As I write this, we, and the economy as a whole, are in highly unusual circumstances. There have been 14 interest rate rises in succession. This is the first time since the Bank of England was founded in 1694. Previously, the most they have ever risen in succession was twelve times and that was 1988 into 1989.
While employment has remained high, people’s ability to afford a home has dropped as inflation rose quickly and interest rates followed. Brexit and Covid also played their part leading to a situation we have never experienced before.
This all puts lenders in a difficult position when trying to establish affordability for someone wanting a mortgage or remortgage. It is a question of determining not just whether someone can afford a mortgage today; but whether they will be able to do so at a future point down the line as the Consumer Duty rules dictate.
With news every day of people either failing to get on the housing ladder, unable to afford rents, of house prices remaining high and a shortage of places for people to live, it is clear there needs to be a dramatic change. And this change needs to be not only the way the housing market operates, but everything that impacts on people’s ability to afford a home to live in.
Housing has long been a political football, kicked about by every political party for decades, however few have made any real change. It’s now time for a significant overhaul of how the market works.
For six years the government has had a target to build 300,000 new homes a year – a target that is never met, so we now need more wholescale changes.
The government dropping the target rather than working harder towards it, just gives the message that they don’t actually care.
While most lenders signed up to the Mortgage Charter, this is a short-term strategy. Lowering someone’s mortgage rate for six months, only results in implications further down the line which will ultimately cost the borrower more.
What we need now is longer-term action, not for a few months or the term of a parliament, but a twenty or thirty-year plan.
In terms of the challenges we are facing – even in the next year – we have three million people still due to come off their low fixed rates and they will be looking at a significant payment shock as their interest rate doubles or even trebles.
It is hard to predict if or when interest rates will go down again. However, 5% is a historic norm for Bank of England’s base rate, so it is more likely that they will continue to settle at about this level.
Therefore, we need to face the fact that unfortunately some people just won’t be able to afford to stay in their homes and may need to downsize. Whilst this might increase housing stock and help to reduce house prices, this could lead to further negative economic conditions. If enough people are forced to sell their homes, it may at least drive house prices down.
A challenge to dropping house prices however, is house builders ‘land banking’. There have been a number of reports in the past month of house builders actively deciding to build one third fewer houses than they were going to as demand has dropped. This keeps house prices artificially higher than if all those houses were built. This shouldn’t be an option at a time of housing shortages.
Finally, we need to tackle the issue of where homes are built, and this means addressing the difficult issue of the greenbelt. An increasing number of houses are built where people don’t want to live – in converted offices or factories for example.
These homes are typically out of town without the infrastructure to make a community. Because people don’t want to buy there, landlords will often end up purchasing them. This result in a growing two-tier community where those who can afford to buy, live in the more desirable areas of towns and cities, and those forced to rent are in the less desirable homes.
Instead of bolting on homes to places without the infrastructure to support them, we need to build up towns and cities with doctors, schools and parks to enable new communities to flourish.
Fundamentally, the housing market is key to the economy. We need government intervention with both housing stock and availability. The next government needs to make some difficult decisions, to put housing right at the centre.
This means more than fine words and promises. It means tackling, not just the supply of homes, but where they are, the communities around them, inflation, taxation and interest rates.
Katie Pender is managing director of Target
