Rachel Reeves's mortgage reforms reek of desperation

Spectator

5 days ago

Just how desperate is Rachel Reeves to achieve her elusive economic growth? Desperate enough, it seems, to risk a rush of repossessions in a future housing crisis. One of the big announcements in her Mansion House speech this evening, it has been reported, will be a new, permanent mortgage guarantee scheme, plus changes to mortgage eligibility to make it easier for homebuyers to borrow high multiples of their income and take out high loan-to-value mortgages.
What could possibly go wrong? Reeves looks like she will be following the example of Gordon Brown, who presided over an era of deregulation in the mortgage market. This culminated – even if Brown could not be blamed for it personally – in Northern Rock's infamous 125 per cent loan-to-value mortgages. Older readers will remember what happened next.
The tragedy of the housing market is that memories are short. There is a whole generation of buyers for whom the name Northern Rock will mean nothing. Even less will they remember the repossessions of the early 1990s when homebuyers were caught out after a similar lowering of barriers in the mortgage market, followed by a sharp rise in interest rates.
Following the crash of 2008/09 there was supposed a total rethink on mortgage lending, with ideas floated including a ban on high loan-to-value mortgages, as well as high loan-to-income ratios. But it didn't last long. By the time he left office in 2010 Brown – by then Prime Minister – had already started to backtrack. By 2013 the new Chancellor, George Osborne, had grown frustrated by the slow pace of the housing market. If banks were not prepared to advance loans of more than 75 per cent of the value of a property, he decided, then the taxpayer would underwrite the risk instead. There followed the Help to Buy scheme, which enabled 95 per cent loan-to-value mortgages once again, with homebuyers taking the first 5 per cent of losses in the event of a slump, the taxpayer suffering the next 20 per cent of losses – and the banks only suffering losses if a property on which they had secured a loan fell by more than 25 per cent in value.
It was a dream scenario for the banks – and for housebuilding companies, whose shares soared. In what other business is the taxpayer forced to stand as a human shield against losses? Reeves now appears to want to reintroduce this kind of scheme, this time making it a permanent fixture of the market rather than a supposedly temporary one.
Osborne and his Conservative successors as Chancellor might have got away with it, but that doesn't mean that Reeves will. The era of ultra-low interest rates, which for a decade all but extinguished the risk of repossession for most homebuyers, is well and truly over. Unsustainable levels of government borrowing are threatening to force up interest rates sooner or later. Reeves herself nearly pulled the rug from under the mortgage market by reducing the limit for cash ISAs – until banks and building societies reminded her they are an important source of funding for mortgages.
Reeves' latest initiative comes back to a problem which has been evident for the past three decades: the UK economy is horribly reliant on the housing market for growth. As Gordon Brown found, if you want to keep the economy growing, the easiest way to achieve it is to find some way of stimulating demand for housing – until, that is, the market turns sour. Reeves, having failed to stimulate the economy by other means, is returning to an old – and very risky – favourite tactic of modern Chancellors.