My long-held view that the UK housing market is a ‘bubble factory’ because of the way in which policies work to pump demand and choke supply received further confirmation today with the news that the conservative Scottish Tories are lobbying the Central Government to underwrite 95% loan-to-value ratio (LVR) mortgages in order to help UK first home buyers (FHBs) achieve their “dream” of home ownership. From The Telegraph:
The taxpayer should underwrite 95 per cent mortgages for first-time buyers to help them realise the “dream” of home ownership, the Scottish Conservative leader said.
Ruth Davidson said she was lobbying the Prime Minister and Chancellor ahead of next month’s Budget arguing that the Bank of England should intervene to help young people onto the property ladder…
The 34-year-old said she was still renting as she could not afford to buy a home, with lenders demanding deposits of up to 30 per cent in the wake of the banking crisis.
Although mortgages that required little or no deposit were blamed for helping cause the financial crisis, she argued they should be reintroduced for people who can afford the monthly repayments.
“That’s why I’m calling on the UK Treasury to do more with the Bank of England to come up with a way to bring back affordable, 95 per cent mortgages,” she told an invited audience at the Mitchell Library in Glasgow.
“Such deals are still common in other countries like the US, Canada and Australia, so why can’t they return here? I don’t want to encourage people to take on loans they can’t afford, but lending with small deposits has been an important part of our mortgage market for a long time.
“In the past it has helped families on modest incomes achieve the dream of buying their own home. It is time for us to take real action to rekindle that dream.”
Anyone with even a basic understanding of economics would recognise that with the UK’s highly rigid planning system choking supply, such a scheme would be counter-productive and simply cause home prices to rise, making affordability even worse.
It’s also interesting to note Ms Davidson’s comment that she could not afford to buy a home because lenders were requiring 30% deposits in the wake of the financial crisis. This suggests that the problem with UK housing affordability rests more on the supply-side (too many people chasing too few homes) rather than on the demand-side. It also suggests that if LVR restrictions were implemented and credit constrained, it would not solve the affordability problem, even though its would be beneficial long-term from a financial stability perspective.
