Homeownership across Europe was brought to shambles by the 2007-09 financial crises. While the world and UK, in particular, are still recovering from its aftermath, British Prime Minister Boris Johnson has initiated a 95% mortgage scheme for young first-time buyers with the aim of transforming the housing industry from ‘generation rent’ to ‘generation buy’. PM Johnson particularly focused on First Time Buyers (FTB) and Loan to Value credit availability rates in the economy in his press appearance.
Several claims sound economically hollow, made with no regard to past occurrences. Every passing generation of the youth in the UK is experiencing a fall in their financial capabilities to own a house. Many homeowners are currently locked out of the market owing to the 15-20% deposit needed to purchase land.
The devil lies behind the details as they say. As the borrower goes on choosing a higher LTV credit ratio the interest rate options get limited ending up missing the target. With a recession surrounding the global economy, the risk of default also remains to be a matter of concern for the Bank of England.
The crisis saw lending patterns heading skywards. The number of households in the private rented sector in the UK saw a 60% surge from 2.8 million to 4.5 million. Considering the present scenario with grey clouds of the virus covering the future with uncertainties makes giant mortgage schemes like these lose luster. 320,000 private homeowners struggle to pay rent obligations.
The UK has seen the demand-supply dynamic change over decades. The millennials aging between 25-35 have switched roles from homeowners to renters. In 1996 two-thirds of the millennial population belonging to the middle-income group owned houses. Unfortunately, the numbers have only gone down to a quarter. This trend is not just exclusive to the UK but has also been seen in the US and Australia.
Household debt in the GDP of the UK has increased to 84.5% in the first quarter of 2020 from 83.9% of GDP in the fourth quarter of 2019. This down-trend has been a consequence of low LTV credit availability. As matter of fact, the LTV figures have taken a beating since the financial crisis. Stating CML, the LTV ratio was at a median of 95% over a decade till 1998, the years after 1997-98 saw the median figure fall to 90% and then consolidated, but in 2007-08 the catastrophe pushed down the ratio to a mere 76%. The government will be underwritten to the tune of 5% which will leave the taxpayer liable to pay £44 billion .
History shows that global crises like the one we’re experiencing have impacted capital proceedings the most, more so because at these times the average buyer starts saving more and consequently reduces spending marginally across product categories. We are in November now and signs of a vaccine distribution program seem faint which makes it important for the UK to adequately cater to the problem which clearly is with the demand side in the damp market. The job market crisis is also holding working-class millennials distressed.
Over the last 3-5 years, the British real-estate supply has been more or less stagnant. This has put the suppliers in a position of power benefitting from the profit they are earning from the excess demand. The prices of properties have only gone up and they have made hay as the government disburses loans to buyers by relaxing the rates and restrictions.
As a relief measure, the government of Britain has announced a one-year holiday on stamp tax-duty to boost the performance. The move to get home ownerships to rise will need time to show its effects. The next few years will be vital for the housing industry. The government needs to resort to fiscal measures like imposing higher property or land value taxes, thus reducing capital gains. This in turn will hold the middle class in a better position. An income tax rise as proposed by members of the cabinet might not be the right thing to do here, as it will have a detrimental impact on consumer sentiment leading to a further shrinking of demand for discretionary and capital goods. Council tax figures were last reviewed in 1996, and require amendments too since it has created huge tax disparities in Britain.
A rise in the GDP by 13% is a positive sign for the government. Will this production flow also impact the real-estate sector positively or not? Will be heavily dependent on how Boris Johnson along with the Bank Of England strategizes the implementation with due diligence.