If the cap fits, wear it

Banks should lend more to people who are not wealthy. Here’s why

A century ago, German architect, Peter Behrens, coined the expression: less is more. Fittingly, today the phrase is popularly attributed to his protégé, Bauhaus architect and erstwhile furniture designer, Ludwig Mies van der Rohe.

The misattribution is fitting because, from time to time, we should re-examine things that we believe to be true. Popular misconception is the theme of this article. Less is not always more. When it comes to giving families access to home ownership, more is more.

Early in 2022, British mortgage banks and their regulators took baby steps in that direction.?They scrapped the rule requiring banks to evaluate an applicant’s ability to repay if, hypothetically, mortgage rates spiked by 3%.?This rule change was a tacit admission that the stress test was arbitrary and no longer fit for purpose.?As luck would have it, the stress test was dropped mere months before the disastrous Mini-Budget caused mortgage rates to spike by 3%, something that had not happened in a generation.?Irony is not dead.

A second arbitrary rule, the so-called loan-to-income ratio, discourages banks from lending much more than four times the applicant’s household income.?That rule is also well past its sell-by date and should be scrapped.

Strap in.?Inconvenient facts approaching.

Fact One: The Financial Conduct Authority regulates banks. It does not regulate landlords.?So, it ignores the plain fact that barriers to mortgage lending condemn millions to rent. These families fall outside the protection of the regulatory perimeter. Out of sight and safely out of mind.

Fact Two: Data from the Office of National Statistics suggests that the median-valued home costs roughly nine times median gross annual workplace income.?This measure of affordability is not uniformly distributed. In many parts of this incredibly diverse country, homes can cost substantially more than two times the income cap.

Fact Three: renting for thirty years costs significantly more than it costs to pay off a thirty-year mortgage. Worse, in year thirty-one, when the borrower owns free and clear, the renter keeps on paying rent, perhaps for a further thirty years.

Mix these facts in a circular tin, add yeast, stir with a wooden spoon, place them in a warm oven, and let the conclusions rise. These protective measures force people who are “too poor to buy” to pay vastly more just to live in a house they will never own.?By vastly, I mean it's not even close.

Is Alice looking through the glass darkly??Is this Orwellian double-think??Help me out.?Answers on a self-address postcard, please.

And here’s one more inconvenient fact. The rental trap is not uniformly distributed. According to the English Housing Survey, approximately 77% of households identifying as black rent their homes versus 46% for other minority ethnicities and 31% for those identifying as white.

These data are accessible to anybody with a Google machine and, last I checked, the Office of National Statistics, the Financial Conduct Authority, and the Ministry of Levelling Up were all agencies of the same government.?A short conversation around the cooler is needed.

Enough with the facts, consider this counterfactual scenario. Should families earning median income in Manchester (roughly ￡32,00) be barred from renting a home worth more than ￡140,000 in a city where the median-valued home costs ￡210,000? Naturally, families with ￡70,000 of savings lying around would be exempt from this protective measure.

Down south, families in Croydon (median income ￡35,000) would be prevented from renting homes worth much more than ￡150,000.?Median valued homes in Croydon cost ￡410,000.?Once again, families with a cool quarter of a million lying around would be exempt.

It’s only a thought experiment but clearly, the cap doesn’t fit.?If anyone can articulate a rationale for such a bizarre outcome and dress it up as consumer protection, please, please let me know in the comments.

Trigger warning: I lied.?More facts approaching.?Nobody wants to lose their home, whether they are buying or stuck renting.?People’s circumstances change for many reasons: death, divorce, illness, inebriation, intoxication, incarceration, accident, involuntary redundancy, and retirement, among others.?The incidence of these inevitable vicissitudes won’t change just because some of the families affected are forced to rent.

Fact Four: A few thousand people are evicted each year for defaulting on their mortgages – maybe five thousand unfortunate families.?Just like self-driving cars, trying to drive this number to zero is misguided.?Five thousand a year totals twenty mortgage repossession every business day. Twenty. Count them on your fingers and toes.

Fact Five: A few million renters (perhaps five million if you extrapolate from the English Household Survey) want to buy a house. Most can’t.?A million more families say they used to want to buy but have come to realise that ownership is beyond them. ?

One more time with feeling.?Should these millions remain out of sight and out of mind or should we as a society do more?

We’re forming a club for renters who want a pathway to ownership. Our core product is a regular residential lease with a few paragraphs tacked on the end giving the tenancy an end date, after which the tenant can buy the freehold for a peppercorn. We cap the lease at forty years because nobody should pay rent forever.

Innovative but not complicated.

We’re determined to use #fintech and #fintechinnovation to promote #financialinclusion

Ike Udechuku

Cofounder | CEO | The Pathway Club