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Help to Who? Using the state to help to buy

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Help to Who? Using the state to help to buy

  1. 1. Help to Who? Using the state to Help to Buy Wednesday June 5th, 2013!
  2. 2. !  John Stewart, Director of Economic Affairs, Home Builders Federation! !  Toby Lloyd, Head of Policy, Shelter! !  Dr Christian Hilber, Reader, Department of Geography and Environment, LSE! !  Chair: James Lloyd, Director, Strategic Society Centre! !
  3. 3. !  When is it the role of government to underwrite private mortgage lending?! !  Why are UK banks not offering higher loan-to-value mortgages? Is this a function of temporary institutional constraints or an assessment of UK house-price risk? How will lenders assess this risk when Help to Buy ends?! !  What outcomes are Help to Buy trying to achieve? Do these outcomes cohere with wider housing policy objectives?! !  What are the distributional consequences of Help to Buy? Who will benefit from the scheme? What does Help to Buy mean for the aspiration agenda?! !  What does international and historical experience tell us about the role of the state in financing private house purchases?!
  4. 4. Help to Who? Using the State to Help to Buy John Stewart Director of Economic Affairs, HBF 5 June 2013
  5. 5. Presentation Outline •  Economic context •  Mortgage policy proposals •  High LTV mortgage availability •  Mortgage schemes: key details •  Impact: volumes or prices •  International comparisons
  6. 6. ECONOMIC CONTEXT
  7. 7. 90.0 92.0 94.0 96.0 98.0 100.0 102.0 104.0 106.0 108.0 110.0 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 GDPPeak=100 Quarters from peak Comparing Recessions (GDP peak=100) 1973- 1979- 1990- 2008- Source: Office for National Statistics; HBF
  8. 8. Chart 3.1 GDP and sectoral output (from Bank of England Inflation Report, May 2013) (a) Chained-volume measures. GDP is at market prices. Indices of sectoral output are at basic prices. The figures in parentheses show 2009 weights in gross value added.
  9. 9. Housing contribution to GDP Housing within GDP •  Household expenditure: 13.5% •  Capital formation: 3.3% Of which Newly built homes: ~1.4% Net new build jobs: 2.4 direct and supply chain
  10. 10. Housing contribution to GDP Things are looking up [ in the US]. Led by rising house prices, the US recovery is likely to accelerate this year. (Lawrence Summers, FT, 3 June 2013)
  11. 11. MORTGAGE POLICY PROPOSALS
  12. 12. Should Government underwrite mortgages? •  Temporary interventions •  Aspiration: help to buy own home •  Support home building: GDP, jobs •  dramatic intervention to get our housing market moving (George Osborne Budget speech)
  13. 13. Should Government underwrite mortgages? …Government s view that the current scarcity of high loan-to-value lending is primarily a cyclical issue rather than a symptom of a longer-term structural change in the mortgage market. (Treasury. Help to Buy: Mortgage Guarantee. Scheme Outline)
  14. 14. Mortgage policies •  Funding for Lending scheme: to lower rates, increase net lending •  Help to Buy: Equity Loan: deposit gap and affordability •  Help to Buy: Mortgage Guarantee: deposit gap
  15. 15. 2012 2013 2014 2015 2016 June April January January May Q3 March December FLS starts HtB: Equity Loan starts HtB: Mtg Guarantee starts FLS ends General Election HtB: Equity Loan ends HtB: Mtg Guarantee ends Bank rate starts rising?
  16. 16. Perfect storm in 2016? •  Mortgage rates rising (FLS and bank rate) => affordability deteriorates •  As support for new build ends •  And mortgage support for high LTV mortgages ends
  17. 17. HIGH LTV MORTGAGE AVAILABILITY
  18. 18. 70 75 80 85 90 95 100 - 5 10 15 20 25 30 35 40 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 MedianLoan-to-Value(LTV) Mediandeposit(£000) First-time Buyer Median Deposit & LTV (UK) Median deposit Median LTV Source: CML FSA: 95%+ LTVs = 0.2% all mortgages 2011/12
  19. 19. 0 10 20 30 40 50 60 70 80 90 100 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2012Q3 %regardingas'MajorConstraint' HBF Survey: 'Major' Demand Constraints (GB) Mortgage rates Mortgage terms Mortgage availability House prices
  20. 20. Why few high LTV mortgages? •  Funding crisis from 2007 H2 + need for low risk to secure funding => restrict lending to less risky, low LTV •  Basle capital requirements => LTV mortgage rate premium higher than in past* •  Lender fear of falling house prices? * 95% mortgages currently in range 5-6%
  21. 21. MORTGAGE SCHEMES KEY DETAILS
  22. 22. HtB: Equity Loan •  New build, England only (at present) •  All builders can apply •  At least 5% deposit •  Government equity loan: 10-20% •  Price cap £600,000 •  Projected take up: 74,000 sales, £3.5bn (around £17.5bn new home sales) •  April 2013 - March 2016
  23. 23. HtB: Mortgage Guarantee •  New & second hand, UK •  At least 5% deposit •  Price cap £600,000 •  Govt guarantees portion* of repossession losses (7 yrs) •  Normal 95% LTV affordability & credit criteria •  Projected take up: 190,000 sales pa, £130bn mortgages •  January 2014 - December 2016 * 95% of losses down to 80% of purchase price
  24. 24. HtB: Mortgage Guarantee Key issues to be resolved •  Value of commercial fee to Treasury – match commercial MIG rates? •  Capital relief? •  Mortgage rates (especially vs NewBuy)? •  Withdrawal: taper vs cliff edge? Future Government needs Financial Policy Committee (FPC) agreement to renew
  25. 25. IMPACT VOLUMES OR PRICES?
