The Bank of England believes that the way to stabilise the housing market and economy is to have fewer owner-occupiers
While researching owner-occupation rates last week for my article A shock slump in mortgage debt, I stumbled across a speech that David Miles, a member of the Bank of England's rate-setting Monetary Policy Committee (MPC), gave last November.
At the time, the speech - "Mortgages, housing and monetary policy -- what lies ahead?" - attracted scarce media attention.But it's contents give a clear indication of the Bank's views on home ownership.
'An extraordinary period of readjustment'
I've long argued the case that the UK has an unhealthy obsession with house prices and owner-occupation. What pleases me is that some members of the Bank of England's MPC also question the conventional wisdom that high house prices and high levels of owner-occupation are inherently good for Britain and its economy.
In his speech, Miles started out by explaining, in the simplest terms, the lure of owning a home, noting that "Few people are nomads by choice". In other words, people place great value on having somewhere that they can reliably call home for many years, which is why most Brits are owner-occupiers or would-be home-owners.
Unfortunately, our common desire for housing stability and predictability brought the UK financial system to its knees during the global financial crisis of 2007/09.
As a result, it took £1.5 trillion of public money -- the UK's entire output for a year -- to save our financial system. This included huge cash bailouts to failed lenders such as Bradford & Bingley, Northern Rock, Lloyds Banking Group and Royal Bank of Scotland.
That's why Miles warns that the UK's housing and mortgage markets "may never be the same again". Since the 2007 peak, the average house price, adjusted for inflation, has fallen by about a fifth (20%). The number of property transactions has halved since mid-2007, plus net mortgage lending has collapsed to nearly zero. In fact, net mortgage lending was a negative £73 million in May.
What's really worrying is that this steep decline in housing-market activity came about despite the Bank of England slashing its base rate to a tiny 0.5% a year. Since March 2009, the base rate has remained at 0.5%; its lowest level since the Bank was formed in 1694. Without this unprecedented cut to mortgage rates, house prices would have collapsed even further and faster.
The Bank's housing heresy
In 2008/09, the UK endured an "exceptionally severe recession" -- the longest and deepest in our history. Consequently, our economy is smaller today than it was four years ago, plus it is growing at well below trend rates. What's more, the unemployment rate has risen from 5% at the end of 2007 to 8.2% in April.
In short, the bursting of the housing bubble has done untold damage to the UK economy. This also damaged the Bank's reputation for prudence, as the Bank failed in its remit to ensure financial stability in Britain.
[SPOTLIGHT]To make the UK's financial future more stable, the Bank of England wants to see a "transition to a more resilient housing market".
As we emerge from this turmoil, the Bank of England is determined to do what it can to avoid future housing booms and busts. Instead, the Bank would prefer greater economic stability and an end to the 'property mania' that has caused three housing bubbles and busts in the past 40 years.
Miles warned, "I believe that it is likely that we will get back -- maybe slowly -- to more normal rates of economic growth...but I do not believe that the housing market and the mortgage market will get back to where we were in the years leading up to the crisis. I also do not think we should regret that."
Older first-time buyers
Looking ahead, Miles warns that first-time buyers these days are forced to postpone their purchases in order to save larger deposits. This weakens the bottom rung of the housing ladder. Although alternative schemes such as shared equity and mortgage indemnity schemes can assist such buyers, they will not replace the incredible demand seen before the abrupt market reversal in 2007.
Thanks to first-time buyers being forced to save more and for longer, the Bank expects to see their average age rise.
One knock-on effect of this demographic would be a fall in owner-occupation levels (as well as a general fall in prices). Having peaked at almost 71%, the owner-occupation rate is steadily heading back down towards levels not seen since the late Eighties.
Good for job-hunters
David Miles believes that having fewer owner-occupiers will increase the UK's labour mobility, as it is easier and cheaper for tenants to relocate for work. This would lower the rate of unemployment. So a fall in owner-occupation rates could actually be good for Britain.
What's more, lower owner-occupation rates would mean less money tied up in property and a smaller stock of mortgages, relative to the size of our economy. This would make the UK less exposed to volatility in the housing market.
For example, with a smaller stock of mortgages, an increase to the base rate would have less impact than previously. In terms of the Bank's commitment to financial stability, this would certainly be a good thing.
What do you think? Is David Miles right? Should we want lower owner-occupier levels? Let us know your thoughts in the comment box below:
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