One of the central conclusions drawn from the Global Financial Crisis was that the UK economy was too dependent on financial services and unproductive investment in the property market rather than the real economy. So the economy needs rebalancing.
One of the main issues facing the housing market is that households overwhelmingly aspire to owner occupation, even as the chances of accessing the tenure become increasingly limited. House prices that seem to defy gravity, stagnating incomes, and difficulties in meeting deposit requirements mean that thousands of households have to reconcile themselves to renting privately for the long term. That the whole system is a mess hardly needs saying.
Is addressing the broader economic rebalancing agenda compatible with addressing the dysfunctional housing market? Is it possible to rebalance the economy without persuading households to spend less on housing and invest elsewhere instead? Even framing the question like this implies that households have a choice over incurring large housing costs, which of course is not the case for many people.
Unravelling the dependence of the UK economy on financial services and property investment is no easy matter. It took many years to back ourselves quite so tightly into this corner. How is policy handling the complexities of the agenda?
On the housing side we could argue that things are not going hugely well. Efforts to increase housing supply directly are modest, while efforts to increase supply indirectly by assisting with housing costs – notably the Help to Buy scheme – have been widely condemned as wrong-headed. On the economic side, the government has clearly made some efforts in the direction of rebalancing both sectorally and regionally, but these are initiatives that are going to take years to have serious impacts on the productive capacity of the economy. Whether the government is pursuing the rebalancing agenda with sufficient vigour is debatable.
That brings me to a curiosity.
This week the Bank of England announced the extension of its Funding for Lending Scheme. The scheme is now likely to attract considerably more interest from property investors wanting to make use of it for buy-to-let mortgages. The scheme was set up last year to try to free up lending to small and medium size enterprises and on property. It was an attempt to overcome banks’ apparent aversion to lending to SMEs. It was a modest attempt to contribute towards the rebalancing agenda.
Before this week’s announcement concerns had been expressed that the profile of lending under FLS was skewed towards mortgages rather than SMEs. This week’s move seems only likely to increase the problem. In the current context, rental returns are reasonably healthy while (potential) BTL landlords have less difficulty than SMEs in convincing the banks that they have a “business” model that offers real collateral and relatively secure income streams. BTL purchasers have more financial firepower than first time buyers so they are outbidding first time buyers, thereby continuing to sustain price levels. In the process, households are priced out of the owner occupied market and you create demand for your own product. Tenure restructuring continues. The process is self-reinforcing.
If the problem you’re attempting to deal with is risk aversion on the part of lenders then including property based lending in the FLS was going to create a bias in decision-making right from the start. Given uncertain economic prospects and the way the housing market is developing we have an ever greater pool of desperate private renters. BTL lending is going to look more attractive than lending to owner occupiers. So the bias against lending for genuinely entrepreneurial activity is going to be reinforced.
BTL lending recovered strongly last year, having been hit hard by the GFC. It’s not at all clear that it needs further support from the Government.
But if your objective were to ensure that economic rebalancing and access to owner occupation were simultaneously made more difficult then the changes made to the FLS this week are probably as good a way to go about it as any.
You do have to wonder sometimes. You really do.
I had provisionally called this post FLS+BTL=WTF? but I decided that was probably not entirely wise. Yet it does seem to me to capture the situation quite well.
Image: © Stuart Miles – Fotolia.com
Very good article, many thanks for pointing out how bad the government/BoE policy is against tenants and FTB.