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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.

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  • GHU 4th May 2012 at 2:56 pm

    Having spent slightly longer within the mortgage industry (but only 6 years more) I too have taken a great deal of interest in its history and most especially to those changes that have taken place during my working lifetime. I therefore read this article with a high degree of interest but found some elements not to be in tune with my thinking.

    Firstly I think the statement that Building Societies had been ‘monopoly suppliers of mortgage finance since the industrial revolution’ is suggesting that the whole movement was out to exploit its customers. That is to forget that Building Societies only started in or around 1850 (and as to whether that was the beginning of the industrial revolution is a moot point) and were as the result of ordinary people coming together for the sole purpose of creating a co-operative to build houses for each other. Once the houses were completed many of the Societies were ‘terminated’ and those that continued became permanent societies (hence names such as The Leeds Permanent). My point however is that Societies were not created as profit making monopolies but solely to assist ordinary people to buy houses at the lowest possible price. The long standing ethos of only lending to their members was part of the reason for limiting funds accordingly.

    I also think you are being slightly selective in some of your other recollection:

    • Building Societies did apply a proper market rate because they were almost completely retail funded. They were not permitted to raise large sums of wholesale finance and this was enshrined in the Building Societies Act of 1967. Very much as today the mortgage rate was geared to the cost of retail funding I accept that they had the ‘lion’s share’ of the market but do you really think that banks would not have entered the market if there was profit to be made?
    • This changed with the Thatcher Government’s deregulation of the mortgage market in 1983. Unfortunately however Building Societies had to wait until the new Building Society’s Act of 1986 before they were allowed to compete on a level playing field and start raising wholesale money.
    • The first players in the deregulated field were not actually the banks but centralised lenders such the Household Mortgage Corporation and National Home Loans. I remember (the often called maverick) Richard Lacey being a prime mover They benefitted from the cheap cost of wholesale money and took a massive market share very quickly because Building Societies could not raise such cheap money. Their ‘demise’ came when wholesale funding prices rose significantly in the late 80s and they got caught by the implication of borrowing short and lending long – as was so notably demonstrated by Northern Rock in the noughties.

    After deregulation I would suggest that the Banks were in fact quite late in becoming major players in the mortgage market albeit that they did take advantage of deregulation. Let’s face it those Societies that converted to banks did so because of the more liberal regime for that sector of the market.

    Personally I look back at the pre-1983 Act with some degree of nostalgia. Limited funding for the market stopped the major booms and busts that we have seen since 1990 and Building Societies required borrowers to make a personal commitment. MIG claims were negligible because lending was better geared to affordability and a 90/95% advance wasn’t that difficult to get.

    Finally it always used to be suggested that 65% owner occupancy was about the maximum that could be achieved in the UK and the fact that it was not sustainable at higher levels could suggest that the 65% figure was about right. There is always a point of saturation for all markets and perhaps that is what we have to face going forward