How to turn renters into homeowners
“My Government will help more people to own their own home whilst enhancing the rights of those who rent.”
These words, from Her Majesty, during the Queen’s Speech, reflect an important focus for the Government. It was only last autumn that the Prime Minister outlined his intention to help Generation Rent become Generation Buy.
In the wake of the Queen’s Speech it seemed appropriate to return to some of the issues raised in a paper I produced for Policy Exchange on housing earlier this year.
Some of the recommendations made in that paper were addressed by subsequent government policy, in particular some of the affordability issues that deter potential buyers.
However, fundamental problems persist.
Not enough properties have been built of the right type and price in the areas needed. But building more properties, while vital, will not be enough.
If more properties are built, then people need to want to live in them, be able to afford them and be able to access the finance to buy them. The government cannot control all the outcomes.
As we pointed out, the solution to this problem needed to be found on both the supply and the demand side.
The biggest and most immediate issue to be addressed is more supply of affordable properties and on a massive scale. A house building boom is needed as part of the solution.
Challenges on the demand side need to be addressed too and overcoming them will complement the building of new housing that is needed.
The Queen’s Speech indicated that easing planning restrictions will be centre-stage. These will be aimed at encouraging more supply, through the building of new homes.
Clearly, as some of my colleagues here at Policy Exchange have indicated, ensuring that these are good quality and aesthetically pleasing properties is necessary. To adapt the supermarket analogy of “pile them high, sell them cheap”, we need to avoid “build them poorly, sell them expensively”.
As this need for more supply begins to be addressed, another challenge will be all too apparent on the demand side.
Many properties are too expensive for generation rent. In central London it used to be a case of local supply and global demand. This pushed prices up. Now, the same challenge is likely to be seen across urban centres across the UK: local supply, global demand and prices pushed ever higher.
Halting that global demand would fly in the face of global Britain and is unlikely to be halted. That’s perhaps understandable, but it is necessary to be aware of its consequences. Hence the government offers help on affordability, easing tax requirements or through Help to Buy (HTB).
A number of large high street lenders have joined this HTB scheme, offering loans up to 95% of the property’s value. The trouble is, these mortgage products are not available on new builds. That is because lenders perceive there to be a bigger risk on these. My conjecture would be that the developers invariably have ramped up the price and then offered various schemes aimed at attracting the new buyer. This makes it difficult to know the true price should be, so the lenders prefer not to lend.
Offering high loan to value (LTV) mortgages on existing supply does not address the problem.
Many who are renting may feel they prefer to rent in a place they may prefer to live. Ideally they wish to own it, but the property may not be for sale by the owner, or landlord, and if it were then the price or the deposit required by the mortgage lender too high.
Government intervention on the demand side risks crowding out private sector solutions to this problem. That solution is the provision of financial products by lenders, allowing people to buy on a scale they are comfortable with.
The risk involved is often a perceived one, as renters will have already demonstrated a history of paying their rent. Ideally rent history should be used a substitute for any deposit.
In my paper earlier this year, I alluded to the market providing the solution, with blended mortgage products: the borrower deals with one lender, with the different slices of perceived risk being absorbed by different providers of finance to that lender.
It is a market solution that is already being rolled out in the UK but it needs far more encouragement. If the market is prepared to accept the perceived risk then 100% LTV mortgages would be perfectly acceptable, too, although over time, perhaps quickly, the borrower will not only be able to see their outstanding LTV reduced but as the perceived risk falls (because of a lower LTV) so too should the mortgage interest rate demanded by the lender fall. But that is not the only important point.
As we outlined in our paper earlier this year, the riskier slice on the higher element of the high LTV mortgage is not born by the government, the tax payer, or even the high street lender, but by the vast global capital markets. Encouraging the growth of this private sector-led blended mortgage product market should be an implicit aim of policy to help achieve generation buy.
Currently the mortgage products that the Government is providing help with do not support the ability of first-time buyers to buy the type of homes that they are hoping will be built.
They may also be beyond the reach of many because of the deposit trap: people who have a great track record of paying rent still can’t afford a deposit nor are able to access.
Also, none of the ‘government lenders’ are allowing loans on new build properties, which doesn’t fit well with the government’s objective to build around 300,000 new homes per year.
The government needs to step back and let the market find the solution, as it will.
As things stand, generation rent will not become generation buy. Instead it will be first generation rent followed by a second generation rent.