Boris Johnson wants young Brits to buy a house, even if it means banks have to lend like in 2006

Boris Johnson wants young Brits to buy a house, even if it means banks have to lend like in 2006

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To revive the British economy hit by coronavirusBritish Prime Minister Boris Johnson has offered to give the country’s favorite asset: homes a boost.

Johnson, speaking at his Conservative Party’s annual conference on Tuesday, said it was about time for the government to continue with a plan – first addressed in the party’s manifesto in 2019 – that would help first-time buyers buy a house with just 5% down payment.

The government would help cover part of the lender’s losses if the borrower defaults. It’s part of Johnson’s plan to create what he calls the “Generation Buy” among young Britons.

“We believe this policy could create two million more homeowners, the biggest homeownership expansion since the 1980s,” Johnson said.

Home ownership for young families

It is true that homeownership levels in the UK have declined. People aged 35 to 44 are now three times more likely to be in private rented accommodation than 20 years ago, with just 50% of people in that age group having a mortgage today, compared to 68 % in 1997, according to a report released earlier this year by the UK’s Office of National Statistics. Those between the ages of 24 and 34 are twice as likely to be renters today than they were then.

But Johnson’s plan is sounding the alarm bells among some banks and charities who fear it represents a return to dangerous lending practices that UK regulators have been trying to stamp out since the 2008 financial crisis.

Eric Leenders, Managing Director of Personal Finance, UK Finance Retail Banking Organization, Told The Financial Times that “businesses have a duty to lend responsibly and to consider the affordability of the long-term mortgage, thereby helping clients avoid the risks associated with negative equity.”

Meanwhile, Polly Neate, managing director of the UK housing charity Shelter, accused the Prime Minister of selling ‘pipe dreams’ given that the average house price is now more than eight times the average wage United Kingdom.

UK house prices rose at their highest annual rate since 2016 last month, as Britons shifted their work habits and a cut in purchase taxes stoked a resurgence. Here, a pedestrian walks past terraced houses in Bath, UK on Wednesday October 7, 2020. Wire photograph: Jason Alden – Bloomberg via Getty Images

The Prime Minister’s plans to relax affordability standards seemingly run counter to what UK regulators have tried to accomplish over the past decade.

In 2007, almost half of the mortgage products available in the UK allowed loan-to-value ratios of up to 95%. Three years later, in the depths of the financial crisis, that number fell to just 1.2% of the market, as banks naturally backed down on lending.

But, in 2014, the Bank of England became alarmed that high levels of mortgage debt, combined with rapidly rising house prices, were fueling a risky asset bubble in residential real estate, as was the 2008 collapse in the United States that helped trigger the global financial crisis. crisis. That year, house prices rose by almost 9% per year, approaching their pre-crisis rate in September 2007.

In response, the bank imposed rules whereby only 15% of a lender’s mortgages could be issued with loan-to-income ratios above 4.5. The UK banking regulator also imposed more stringent requirements on the amount of capital banks had to hold in reserve to cover potential losses on high-value mortgages.

Banks are reducing the amount of high value mortgages they would take out. Some have stopped offering mortgages with loan-to-value ratios above 85%. The average loan-to-value ratio of a mortgage that was above the median level – which was 71% in 2019 – is now 88.4%, down slightly from 90.6% in 2006, according to the Bank from England.

Much of Britain’s wealth

It’s not hard to see why Johnson wants to attract more buyers to the real estate market. It’s an easy way to boost some economic activity and goose household wealth at a time when most other areas of the economy have been flattened by the pandemic and the uncertainty that threatens Brexit.

Housing wealth represents 35% of all household wealth in the UK, just behind the value of pensions, and its contribution has increased by 5% since 2014, according to ONS data.

And property values ​​have never been higher. In September, the UK average house price hit an all-time high of £ 226,129 ($ 293,000), while in London the average house price is now a record £ 480,857 ($ 623,000) in September, 57% above their 2007 levels. Meanwhile, new mortgage approvals have peaked for 13 years, according to the Bank of England.

Johnson’s latest pledge of 95% mortgages is just part of the strategy his government has pursued to inject rocket fuel into the already hot housing market.

In July, Rishi Sunak, Chancellor of the Exchequer of Johnson, announced a year-long break from stamp duty – a tax that buyers pay on most residential property purchases – on homes worth maximum of £ 500,000 and a rate reduction, to 5% from 8%, for properties between £ 500,000 and £ 925,000. The cuts contributed to a massive increase in the number of people looking to buy as soon as the foreclosure restrictions were lifted in July, with the number of buyers in the market increasing by 38% compared to the same period in 2019 and, according to one estimate, one in every seven homes in the country find a buyer within a week of listing.

But it remains to be seen whether deliberately using the housing market to help Britons feel richer and more financially secure in otherwise bleak economic times.

At the end of September, the Bank of England expressed concern that the big UK banks were not correctly rating the risk of residential mortgages and not reserving enough capital to cover potential losses. . Some banks attributed “too low” risk measures to mortgage loans, the BOE Careful The Regulatory Authority said. This finding adds to concerns about the stability of an already in the face of a potential tidal wave of $ 99 billion in bad debt due to the pandemic.

As a result, he plans to tighten reserve requirements. “It is imperative that risk weights are calculated and set with caution to ensure that individual companies have sufficient capital for the risks to which they are exposed,” the BOE said in the proposal published on Wednesday. Bloomberg reported that some banks applied an average risk rate of only 10% to mortgages in their own risk models, compared to 35% in the model used by the banking regulator.

After all, as some affordable housing advocates point out, getting a mortgage is one thing. Being able to pay is another.

As Shelter’s Neate said, “You have to ask yourself whether the Prime Minister is in touch with reality,” she said. “He talks about giant mortgages at a time when more than 320,000 private tenants have fallen behind on their rent due to Covid-19.”

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