MPC member predicts decline in home-ownership
Published: 30 November 2011 | Author: Bernard Clarke
Bank of England monetary policy committee member David Miles has predicted that current housing affordability problems for first-time buyers could lead to a continuing decline in owner-occupation.
Speaking to the Northern Housing Consortium earlier this month, David Miles argued that the need for buyers to provide more equity in the form of larger deposits could bear down on first-time buyer numbers, as they were forced to postpone their purchase while saving for a deposit.
In the short term, he predicted, this would create transitional problems, particularly for house-builders. Indeed, it is this issue that the government is partly seeking to address with its recently announced mortgage indemnity scheme. In the longer term, however, a lower rate of owner-occupation and a larger rental sector need not be a negative outcome, David Miles argued.
The housing market was going through "an extraordinary period of re-adjustment," he said, with property transactions having halved since 2007 while house prices had fallen by 20% over the same period. House-building had declined by more than 50%, while net mortgage lending had remained positive but fallen sharply.
"It is not surprising that the recession and the financial stresses have had a huge impact on the housing market," he said. "The disposable income of the majority of households has fallen; uncertainty about future levels of income has increased sharply. Uncertainty pushes down on the value of long-lived assets, and few assets are as long-lived as houses."
With lenders requiring house purchases to be funded with more equity, many people were postponing home-buying while they saved for larger deposits. As a result, the average age at which people are able to buy their first home would rise, David Miles predicted, while owner-occupation continued to decline.
Other ways of bridging the equity gap could include shared ownership schemes and equity loans, and David Miles believed that lenders and borrowers would explore a range of types of loan contract giving home-owners choices over how much price risk they wanted to take on.
One outcome – although a far from inevitable one – was that lower levels of owner-occupation and mortgage debt would mean the Bank rate had less effect on the economy, he predicted. Changes in house prices would also have less impact, making the economy more stable and monetary policy easier to manage.
We agree with David Miles' analysis of current housing market problems and his outlook on how patterns of home-ownership and tenure might change in the future, particularly if house prices remain at current levels. But it is also possible that the housing market could change and develop in other ways.
One possibility, for example, is that, as interest rates rise to more normal levels, house prices may weaken considerably, relative to incomes, which could significantly shorten again the period first-time buyers are required to save to raise a deposit.
If access to home-ownership improved as a result, the trend of declining owner-occupation in recent years could be reversed. In our view, the crucial measure to help address housing market problems is to deliver an increase in the supply of homes, and for these homes to be available in a balance of tenures that meets the needs and sustainable aspirations of the population of the UK.