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Home > Mortgages > Mortgage Products

By Marc Shoffman | Published Mar 22, 2012

Find other ways to pay: Bank of England report

In a 24-page discussion paper, Demographics, House Prices and Mortgage Design, David Miles, external policy maker of the Bank’s monetary policy committee, claimed that rising populations would push house prices up, making it harder for buyers to find affordable homes.

He said: “If population density is on an upward trajectory, rises in population and in incomes increasingly generate price responses and diminishing levels of housing stock.

“This has implications for the optimal structure of housing finance. It makes equity financing of home purchase more desirable. Hybrid debt/equity contracts for financing house purchase have micro and macro benefits.

“At the household level, they allow risk sharing to be more effective – which generates larger benefits the higher are house prices. At the macro level, hybrid contracts may be a stabilising force because they generate funding costs that increase as house prices accelerate.”

He warned that a rise in population density was likely to happen fast in the UK and could result in the rise in house values becoming steeper than the rise in real income.

Mr Miles suggested using shared-ownership schemes, where the buyer acquires only a share of the home and pays rent on the fraction owned by the equity provider.

Another variant is equity loans, where, unlike shared ownership schemes, the buyer retains the ownership of the entire property.

He said: “New home owners in the future may need to have more equity than was normal in the years leading up to the financial crisis.  This will have an effect – probably permanently – on the pattern of home-ownership and – at least transitionally – on the demand for housing.”

Mr Miles added buyers were now likely to postpone purchases while they save for a larger deposit.

Matthew Rich, IFA for Somerset-based Alan Seward Financial Services, said: “Mr Miles is right that the population is rising. But the problem is with supply: not enough houses are being built.

“The key is to build more houses. All these financial initiatives really just tinker around the edges. It does not matter how you slice the cake if there are not enough properties going round.

“There is certainly a demand for affordable properties, but the fact that buyers have access to a loan does not make things more affordable. If property prices are high, ideas such as shared schemes still would not work. The root cause is not being addressed.”

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