  26. 26. Impact: volumes or prices? •  HtB: Equity Loan New build supply response – though may not be 25,000 pa •  HtB: Mortgage Guarantee Some new build supply; second-hand supply (buyers who are sellers*); plus 190,000 pa is gross – net additional transactions lower *CML: 326,000 home mover mortgages 2012 plus add cash buyers with home to sell (e.g. trade downs)
  27. 27. Impact: volumes or prices? Other constraints on price increases •  Will all lenders take part? •  Will Mortgage Guarantee apply to new & second- hand? •  Lenders tight 95% affordability & credit scoring •  MMR => some buyers constrained •  Will valuers constrain increases? •  Affordability deteriorates as prices rise
  28. 28. Impact: volumes or prices? •  And if prices surge, surely a response from Treasury, Monetary Policy Committee (MPC), Financial Policy Committee (FPC) – post General Election? •  Poisoned chalice for new Government?
  29. 29. INTERNATIONAL LESSONS
  30. 30. Help to Who? Using the State to Help to Buy John Stewart Director of Economic Affairs, HBF 5 June 2013
  31. 31. Help to Buy: An  academic’s  view  based  on   economic theory and empirical evidence Christian Hilber London School of Economics June 2013 Strategic Society Centre Public Debate – Help to Who? Using the state to Help to Buy – London, 5 June 2013 ?
  32. 32. Overview 2 1. What will Help-to-Buy achieve?  What does economic theory predict?  Supporting empirical evidence 2. Who benefits?  Winners and losers – not who you might think… 3. What should the government (not) do? Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  33. 33. Starting  point:  A  real  problem… 3  House prices in UK are extraordinarily high  UK has second highest buying price per square metre in the world (only topped by tiny Monaco!) (Globalpropertyguide.com; last accessed March 2013)  And we live in extremely cramped housing!  A new-build house in UK is 38 percent smaller than in densely populated Germany and 40 percent smaller than in the even more densely populated Netherlands (Statistics Sweden, 2005)  Might  ‘Help  to  Buy’  solve  this  problem? Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  34. 34. Insights  from  ‘Economics  101’ 4  Main effect of Help to Buy  Equity loans and the mortgage guarantee both boost demand for housing, especially of first-time-buyers  Higher willingness-to-pay, all else equal  Also: starter homes and new builds are reasonably closes substitutes for other types of housing (incl. rental)  Positive effect on aggregate demand for housing Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  35. 35. Insights  from  ‘Economics  201’ 5  Policy strongly affects ability of potential first-time buyer to afford down-payment on starter home  Additional boost to housing demand  Because  of  capital  gains  &  ‘moving  up  the   housing  ladder’  feeds  through  to  trade-up homes  Has substantial impact on overall housing market (Ortalo-Magné & Rady 2006) Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  36. 36. The  demand  side… 6 House prices Housing stock Demand w/o HtB Demand w HtB Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  37. 37. What about supply? 7  UK planning system extraordinarily inflexible  Since 1947: virtually no fiscal incentives at local level to permit development  Government  reforms  since  2010  not  (yet)  ‘biting’  Underlying causes?  UK = highly centralized country, virtually no fiscal power at local level  Political power tilted towards homeowners (NIMBYs or better: BANANAs)  Perhaps  world’s  most  restrictive  planning   system… Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  38. 38. The  supply  side… 8 House prices Housing stock Long-run supply Demand w/o HtB Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  39. 39. The  effect  of  Help  to  Buy… 9 House prices Housing stock Demand w/o HtB Long-run supply Demand w HtB Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  40. 40. Evidence 10  Hilber and Vermeulen (2010, 2012)  Demonstrate that tight local planning constraints in parts of England (in conjunction with strong demand) are to a good extent responsible for extraordinarily high house prices  Had the SE the restrictiveness of the NE, house prices in the SE would be 25% lower Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  41. 41. Evidence (cont.) 11  Hilber and Turner (forthcoming)  Mortgage interest deduction in US  Raises house prices in regulated cities  Reduces homeownership attainment in these cities  Zero overall effect on homeownership attainment  Why? Subsidy pushes up prices in constrained places and prevents marginal would-be-buyers from becoming homeowners  US wastes 100 Billion US-dollar each year! Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  42. 42. Winners and Losers 12  Main beneficiaries = Existing owners of owner-occupied housing  Mainly wealthy & elderly population  First time buyers not better-off  Mobile renters worse-off  Typically poor & young  Tax payers bear cost of schemes & risk  But wealthy also pay more taxes  Zero sum game? Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  43. 43. We  may  ALL  be  losers… 13 1. Taxes needed to finance scheme have a ‘deadweight  loss’  Pure welfare loss for society 2. Systemic  risk  (…yet  again)  Government  does  not  only  provide  ‘implicit   government  guarantee’  but  directly bears various costs and risks  If housing markets collapse then government takes  direct  hit…  Unlikely? Perhaps, but… Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  44. 44. What should the government (not) do?  Subsidies to consumers are ineffective, costly & risky  Must  tackle  ‘supply  side’  problems  instead!  Give strong incentives to local authorities (and NIMBYs) to facilitate construction of new housing and expansion of existing housing  One idea (of many): Introduce proper local property  tax  and  get  rid  of  e.g.  ‘absurd’  stamp   duty (Mirrlees Review 2011; Hilber & Lyytikäinen 2013) Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  45. 45. And what can we learn from the US housing crisis?  Securitization can improve social welfare in principle BUT…  Design and implementation of securities market in US was flawed + markets were poorly regulated  Lessons from the US debacle 1. Ensure competition – no monopoly or duopoly 2. ‘Too  big  to  fail’  is  bad  – commit to no government backing, so investors face true risks 3. Regulation ought to focus on market efficiency and systemic risks  It appears British politicians may not have learned these  lessons…. Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  46. 46. References 16  Globalpropertyguide.com (http://www.globalpropertyguide.com/most-expensive- cities; last accessed: 28 March 2013)  Hilber, C. and T. Lyyitkäinen (2013) ‘Housing  Transfer Taxes and Household Mobility: Distortion on the Housing or Labour Market?’, London School of Economics, mimeo, April 2013). (Paper presented at the CEMMAP Workshop on Housing: Microdata, Macro Problems, May 2013)  Hilber, C and T. Turner (forthcoming) ‘The Mortgage Interest Deduction and its Impact on Homeownership Decisions,”  Review of Economics and Statistics.  Hilber, C. and W. Vermeulen (2010) The Impacts of Restricting Housing Supply on House Prices and Affordability – Final Report, London: Department for Communities and Local Government. Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  47. 47. References (cont.) 17  Hilber, C. and W. Vermeulen (2012) ‘The  Impact of Supply Constraints on House Prices in England’,  London  School of Economics, SERC Discussion Paper No. 119, September 2012.  Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G. and Poterba, J. (2011) Tax by Design: the Mirrlees Review. Oxford University Press.  Ortalo-Magné, F. and S. Rady (2006) ‘Housing  market   dynamics: on the contribution of income shocks and credit constraints’,  Review of Economic Studies, vol. 73(2), pp. 459-485.  Statistics Sweden (2005) Housing Statistics in the European Union 2004, Karlskrona: Boverket, Publikationsservice. Intro /Problem Theory Evidence Who benefits? What (not) to do? References
  48. 48. Q & A Thank you! Presentation with references & hyperlinks is downloadable from: http://personal.lse.ac.uk/hilber/ 18
  49. 49. 1Thursday, 6 June 13 Until there’s a home for everyone Who does Help to Buy need to help? Toby Lloyd Head of Policy
  50. 50. 2 A decade of big change in renting
  51. 51. 3 Change among renter groups
  52. 52. 4 Is it a ‘choice’ between renting/owning? !  2/3s of renting families want to own but don’t think they’ll ever be able to afford !  Fewer than 1 in 10 renting families value flexibility of renting !  44% of parents feel their children would have a better childhood if they had more stability !  Fewer than half of renting families can save more than £50 a month
  53. 53. 5 Why not? Is it a lack of lending?
  54. 54. 6 Why not? Is it house prices?
  55. 55. 7 Affordability for median families 90% mortgage on a median local home 59% affordable
  56. 56. 8 Affordability for median families 90% mortgage on a median local home 95% mortgage on a median local home 59% affordable 49% affordable
  57. 57. 9 Pen portrait: Jo and Dave in Watford !  Earn £50k (1.5x median local FTE) !  Local median house price is £208,000 !  Would need to earn £5,500 more to afford a 90% mortgage !  Would need to earn an extra £8,500 to afford a 95% mortgage
  58. 58. 10 Affordability for lower quartile families 90% mortgage on a median local home 18% affordable
  59. 59. 11 Affordability for lower quartile families 90% mortgage on a median local home 95% mortgage on a median local home 18% affordable 12% affordable
  60. 60. 12
  61. 61. ! ! ! ! Strategic Society Centre
 32-36 Loman Street
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 SE1 0EH
 info@strategicsociety.org.uk! www.strategicsociety.org.uk
 Twitter: @sscthinktank ! ! The Strategic Society Centre is a registered charity (No. 1144565) incorporated with limited liability in England and Wales (Company No. 7273418).!

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