Opinion: Boris Johnson's 95% mortgages will put Britain back on course for a house price crash

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 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 benefit the already well off at the expense of the young and the poor. Council tax in England and Scotland has not been revalued since 1991, meaning a £150k home in Middlesbrough pays more than a £2.5m mansion in Westminster. This should significantly reduce speculative demand.

There are rumours that the chancellor may raise capital gains tax to the same level as income tax. There is no reason they should not be higher. A sustainable economy is one that taxes unearned wealth and rents, not income and profits.

The Bank needs to find a way of incorporating house prices into both its price stability and financial stability mandates. This will need to take account of regional variation, but the focus should be on bringing house prices back in line with incomes. In the longer term, the UK needs new kinds of banks that are not solely focused on real estate lending. These should include more regional and local banks which can build relationships with smaller firms and a state investment bank focused on innovation and infrastructure.

And rather than subsidising demand, subsidise the supply of land and housing, most obviously via a major public home building programme. Affordable land is often said to be the stumbling block for new housing developments, but the public sector owns huge swathes of underutilised land where building could be undertaken. Rather than flogging off land to the private sector, by keeping housing public the flows of income from social renting and the capital gains on land would flow back to the taxpayer rather than private land owners and banks.

Finally, face up to the fact that homeownership – recently described by the Economist as “the west’s biggest economic policy mistake” – is not the be all and end all we have made it. Research shows that higher levels of homeownership reduce mobility and employment and encourages Nimbyism. Renters must be given much stronger rights and landlords given tougher rules on decent housing. The Covid crisis has made clear just how precarious the situation is for Britain’s growing cohort of private renters.

Alternatively, we could just carry on banging our heads against the brick wall of more mortgage debt. In doing so, we will enrich the banks, landlords and developers, but continue to economically disenfranchise millions of younger adults.

This article was first published in the Guardian on 8 October.

Links

• Dr Joshua Ryan-Collins’ academic profile
• UCL Institute for Innovation and Public Purpose
• UCL Faculty of the Built Environmen