Does the mortgage market serve the modern world?
Since the turn of the millennium, the UK has lost 7m homeowners. That is 7m people who, had they been born 21 years earlier, would now own a home, but instead have found that they have turned up late to the party.
The result is that now just one-third of young people own their home – a monumental drop from more than two-thirds 20 years ago. And we risk losing millions more.
Capital accumulation is the greatest challenge faced by young people, who struggle to get onto the property ladder while saving for their own retirement.
The main culprit for runaway house prices is of course the interest rate supercycle, but its effects have been compounded by the post-financial-crisis regulatory framework and the fiscal policy decisions of successive governments.
In short, our fiscal, monetary and regulatory authorities have spent the past decade fuelling a bull market for homeowners and a bear market for the rest of society.
To start with fiscal policy: stamp duty land tax is the principal structural ill in the housing market. It is a perverse and inequitable tax that subsidises the old and capital-rich at the expense of the young and capital-poor.
It taxes people climbing the property ladder and leaves people in their 'forever homes' – those with the most housing wealth – untouched.
And do not be fooled into thinking that the tax breaks available to first-time buyers mean that they are not victims of this model. By taxing transactions, SDLT disincentivises moving home and so impairs market liquidity.
By reducing the supply of properties, it creates a framework in which house prices must rise to bring new supply to market.
What’s more, older homeowners are taxed for downsizing, preventing the efficient recycling of the housing stock and promoting the 'space hoarding' phenomenon, ie where parents have large, empty nests and their children rent.
Perversely, the only thing more damaging than stamp duty was the stamp duty holiday introduced by the government in 2020, which was scandalously made available to portfolio landlords and second-home buyers for a limited time only buying frenzy.
Having driven up house prices by 19 per cent since the end of 2019, the government has introduced a new first-time buyer scheme that offers a 30 per cent discount on specific new homes.
Turning to the regulatory environment: the regulators are not solving for optimal social outcomes because their remits do not ask this of them.
Their limited mandates incentivise them to displace risk from the regulated public sphere to the unregulated private sphere. The result is that their actions can inadvertently work against the wider social good.
By way of example, tightening lending standards has led to a very healthy mortgage industry with extremely low levels of arrears and repossessions, but also economic insecurity among a growing class of young people locked out of the housing market.
To compound this problem, regulation has pushed lenders away from tackling the needs of aspiring homeowners by providing new economic incentives to double down on lending to existing homeowners.
A bank’s commercial 'north star' is its return on tangible equity, which is the annual profit it generates for each pound of shareholder capital that it holds.
The regulator, in the form of the Prudential Regulatory Authority, determines how much equity capital (the denominator in this all-important profit calculation) a bank needs to hold for each loan they issue.
Recent years have seen banks transition to a new regulatory framework (advanced internal ratings-based models), that has radically reduced the capital requirements for low-risk mortgage lending.
For a mortgage with a deposit of 10 per cent or 20 per cent – your typical first-time buyer product – banks using AIRB models on average must hold £0.22 for every £1 they lend.
But increase that deposit to 30 per cent and the bank only needs to hold £0.12 in the pound. Where the value of equity in the home is greater than 50 per cent, a bank holds just £0.05 for every £1 lent.
Banks have been incentivised to plough capital into low loan-to-value lending, pushing down interest rates for home-move and remortgage customers while making products that serve first-time buyers comparatively less attractive.
The winners are existing homeowners sitting on handsome amounts of home equity.
The good news is that some of our major financial institutions are now putting social impact high on their list of priorities, bringing ethical considerations to bear on their capital allocation decisions.
Legal & General’s homes initiative is bringing much-needed supply to the housing market and Lloyds Banking Group is delivering on its ambitious lending target for first-time buyers.
But as lenders, we can and should be doing much more, being bolder and more imaginative in our thinking. We need new, truly customer-centric business models that support aspiring buyers every step of the way.
We must strive to create a just society in which everyone can have a stake in the property they occupy. To do this we must reinvent housing, not just home finance.
Will Rice is co-founder and chief executive of Generation Home
