New report debunks the myths of owner-occupation crisis in UK | Credit Raters post

New Report Debunks the Myths of Owner-Occupation Crisis in the UK

24 Dec 2019
Approx Reading time: 6 minutes

Summary

  • In the course of the last decade, homeownership under owner-occupation has reduced by 6%, particularly worse in the case of 25 to 39-year-olds.
  • Presently, the median deposit for first-time buyers is £30,000.
  • Almost 3.57 million “Resentful Renters,” i.e., people who could have been homeowners before the financial crisis but are not now are in England.
  • Long-term, fixed-rate, low-deposit mortgages appear as the best way to deal with the homeownership crisis without regulatory changes.

According to a recently released report by Graham Edwards, co-founder and Executive Chairman of Telereal Trillium (TT), one of UK’s largest private real estate companies, the UK’s housing market needs long-term, fixed-rate mortgages. The findings of the report show a massive decline in owner-occupation among younger people. In the period from 1991 to 2016, owner-occupation among 25 to 39-year-olds has declined from 67% to 38% i.e., almost half. The case for the 18 to 24-year-olds is quite severe in terms of owner-occupation with a sharp decline from 36% to 10%. 

The gangrenous problem of homeownership crisis

Results from a survey by the Centre for Policy Studies indicate that the primary agenda of the Government for the betterment of young people should be affordable housing. Presently, the Government has to tackle the ownership crisis, which is presently the most crucial domestic challenge economically, electorally, and socially. So, what’s the solution to this challenge? The foremost obstacle in addressing the ownership crisis is the simplistic generalization of causes of the crisis. Many such generalized assumptions regarding the cause of the ownership crisis point out towards reduction in the construction of houses. 

However, the report “Resentful Renters: How Britain’s Housing Market Went Wrong, and What We Can Do to Fix it” shows that the rise in real estate prices throughout England is localized i.e., found in some places only. However, the decline in ownership has been evident throughout the country. As a matter of fact, there was no shortage of houses to buy.

The problem is that owner-occupiers could not buy the new houses, and buy-to-let investors grabbed the new properties. Therefore, the ownership share of private landlords in housing stock increased by 8% points in the last decade. It may seem like a small figure in terms of points. But actually, private landlords procured almost 2 million homes in the last decade. 

How did the problem start off?

What could have been the possible cause of such a problem? The report points out the difficulty in accessing a mortgage as a prominent issue for first-time buyers, especially after the 2008 financial crisis. The worst part was the scarcity of 95% loan-to-value (LTV) mortgages, that was the best way to access mortgages.

In response to the ownership crisis, building more homes could not be a viable remedy. Why? The net increase of new homes in England from 125,000 in 2013 to 241,130 in 2019 clearly shows that there is no shortage of homes for purchasing. So, the proposed solutions by the new report aimed at increasing the purchase of homes by owner-occupiers as well as bringing back the 1.4m English households living as “Resentful Renters” through the last decade.

“Resentful Renters” are the 3.57 million adults who expected to be owner-occupiers by 2016. Therefore, the report by Graham Edwards focuses on the root causes of the problem rather than just blindly recommending the construction of new homes as a favorable solution.

Decoding the root cause of the problem

According to a report, titled “From Rent to Own,” by the Centre for Policy Studies in October 2018, the Government has created a market dynamic in favor of buy-to-let. Author of the report, Alex Morton, also added that the Government had shifted the privileges of first-time buyers considerably. For instance, changes in mortgage rules enabled the possibility of claiming relief on mortgage interest for buy-to-let properties.

In addition, the mortgages available for first-time buyers continued to decline in the period from 2005 to 2015, with a reduction of almost 2.2 million mortgages. What could have been the possible reason for such a decline? The various regulatory changes as a response to the global financial crisis resulted in a decline in the mortgage credit supply.

According to the Basel banking rules applicable in Europe and the United States, more bank capital is required against higher LTV mortgages. Regulatory changes by the Bank of England’s Financial Policy Committee also impose restrictions on banks. As a result, the required deposits and income qualifications for mortgages increased considerably. Lower LTV mortgages are very difficult to afford and complicate the situation further for first-time buyers. 

The solution to the problem has come up with the proposal for long-term fixed-rate mortgages in the Conservative manifesto. The proposal aims at balancing the housing market to promote owner-occupation. The proposal takes away the burden of rolling back the regulatory changes after the global financial crisis. The long-term fixed-rate 30-year products could be exempt from stress tests alongside the facility of 95% LTV rates. 

Comments

According to Graham Edwards, ownership of a home is the aspiration of almost every resident in the UK, albeit with a drastic reduction in owner-occupation. He further added that the Government and society, in general, have an obligation to help the younger generation caught up with the property ladder. 

According to the director of the CPS, Robert Colvile, the ownership crisis is presently the most formidable social and economic challenge. He also stated that the Conservative Party supporting the ideal of long-term, fixed-rate, low-deposit mortgages, is a promising initiative for helping first-time buyers obtain ownership of a home.   

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Narinder Singh