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Anthony Hilton: Blame the banks for house price surge as lending soars

The group born between 1983 and 1987 are half as likely to have bought a home at the age of 25 as the same age group 20 years before
The group born between 1983 and 1987 are half as likely to have bought a home at the age of 25 as the same age group 20 years before / Rui Vieira/PA Wire
07 February 2019

ne of the interesting things about housing is that real prices didn’t rise much until the Eighties. Before that, parents tended to counsel children to be careful about bricks and mortar, particularly in out-of-the-way areas.

Of course there were ebbs and flows, particularly with inflation, which was acute in the Seventies. At that time householders seemed to be in clover. But once inflation and the cyclicality of house prices was taken out, home owners had not done as well as they thought.

Since then, and particularly from the mid-Nineties, the price rise has, in contrast, been utterly mind-blowing. Housing has taken off: the earnings multiple for a mortgage used to be two-and-a-half to three times income, with just one person’s income being eligible. Today couples normally pool their earnings to maximise their mortgage power and five or six times income is commonplace.

But why has this happened? If the long-term trend was muted until the Eighties — which it was — why has the housing market since then seemingly taken leave of its senses? And not only in this country: most of the other leading nations have had similar stories.

Josh Ryan-Collins, who is a researcher at University College London, has a theory that it all comes down to the banks.

Until the Eighties banks were not allowed to make mortgage loans. That was the job of the building societies who tended to be conservative, both by encouraging buyers to save for a deposit and then buy only what the society thought they could afford.

But with Margaret Thatcher’s liberalisation came deregulation; the banks were allowed to compete for mortgages. And not just compete — they wiped out most of the building societies.

Banks before deregulation were the capital market for business and they accounted for most of the loans. Now, 30 years on they are leaders of housing finance. Their balance sheet is some 70% mortgages and only perhaps 15% (and some say 10%) of business loans.

The reason small businesses don’t get anywhere when they come looking for finance is that housing is safer. Small business is intrinsically risky whereas even if a home borrower does default, the bank can simply seize the house.

The Government is in thrall to banks because they have a huge effect on home ownership. Yet in spite of this, home ownership is in decline.

The group born between 1983 and 1987 are half as likely to have bought a home at the age of 25 as the same age group 20 years before.

There is also a massive shift of middle income families with children.

Between 1994 and 2004 the poorest fifth dropped in home ownership from 40% to 37% and the richest fifth dropped from 94% to 87%. The middle fifth dropped from 69% to 50%. The aspirant middle class are increasingly priced out.

In his book, Rethinking the Economics of Land and Housing, Ryan-Collins et al focus on land, debt and the effect of bank credit. Land is key. Like the other variables it was steady for decades until the late Eighties. Now whereas a house will have risen three times since 1945, the land on which it sits has gone up tenfold.

Land is entwined with finance and provides great collateral. Graphs of land prices and bank debt since the Eighties liberalisation rise almost in lockstep. And volume of debt — largely mortgage debt — has never been so high on individuals.

Securitisation of mortgages adds another step. Banks sell their mortgages to other financial institutions and then buy some more. This way bank credit runs way ahead of new housebuilding, and prices rise.

To repeat, mortgage lending has gone from 25% to 75% of bank assets since the Eighties. Finance for business is now down to around 10%.

The Government could have leant against this pressure and restrained banks. But they went the other way. They decided the problem was demand and introduced Help to Buy, thereby adding a subsidy to make lending even cheaper. Builders made fabulous profits, homebuyers had to dig even deeper.

Housing has become financialised. People now buy hoping to make money rather than find somewhere to live. Council houses sold off by Thatcher are bought by landlords who make money at market rates while councils have waiting lists. Inequality is rising fast.

The Government seems powerless to prevent it, because it thinks the problem is one of credit rather than homes, so it adds further fuel to the flames.