95% mortgages: Less generation buy, more generation debt

So, as ministers have been hinting on and off for months, the Government is to guarantee 95% mortgages. The hope is that this will make banks more willing to offer them, because they’ll now be less likely to lose money, and make it possible for those with relatively small deposits – worth 5%, rather than 10% or even 20& of a property’s value – to buy homes. 

But is it actually a good idea? Every policy has both pros and cons, of course, so to judge this one let’s take a quick run through the list. First, the case against 95% mortgages.

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It’ll probably increase house prices. 

Increasing the number of people who can plausibly buy something without increasing the availability of that thing will, according to all the laws of supply and demand, increase the market price of that thing. The thing in question here is “homes”. There are no plans to imminently increase their supply – thus, their price is all but certain to rise. That price is, you will recall, already exorbitantly high.

It increases the risk that buyers will fall into negative equity.

One of the reasons you generally need a deposit to buy a house is so that, if prices fall, you don’t end up with a debt bigger than your equity, which makes it almost impossible to remortgage or move. 

For fairly obvious reasons, buyers whose mortgages are worth 95% of their home’s value are at greater risk of negative equity than those whose mortgages are worth 90% or less. The homeownership dream could, if the market ever does fall, swiftly turn into a life-ruining nightmare.

It puts the taxpayer on the hook for any defaults.

The point of a guarantee is that, if borrowers default on their mortgages, the government will help cover lenders’ losses. In other words, if lenders find they were right in their original assessment that these borrowers were too risky to lend thqt much money to, it’s now the government’s problem.

As one broker told the Times when the policy was first mooted last autumn: “If the lender doesn’t think the risk is acceptable … should the government, on behalf of taxpayers, accept the risk?”

It won’t actually help most buyers.

In August 2013, the housing charity Shelter published its Forgotten Families report, which noted, that “almost 8 in 10 of England’s low to middle income families could not afford a family home with a 95% Help to Buy mortgage”. But that was over seven years ago. Since then, house prices have increased a lot faster than wages. We can probably assume that almost 8 out of 10 is an underestimate. 

Let’s look at this another way. Before the pandemic hit, the median household income was just under £30,000 a year. Banks are not supposed to lend more than 4.5 times income. That suggests that the median household could borrow £135,000, which, at a 95% mortgage, means that, even if they could scrape together the deposit, the most expensive property it could buy would be worth just over £142,000. 

This week @theipaper why the #Budget2021 announcement of government-guaranteed 95% mortgages probably won't "turn Generation Rent into Generation Buy", could make things worse and will do little to help low income renters who would like to buy a home https://t.co/Dkh9gqOkWU

— Vicky Spratt (@Victoria_Spratt) March 1, 2021

The average UK property price is around £267,000. 

In other words, in many parts of the county, the vast majority of households are not going to be able to buy a home, with or without a 95% mortgage. Why? Because house prices are too high, or wages are too low, take your pick. Either way: while there will definitely be households that earn good money but don’t have savings who will be helped by this policy, there will be vast numbers for whom it’ll make absolutely no difference.

Except by pushing house prices up, it actually will make a difference: it will make things worse.

It ignores every other element of the housing crisis.

Hundreds of thousands of renters who’ve lost income during the pandemic are in arrears. Homelessness has spiked, and is expected to spike further when the eviction ban finally lifts. Leaseholders are facing bills well into five figures, thanks to the need to remove flammable cladding and pay for waking watches.

The people footing the bill for the Grenfell cladding scandal are not wealthy homeowners who gambled and lost, writes @JonnElledge. They are fairly average households that bought homes in good faith, only to find they were fire-traps. Why should they pay?https://t.co/hG3GzCkHEQ

— Big Issue (@BigIssue) February 16, 2021

These mortgage guarantees will do nothing to help any of those people. In fact (sing along with me now), by increasing house prices, they may make things worse. They’re a sign that, when it comes to housing policy, the government prioiritises a vibrant sellers’ market above all else

So much for the case against. But how about the case for 95% mortgages?

Some people who work in the property industry like it because it means prices will rise.

I’m being glib. I’m sure there must be other arguments in favour of the policy. 

But the government isn’t making them – it keeps saying it wants to turn generation rent into (euch) generation buy, but it has yet to explain how a policy intended to make high house prices even higher is going to achieve that. 

Which leads one to wonder whether that’s really what the policy is intended to do. Perhaps those ever higher house prices aren’t a side effect after all.