The extra subsidy for purchases by those who already own a home is interesting, since as a group they already seem fairly well served by the existing mortgage market - and they have massively expanded their share of that market over the last twenty years. The chart below, based on data from the Council of Mortgage Lenders, shows the trend in the share (by value rather than number of loans) of mortgages for 'home purchase' (i.e. excluding buy to let) between 1993 and 2012. 'Home movers', i.e. those who already own a home, accounted for 52% of the market in 1993 and 66% in 2012 (though note there was a change in how the data was collected in 2005).
|Trend in home mover and first time buyer shares (by value) of UK mortgage lending (dashed lines indicate change in methodology in 2005)|
So why has lending to home movers expanded so much? A new academic paper by Professor Geoff Meen, one of the country's leading authorities on housing markets, offers a partial explanation. He argues that
existing owners benefit particularly at a time of rising prices, because they are able to use the accumulated equity in their current properties to relax the constraints on their budgets and can, consequently, trade up-market or purchase additional properties. These further demands for housing will put upward pressure on prices and will be accompanied by added demands for mortgage debt by existing owners. Since new households do not have these advantages, the share of mortgage debt which they obtain falls and they also suffer from the rise in prices.So basically, home owners benefited disproportionately from the long house price boom of the 1990s and 2000s because they used the increased equity in their homes to put down a bigger deposit, increasing their buying power by enabling them to get bigger and better (in terms of interest rates) mortgages. This increased demand then fed back into house prices and the process continued, in what Meen calls a financial 'accelerator' effect. What's more, some home owners didn't sink their increased wealth into a new home for themselves but instead bought one or more additional homes - so this dynamic also can also help explain the rise of buy to let, not as some unrelated external factor but as the natural result of the hugely unequal accumulation of home equity.
First time buyers, meanwhile, got hit by both rising prices and a shrinking share of the mortgage market. The average time spent waiting to buy went up and the home ownership rate went down. When First time buyers got much of the blame when the market crashed, but Meen argues that "the rise in the debt stock was mainly a consequence of the actions of existing owners", with most first time buyers simply caught up in the consequences. With a crushing irony, the hike in deposit requirements that followed the crash hit first time buyers much harder than home owners.
There's one upside for first time buyers: during an economic downturn prices usually fall faster than incomes (because housing demand is 'income elastic', i.e. demand changes by more than the change in income), and the fall in prices disproportionately reduces the buying power of home owners while bringing some prices within the reach of first time buyers. So in a downturn the accelerator becomes a decelerator and the first time buyer market share can increase, as long as they aren't too crushed by high deposit requirements. And indeed, we do see some signs of first time buyers reclaiming market share in the last few years in the chart above.
It's a simple enough theory, but it seems to explain a lot of important features of the UK's housing market in the last decade or so, from the boom and bust cycle to the falling home ownership rate to the increased proportion of cash sales from all the accumulated equity still sloshing around the system.
But as the accelerator/decelerator dynamic seems rather built in to how UK mortgage markets work, the question of what we can do about it is a tricky one. As noted above, traditional controls on loan to value rates don't really help since they don't constrain home owners with significant accumulated equity. Instead, Meen suggests two things:
- First, we should increase the housing supply on a widespread and long-term enough basis that it outpaces rising demand from population and income growth, preventing house prices from rising too much and unearned wealth accruing to home owners.
- But for periods when prices do rise we should look into 'fiscal measures' to reduce the effect of those rising prices on rising demand - measures such as the property tax proposed by John Muellbauer in 2005. This tax would be a constant percentage of each home's value and would rise or fall in line with house prices, so that higher prices wouldn't be a free lunch for home owners.