Friday Highlight  

Does the mortgage market serve the modern world?

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. 

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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.