The report highlights how tougher regulation and higher capital requirements for lenders have accelerated the fall in homeownership and dramatically reduced the number of people – especially younger households – who are able to buy their first home.
Using government and industry data, Genworth’s analysis of first time buyer numbers compared with expected demand shows people entered owner-occupation at a consistent rate from 1985 to 2006, with 10.26m buying their first homes, only slightly under the expected 10.29m based on population trends.
But since 2007, an unprecedented collapse has taken place, creating a large and persistent deficit in first time buyer numbers. The combined effect over seven years from 2007 to 2013 is a shortfall of 1.8m first time buyers against expected demand. Put simply, 1.8m of the UK population who would have been expected to buy their first home since 2007 have not done so.
Even with the government’s Help to Buy schemes in place, figures for the first six months of 2014 indicate there will be 296,200 first time buyers this year when demographic trends suggest there should be 500,000 to satisfy demand. This annual deficit of 41% or 203,800 will push total frustrated demand from the previous 1.8m to beyond 2 million.
Long term plan needed to support first time buyers while protecting the financial system
As a result, the report warns that the UK is facing a large and rapidly growing crisis in access to homeownership alongside the crisis of inadequate house building.
It highlights the impact of the high LTV lending drought on the house building collapse during the recession – high LTV borrowers made up 40% of new build sales before the financial crisis – and examines the policy response to correct the fault through the dual Help to Buy schemes, which have accounted for virtually all the growth in new housing output over the last year.
Genworth argues these temporary government interventions need to be replaced with a permanent, market driven mechanism that supports access to homeownership for ordinary families while protecting the safety of the financial system.
Without a permanent long term replacement for Help to Buy to bolster high LTV lending, new building rates could quickly fall back or properties could get to market and not find buyers among the key frustrated demographic.
A system of mortgage insurance – which already exists in varied forms in Canada, Australia, the U.S., Hong Kong and the Netherlands – would provide the UK with the missing piece of its regulatory jigsaw: a comprehensive framework to mitigate the risk of high LTV lending by transferring it from a mortgage lender to an insurance provider designed to bear the risk.
Mortgage insurance for high LTV loans – backed by capital relief for lenders –would ensure prudently underwritten mortgages can be available in the quantity and at the price required to support first time buyer aspirations in the UK.
As a regulatory tool, it would also reconcile the twin objectives of keeping the financial system safe and keeping homeownership open as an option for the majority, without calling on taxpayer funds to prop up the first time buyer market.
Simon Crone, vice president for mortgage insurance (Europe) at Genworth, comments:
“The scale of frustrated demand is growing larger by the day. Interventions so far have barely begun to make any inroads into a problem that threatens to permanently undermine UK homeownership, with younger households bearing the brunt of the impact.
“The UK is facing a dual crisis of first time buyer lending alongside low house building. There is plenty of scope to improve on Help to Buy, which remains a temporary fix to a problem currently hardwired into the market. But we must avoid its removal until there is a long term solution in place. Delaying these vital decisions will only exacerbate the issue.
“Help to Buy must become a precursor to a permanent system where mortgage insurance for high LTV loans – backed by capital relief – plays an ongoing role in helping first time buyers access the market, ensuring a sustainable rise in house building and protecting the safety of lenders and the financial system.”
Regulation has pushed the price of high LTV loans out of reach for many buyers
Genworth’s report shows that high LTV lending was crucial to advancing and sustaining UK homeownership from the 1930s onwards, and its subsequent decline has been the key factor in falling rates of owner-occupation with 25-34 year olds hit hardest.
Tougher regulation since 2008/9 has reinforced a shift of focus away from first time buyers in the mortgage market, contributing to a dramatic reduction in high LTV mortgages and pushing up their cost for lenders and borrowers.
Comparing the average cost of a two-year fixed mortgage at 75% and 95% LTV in July 2014, borrowers effectively paid a rate of 15.8% on the balance between 75% and 95% compared to 2.5% up to 75% LTV.
It means on an average first time buyer home of £147,000, a 75% LTV borrower would pay £496 a month while a 95% LTV borrower would pay £843. Assuming both were assessed as being able to pay up to 30% of their net income on their mortgage, the 75% LTV borrower would need a gross salary of £24,800 while the 95% LTV borrower would need £45,800, hugely restricting the number who can take out a high LTV mortgage.
Simon Crone, vice president for mortgage insurance (Europe) at Genworth, continues:
“The insurance sector has the capacity and willingness to replace much of the government’s exposure under Help to Buy and support a transition to a permanent scheme that helps rescue owner-occupation from its current decline.
“We urge government and regulators to work with private insurers to address the two most pressing priorities in the housing market: boosting construction of new homes and supporting first time buyer access at a price they can afford.
“Both objectives depend on the availability of high LTV mortgages, and a solution that delivers these outcomes while protecting financial stability is the missing piece of the UK’s regulatory jigsaw.”
