Ryan Bembridge

June 14, 2016

house price increase graph

A think tank has blamed spiralling UK house prices on the availability of cheap mortgage credit rather than a failure to build enough houses.

Peter Saunders from the think tank Civitas wrote that the explosion of credit in the late 1990s and the low cost of credit since 2008 is the primary reason house prices have increased by 132% between 2000 and 2014 compared to an average earnings increase of just 51%.

He went on to recommend for the Bank of England to rein in mortgage lending if necessary to ensure house price to earnings ratios are maintained.

Industry calls for longer-term tenancies

His proposal document ‘Restoring a Nation of Home Owners: What went wrong with home ownership in Britain, and how to start putting it right’ is available on the think tank’s website.

Saunders said: “Many experts believe that this unprecedented and deeply damaging ‘fourth house price boom’ has been caused mainly by our failure to build enough houses.

“There are… strong reasons for arguing that restricted supply was not the key cause of this crisis of housing affordability.

“The main causes of our problem have been on the demand side. The failure to control the explosion of credit from the late 1990s onwards grossly inflated house prices, and the historically low cost of credit since 2008 has kept them inflated and prevented the price correction which is necessary to restore the link with earnings (as occurred in the three previous house price booms).

“The growth of buy-to-let has further fuelled demand, and this has been reinforced by an influx of foreign money into the luxury London market, the strong growth in immigrant numbers, and an increase in the number of parents’ drawing down their own housing equity to help their children buy.

“Recent government attempts to resolve the affordability problem by subsidising buyers have only thrown fuel on the flames. Help to Buy equity loans and mortgage guarantees have almost certainly pushed prices even higher, and new pension freedoms have channelled more new money into housing. Demand-side subsidies should be wound up as the first step to restoring affordability.”

Currently new buyers are purchasing properties 20 to 30% over value, he estimated, while he felt some buyers could be crippled when interest rates return to normal levels on their inflated loans.

He added: “The Bank of England should be given a statutory duty to regulate mortgage lending to keep the ratio of average house prices to average earnings within a specified range over the medium term.

“[This] would be achieved by constraining (or loosening) the lending rules governing credit for house purchases in response to fluctuations in national (and perhaps also regional) house prices.

“We must never again allow a house price boom to get out of control and go uncorrected as has happened since the late 1990s.”

The report also called for Right to Buy in the private sector – a policy of Labour leader Jeremy Corbyn – on properties less than 25 years old and five year tenancies as standard.

Saunders said: “The Right to Buy which is currently enjoyed by tenants in the social rented sector should be extended to tenants of landlords in the private sector with discounts capped to prevent landlords incurring losses.

“This Right to Buy should not apply to properties less than 25 years old, landlords should be partially compensated by capital gains tax concessions when they sell, and the standard duration of tenancies in the private sector should be extended to five years.

“Prospective landlords (private as well as institutional) would in future be encouraged to buy new-build properties, for these would be immune from Right to Buy for 25 years (ample time to make a decent return on the initial capital outlay).

“This would give a boost to new housing supply. But they would tend to steer clear of buying older properties, leaving more of the second-hand market to buyers who wish to live in the property.”

Saunders claimed that his proposals would put a downward pressure on house prices, especially at the lower end of the market as tenants take advantage of the Right to Buy discount to trade up.

Jonathan Burridge, an East London-based mortgage broker, said: “When access to credit was lacking during the recession house prices fell but preventing people from having access doesn’t feel an appropriate move.

“The PRA exists and they are already starting to get their teeth into buy-to-let.

“We are already seeing measures from them on prudent lending so the Bank of England already has some control of what goes on.”