunities. Long-dated fixed-rate mortgages have the potential to match society’s need for affordable housing with pension schemes’ need for appropriate assets.”