All praise prudence
Mortgage banks are not allowed to lend more than 4.5x the borrower's income unless those loans fit into the Fifteen Percent Bucket.? Thankfully, rules can be reformed. The Fifteen Percent Bucket is so absurdly outdated, one is tempted to use humor to highlight a very serious issue.
Most banks have filled their bucket already.? Don’t look at me.?Ask them.?The UK mortgage market is large, mature, and offers low margins. One top-four mortgage bank is speculating about picking up sticks. It would surprise me if the big banks had not already filled their Fifteen Percent Buckets. If so, the best way to spur new lending is to kick the bucket rule altogether.
Let's start with the serious bit. People live in homes that cost vastly more than banks are allowed to lend. Pulling together a 10% deposit to buy a home that is wholly unsuited to your needs does not solve the problem of housing affordability. Getting rid of The Fifteen Percent Bucket is more important than helping people put together a deposit.
Mr Gradgrind wants facts: Keeping the Fifteen Percent Bucket in place since 2009 has not stopped house prices from outpacing incomes but it has trapped millions of renters who would rather be owners. The chart below uses ONS data for England and Wales between 2002 and 2023. It shows the ratio of median house prices (in the numerator) to median gross annual residence-based earnings.
Here's how to interpret it:
Profile in courage: Fifteen years into this experiment, perhaps it's time to try a different approach. Step forward, Chancellor Rachel Reeves. She has suggested looking at outdated regulations, like the Fifteen Percent Bucket, as part of a raft of changes to shift Britain towards higher economic growth.?Curiously, some people think kicking the bucket is a bad idea. I'm yet to hear a cogent reason supporting that view.
The “fixed stock of homes” argument. ?Some argue that there is a fixed stock of homes for sale.? They say that making it easier for people to buy homes will push prices up and make homeownership less, not more affordable.?
Riposte:? The stock of homes for sale is not fixed.?Kick the bucket and banks will offer more loans, housebuilders will release land, and demand for rented accommodation will fall.? Landlords will sell, putting downward pressure on property prices.? In the long run, there will be a steep fall in the number of people who rent from private landlords.
Forecasting is difficult, especially about the future, but there is abundant evidence that profound changes in the tenure of occupancy happen on a generational timescale. As we want Chancellors to think long-term, let's applaud Ms Reeves for doing so.
All change: We are drowning in evidence that the property market is dynamic. The number of households in England (ie, 85% of the UK) has grown 25% since 1990. The number of households occupying homes and repaying a mortgage has fallen in absolute terms. Where is the evidence that the stock of houses is fixed?
The “it all went wrong last time” argument.? Some claim that allowing people to buy homes represents a systemic risk to the banking system.?
Riposte:? Mortgage lending is profitable, despite low margins.? Excessive defaults did not threaten British mortgage banks in 2008.? At least there's no evidence to that effect. The overwhelming majority of people who borrowed to buy homes repaid those loans.?Their homes rose modestly in value when you strip out inflation (2009 to 2024) and the vast majority are far better off than they would have been if they did not buy.
The availability heuristic: As a species, we are not good at thinking in probabilistic terms. We prefer to point out things that stick in the mind as if the eye (or ear) catching stat was important. Nobody wants planes to crash. But we also want to travel by air and, when weighted by probability, it's worth taking the risk.
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Let's do the math. If you buy a place worth ￡200,000 and it rises in value by 2-3% per annum (net of inflation) for 30 years. It will probably be worth somewhere between ￡350,000 and half a million pounds. Passing those homes onto your kids will probably help their chances in life.
If you were stuck renting for thirty years, your stake in the value of your home would probably be worth somewhere between zero and zero. Since people buy at age 30 and life expectancy is roughly 85 years of age, those stuck renting will probably shell out a whole bunch more money when their neighbours who bought homes can spend that money to support their retirement.
Let's do more math: In 2009 there were about 7.7 million households in England in the process of buying a home with a mortgage. During the year about 40,000 homes were repossessed. Each repo was a disaster for the family involved. The plane crashed. But 99.5% of those borrowers did not lose their homes.
A probabilistic assessment of policy options would start with this peak level of foreclosure. Cumulate a static block of borrowers with a success rate of 99.5% for 30 years and 15% of those homes would be lost to foreclosure and 85% would be repaid.
But wait, there's more: Over the span of thirty years, house prices (tend to) rise, and mortgage loan balances (tend to) fall. The word "tend" is the probabilistic bit. Ergo, some of those people would lose homes worth half a million quid when their outstanding balance was close to zero. Given a chance, would you roll the dice and buy a home or stay renting where you are guaranteed to own nothing in the end?
Let's put this in context, half a million pounds dwarfs the amount people expect to accumulate in pension savings. That money flows to landlords, it's not lost, it just ends up in the hands of people fortunate enough to own property.
Providing access to ownership is a serious matter. The debate about liberalising lending rules is also serious. Claims that changing the rules courts disaster need to rest on data or some credible factual basis. If not, those opposed to change are simply not being serious.
I support the Renters Reform Bill but changing the mortgage lending rules will help people who don't want to be stuck renting. It would be prudent to kick the bucket.
People affected by these issues should feel free to reach out
Ike Udechuku | Cofounder | Pathway
The rules that bind and hold us tight, Like shadows cast in waning light, Must shift and turn, a wiser flow, For hearts locked out have much to show. The banks may grow, and wealth may rise, But human lives beneath the skies, Crave not just walls or hollow stone, But the earth's embrace, a place called home. True wealth lies not in stacks or gold, But in the land where peace unfolds. For when we build where nature calls, The house is built, yet heart stands tall.