Harsh lessons of housing history

Social and economic changes over the past three decades fostered a rise in home ownership from a privileged minority to a whopping 70%. But now the tide has turned and many people who would once have been able to achieve their dream find themselves excluded

This is not so much a year to be remembered as a year of remembrances. We have, for example, the centenaries of the sinking of the Titanic and Captain Scott’s ill-fated expedition to the South Pole, and on a happier note, there is the Queen’s Diamond Jubilee.

On a more minor scale, May 2012 marks my 30th year as an observer of the UK mortgage market and with this in mind I thought I might be self-indulgent and reflect on the changes I have witnessed to see if there is something to celebrate or whether I should be crying into my champagne.

Queen Elizabeth’s reign differs substantially from that of Queen Victoria – the only other British monarch to have celebrated 60 years on the throne – in that the former presided over a huge expansion of empire while, to put it kindly, our Queen has been the mother of the Commonwealth.

And then there is housing. When Victoria celebrated her Diamond Jubilee in 1897, home ownership was for the chosen few. Only around 10% of households were home owners and most people rented from private landlords. Social housing was really a post-World War I development and in 1918 only 1% of households in England lived in council accommodation. Home ownership by that time had grown to a modest 23%.

Come 1953, the year of the coronation, home ownership in England had crept up to 32% of households – in the ensuing 35 years, social housing had reached 18.6% and the private rented sector had declined to 50%.

Jump forward to 1981, the year before I started writing about housing finance, and home ownership had grown to 57.2%, social housing had increased to 31.7% and the private rented sector had shrunk to 10.7%.

Reflecting on this, and the fact that building societies had virtually been the monopoly suppliers of mortgage finance since the industrial revolution, I wrote that the sector had financed a social revolution which had seen the country move from being a nation of tenants to an owner-occupied democracy.

Of course the situation had been distorted by generous tax relief on mortgage interest to buyers that was to peak at around £14bn and by the unforeseen consequences of the 1977 Rent Act that was meant to protect tenants from unscrupulous landlords but resulted in an exodus of landlords from the market.

But that was just the start of it. With Right to Buy being introduced around that time, and with the Thatcher administration freeing the banks to compete in the mortgage market, things were about to take off.

At the beginning of 1982, building societies were the dominant market force and, given the political sensitivities of the time, they never applied a proper market rate to savings or mortgages so they could never satisfy mortgage demand. Thus buyers only qualified for a mortgage after a long period of saving, giving rise to the term ’mortgage queue’.

When the banks entered the market, all that changed. By the end of 1982 they were taking 40% of all new mortgage lending. Mortgage queues were a thing of the past.

But the banks came and went, to be replaced by central lenders that tapped into cheap wholesale money. And when the markets changed and those funds dried up, along came the off-balance sheet non-conforming lenders based on the US sub-prime market model.

As a result of all this innovation, funded by great wads of money from the burgeoning Chinese economy, home ownership took another great leap forward, peaking at 70.9% in 2007 just before Northern Rock crashed and the liquidity crisis sent the economy into recession.

Since then, owner-occupation has been on the decline and is currently around 66%, while the private rented sector – which saw a modest revival of its fortunes following the 1988 Housing Act and the introduction of shorthold tenancy, and a more spectacular rise in subsequent years – is predicted to overtake social housing to become the second most important tenure in the country.

Council of Mortgage Lenders research into tenure aspirations consistently shows that most of us still aspire to be home owners in the long term. In 2010, 79% of respondents renting in the private sector indicated that they hoped to be home owners in 10 years’ time, but a somewhat lower 54% hoped to be owner-occupiers in two years.

Thanks to regulation and the laws of unforeseen consequences, we have a new generation of the financially excluded and it is time for me to dilute my champagne with tears.