LONDON (Reuters Breakingviews) - The UK housing market could do with a well-aimed bazooka. Prime Minister Boris Johnson wants to help 2 million Britons buy their first home, he declared in a speech on Tuesday. The danger is that he makes properties even costlier while leaving taxpayers exposed to losses.
Pretty much every British prime minister in recent decades has tried to fix the country’s lopsided housing market. The United Kingdom builds too few new properties – the number of houses completed last year was about the same as in 2007 - and they are out of reach for younger buyers. Those problems are now compounded by the shocks of Brexit, and the Covid-19 crisis. Fiddling with the mortgage market is a relatively quick place to start.
Perhaps the least expensive solution, hinted at by Johnson in a recent interview, is to unpick post-crisis reforms that require banks to test borrowers’ ability to repay home loans even at much higher interest rates. That would in turn allow banks to make bigger loans - Johnson suggests 95% of the property’s value - making it easier for new buyers to get on the housing ladder.
Scrapping affordability checks altogether looks like a risky move. During the financial crisis, the government was forced to rescue banks that had made large mortgage loans. Moreover, tweaking the rules may not be enough to persuade banks to bring back 95% mortgages. These products also incur higher capital charges because they would leave banks nursing greater losses in a crisis.
A more subtle idea is to persuade banks to make very long-dated mortgages at fixed interest rates, and then selling those loans to investors seeking long-dated returns, such as pension funds. Yet this market is untested.
The quickest fix would be for the government to step in by providing guarantees. Under Johnson’s predecessors, David Cameron and Theresa May, the British government guaranteed over 270,000 “Help to Buy” mortgage loans in which the government takes the risk on the most vulnerable slice of a 95% mortgage.
Like all government interventions, “Help to Buy” can push up house prices. Therefore, any new mortgage subsidy will have to go hand in hand with a substantial house-building programme. Ideally, cheap loans would only be available on new properties. That would make it harder for Johnson to achieve his 2 million target, but it could still be a step forward.
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