This article charts in broad terms the evolution of the UK’s housing and mortgage markets over the last decade, through the crash and recession and progress through the continuing recovery. Indeed the scale of the interventions in the UK housing and mortgage markets is very big and wide ranging by international standards. Despite or perhaps partly because of them the UK markets have also undergone a fundamental transformation. Home ownership has declined and private renting has increased while social housing is being reworked.
The question then is are these changes likely to be cyclical or structural and the answer is probably both! There are important structural shifts in the control and regulation of the UK mortgage market that ‘hard wire’ certain limits into the housing market through more restrictive access to mortgages. There are differing views as to the scale of this and the government has moved in recent months from what might have been termed a clear policy of tenure neutrality to a somewhat more ambiguous position where it is strenuously proclaiming its support for home ownership while at the same time working hard to expand the private rented sector.
The government has recognised that having a small private rented sector means that when home ownership comes under strain it has little choice but to expand its social housing programmes. While it is recognised that an expanded private rented sector is not cost free,. This has encouraged government to think about expansion driven by private investors, and not least pension funds (since rents provide a good match with pension liabilities) and outside of government spending capacity.
Given the likely outlook on public finances over the medium term it is highly probable this will become a core housing policy regardless of the party/parties in power. So the UK (or at least England) has moved from a housing system dominated by social renting and home ownership to one where we are more likely to see private renting and home ownership as the main tenures.
In stepping back as a funder/provider of social housing the government then becomes more reliant on the market and has balanced regulatory interventions to ensure good consumer outcomes against its reduced direct role. It also has to think about the opportunity costs of putting personal and other subsidies into the private rented sector (and ultimately to profit landlords and investors) against social housing provided by public or nonprofit providers at below market rates.
Reinforcing the role of the market at the centre of housing provision poses other challenges, as is evident in the post-crash global debate on macro-prudential regulation and sectoral interventions and not least in relation to the housing market. Given the role house prices and housing markets played in the crash it is little wonder that worldwide the regulators have been giving attention to how they might control future housing bubbles and related activity.
A number of countries have introduced forms of restriction on debt-to- income ratios or mortgage term to restrict mortgages. New Zealand has recently introduced a limit on the proportion of new lending above 80% loan to value. All have been aimed at reducing housing market activity and price pressures though with varying results.
What we can observe in the UK are a number of transformations over time, which tell us that arguments about permanence and inevitability of certain housing market structures can be somewhat misplaced. The UK has moved from being a society dominated by private renting in 1916 to one where home ownership and social housing made the running in the post war period. Although this balance was shifting in the last decade of the 20th century and onwards the credit crunch has driven forward the rise of private renting and put further momentum into the contraction of home ownership and social housing.
How this rebalancing will play out over the next few decades is uncertain but it seems likely we will see a dis-engagement in directly funded housing provision and a move towards targeted short-term interventions along with macro-controls on the market. This further exposes the government to the risks that the market will not deliver what is needed and not least in terms of securing a massive increase in housing supply. This in turn may mean the UK will see continued market volatility with all the economic and political tensions that brings.
That in turn may usher in a new era of intervention though not in the form of direct provision but rather in the area of property taxation. The ebb and flow of the market and policy pose significant challenges for the mortgage industry in terms of the scale of likely demand for mortgage funds, product innovation and pricing. In a sense it has always been so but now the regulatory armoury is bigger and more encompassing with a global commitment to act rather than observe. It puts a new premium on lenders better understanding the environment in which they are working and how it might evolve.