Only policy targeting reductions in income inequality will help first-time buyers and improve homeownership levels
Christopher Worrall is a housing columnist for LFF. He is on the Executive Committee of the Labour Housing Group, Co-Host of the Priced Out Podcast, and Chair of the Local Government and Housing Member Policy Group of the Fabian Society.
The absence of Labour’s Shadow Minister for Housing and Planning, Matthew Pennycook MP at September’s 2022 Party conference left many questions unanswered. Fortunately, Keir Starmer graced us with a pledge on homeownership. One that promised to make “Labour the party of home ownership in Britain today”. He argued this would be achieved through a homeownership target of seventy percent, offering to “help real first-time buyers onto the ladder with a new mortgage guarantee scheme”.
We may have had further detail on what this meant had the Tony Blair Institute (TBI) event at conference panelling Matthew Pennycook and Ian Mulheirn’s gone ahead. Yet Keir’s speech, and the proposed non-event, would suggest recommendations put forward in the TBI ‘Bringing It Home: Raising Home Ownership by Reforming Mortgage Finance’ report are highly likely to be on the table. Mulheirn’s report suggested how the current government has “no convincing plan to revive homeownership rates”. Instead, pointing towards the volatility in cost and availability of high loan-to-value (LTV) loans as the single most important determinant cause of falling rates of homeownership.
Lisa Nandy recently spoke with the i’s Housing Correspondent, Vicky Spratt, confirming the proposals for a new state-backed mortgage guarantee scheme. However, Conservative proposals under Gove have in fact included a mortgage guarantee scheme for LTVs of up to 95%. Despite being criticised for low take up earlier in the year the scheme was recently extended to December 2023. The Tories argue it will help people with only a 5% deposit onto the property ladder. Mortgage guarantees appear popular with both Labour and the Tory leadership, but is this focus misplaced when research finds such schemes totally ineffective at increasing homeownership rates?
In the US, where insurance or guarantee mortgages are prevalent, the federal government also supports homeownership in a variety of ways. Programmes that insure, guarantee, or directly provide mortgages to eligible homebuyers are commonplace. The volume of new mortgages with a government guarantee plays a huge part in the market, where they generally exceed 60% of all new loans. Yet research by the US’ own Federal Reserve Board has found government guarantees in fact have “no robust effect on homeownership”. The Fed even made the case to reduce the government’s involvement in the mortgage market. All this falls contrary to claims made by TBI, who call for mortgage guarantee scheme permanency.
In November 2022, Andrew Dyson produced a paper for Progressive Britain on ‘The Role of Modern Government’, making a nod to the Dutch National Mortgage Guarantee Scheme. The Netherlands is a nation where general fiscal and monetary interventions have masked underlying chronic housing supply issues. As recently as 2018, LTVs have only just been capped at 100%. Previously loans above 100% were available. Yet in light of IMF recommendations and the Wijffels Commission, the Dutch mortgage market has been making moves to reduce reliance on government guarantees to 80% LTV levels. More recently, research completed in 2019 based on Dutch loan level data between 1996 to 2015 found that in order to avoid acceleration of the non-performing loan probabilities government insured loans should not exceed 90% LTV. So much for the panacea of high LTV loans Mulheirn claims to make.
In both Canada and the Netherlands, lending was encouraged through expanding government guarantee schemes and low interest rates. In both countries the standardisation of lending regulations targeting the average person became the norm. International Journal of Housing Policy research found such schemes excluded non-prime households from mortgage markets, pushing them into borrowing from unregulated lenders. Those deemed prime found the regulatory regime encouraged them to become highly leveraged and greatly exposed to increased risks of future crises. Ultimately creating a shift in risk-taking from lenders to current and prospective borrowers.
Is this a price Labour believes is worth paying?
I don’t believe so. Mortgage guarantee schemes do not increase homeownership. Neither Labour nor Conservatives can claim they can when facts are to the contrary. Instead we could turn to another solution found in Keir’s speech. Planning reform. Keir had taken aim at speculators stopping communities getting shovels in the ground. Whether those speculators are homeowners or developers is a matter of debate. Those in the ‘Yes In My Back Yard’ (YIMBY) movement believe supply constraints caused by homeowners are a significant factor in causing inequality, low growth, and poor productivity.
Yet we have found discredited supply scepticism seeping into circles influencing Labour Party policymaking. For this reason, we must make denying the housing shortage, as Mulheirn’s report does, a credibility damaging offence. Basic facts being up for debate merely push against the real solution to increasing homeownership – making it easier to build more homes.
Research from Barclays found higher income inequality is strongly associated with lower homeownership. Inequality is intrinsically linked to housing supply. Supply constraints to new housing explain two-thirds of the UK’s increase in house prices between 1997 and 2018. When housing supply is constrained, research shows us the benefits of increased productivity go to landowners. Yet when supply is not constrained our country’s productivity gains translate into increased workers’ wages. Strange, turns out allowing people to live near job opportunities helps reduce inequality after all.
TBI’s report fails to acknowledge any criticism of mortgage guarantee schemes. It does however cite benefits to borrowers at 95% LTV levels. Where under a guarantee a borrower could receive a whopping reduction in interest rate of 0.20%. Apparently, greater availability of long-term fixed rate mortgages is desirable. While at the same time recommending the complete removal of borrowing limits based on multiples of income for those taking said long-term mortgages.
De ja vu anyone?
That said, we know fifty seven percent of Labour voters support a large increase in new housing in their local area. Keir should be able to effectively carry out planning reform on this basis and easily bin ineffective mortgage guarantee schemes. In the end, only policy targeting reductions in income inequality will help first-time buyers, improve homeownership levels, and make Keir’s seventy percent target a reality.