Falling House Prices? Not if Boris Johnson Can Help it

(Bloomberg Opinion) -- Britain’s economic output will probably fall by about 10% this year but the country’s love affair with buying houses has only intensified since Covid-19 upturned our lives.

U.K. house prices were 7% higher in September than at the same point last year, according to Halifax bank data. The average cost of a British home is approaching £250,000 ($290,000).

House prices are defying economic gravity in much of the world. Central banks have cut interest rates and governments have turned on the spending taps to keep people in their jobs — and their homes. The U.K. cranked things up even more by temporarily cutting home-purchase taxes, known as stamp duty. After lockdown, a bigger home and garden is a priority for many of us.

There’s a problem, though. First-time buyers are locked out of the U.K. market because they can’t afford a mortgage. Lenders withdrew high loan-to-value deals when the pandemic began, forcing borrowers to find much larger deposits. That may be impossible unless parents can help. This exacerbates an already cavernous divide between the young, stuck in crummy rental accommodation, and the old, who are often their landlords. 

Prime Minister Boris Johnson’s solution, announced this week, is to offer “young first-time buyers the chance to take out a long-term fixed-rate mortgage of up to 95% of the value of the home, vastly reducing the size of the deposit.”

The proposal addresses a peculiarity in U.K. housing. Traditionally Brits haven’t embraced long, fixed-rate mortgages. If there’s ever a time to change that mindset, it’s now. It’s tempting to take advantage of rock-bottom interest rates to help the young, and to get banks to play their part.

Unfortunately, there’s a strong chance that Johnson’s proposal will simply blow more air into Britain’s house price bubble, while piling risk onto the finance industry. Conservative-led governments have long propped up housing demand without creating enough supply, making values outlandishly disconnected to most people’s salaries.

The U.K. already has home-purchase subsidies, known as Help to Buy (which should really be called “Help for Homebuilders”). Coupled with stamp-duty cuts, expanding credit to would-be homeowners will surely just make prices soar again, putting the ownership dream further out of reach. And why does Johnson think lending to more to cash-poor buyers is a sound financial idea? Mortgage lenders tend to have a better grasp of risk versus reward, and no one knows how bad the pandemic recession is going to be.

Buyers who put down only a small deposit risk being trapped in negative equity if house prices decline. That’s precisely what banks fear will happen when the government winds down Covid-19 support measures. Johnson hasn’t spelled out details such as the precise duration of the new mortgages or whether the taxpayer will be on the hook for any loan losses.

Banks are already struggling to make money because of low interest rates and they’re facing pandemic-induced corporate loan losses. The last thing they need is a wave of mortgage defaults to add to their woes. 

It’s especially confusing to be told to lend more when regulators, including the Bank of England, want lenders to do the opposite.

At least borrowers wouldn’t have to worry about interest rates rising if they locked in to a long fixed-rate mortgage. Negative equity isn’t such a worry if you don’t have to repay for another 25 years. Yet compared to the U.S., France and Germany, Brits tend not to tie themselves down to such long-term deals. Even a five-year fixed interest rate might be considered conservative in the U.K.  

As interest rates kept tumbling over the past decade, this British preference for flexible, variable-rate mortgages was smart finance. But with the BOE base rate falling to 0.1% and the yield on 30-year gilts less than 1%, borrowers who can afford a deposit are starting to see the appeal of locking in low rates.

The U.K. still has some catching up to do, though. A 15-year fixed-rate mortgage product that Virgin Money launched last year remains an outlier. 

In the U.S., quasi-state enterprises Fannie Mae and Freddie Mac buy up and securitize loans and thereby give U.S. banks the balance sheet bandwidth to offer 30-year fixed-rate mortgages. Absent such a system, British banks may struggle to do Johnson’s bidding. 

There are, however, other capital providers — such as pension funds and insurance companies — who might be prepared to take a longer-term view. 

Long-duration fixed mortgages that give borrowers certainty on their monthly costs, and left them afford a home, are certainly worth investigating. But I’ve bad news for young Brits hoping for a property market crash. This government, like all previous ones, looks hell-bent on keeping prices high.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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