First-time buyers frozen out by mortgage ‘stress test’

STRINGENT rules imposed after the financial crisis are locking many potential first-time buyers out of the housing market even if they can afford a mortgage, according to a new report.

A paper by the Centre for Policy Studies (CPS) think tank points out that a Bank of England “stress test” can “deny people mortgages that they could perfectly well afford”.

The report says Boris Johnson’s plan to encourage a new generation of longterm, low-deposit mortgages could help up to 1.9million first-time buyers on to the housing ladder, by making the test “irrelevant” in many cases.

The paper, written by Graham Edwards, a co-founder of Telereal Trillium, a property giant, says owneroccupation has been falling among young people “even in areas where house prices have remained stable”.

Mr Edwards points out that, while the average monthly mortgage payment is £633, the stress test means that buyers can only take out such a loan if they can afford to pay £1,075 a month.

The report suggests that by offering first-time buyers long-term fixed-rate mortgages, regulators and lenders would not need to be concerned about them being unable to afford repayments in the event of interest rate rises.

It adds: “By offering these products to those with good prospects and credit histories, we would be able to do away with the need for a significant deposit – bringing back the 95 per cent loan-tovalue standard and reducing the barrier to entry into ownership.”

Writing in The Sunday Telegraph, Robert Colvile, the director of the CPS, a centre-Right think tank co-founded by Margaret Thatcher, says that the Conservatives’ plans would “eliminate the stress test, because there would never be a jump in mortgage costs”.

Britain has a new Government. And near the top of its to-do list – after getting Brexit done – is solving the housing crisis. A report from the Centre for Policy Studies shows the hideous scale of the problem. It finds that there are 3.6million people under 65 who would have been homeowners before 2008, but now are not: the “Resentful Renters”.

But it also finds that there is a rather unexpected culprit.

Two years ago, Graham Edwards, a brilliant entrepreneur who has built Telereal Trillium into one of Britain’s largest private property firms, started working with the CPS on a new analysis of the housing market. His findings explain why the Conservative Party committed to a bold new housing policy in its recent manifesto – and why it might just spur a home ownership revolution.

What Edwards shows is that the ownership crisis cannot be explained primarily by house prices. Resentful Renters can be found across the UK, whatever the state of the local market.

Instead, he focuses on the toughening of mortgage rules that followed the financial crisis. Today, to get a mortgage, you need to be able to afford not just the actual monthly repayment, but the rate the mortgage would ultimately default to – plus an extra 3 per cent as a “stress test”.

What this means is that, even though the average monthly payment is £633, you can only borrow if you can afford to pay £1,075.

At the same time, the average deposit paid by first-time buyers has tripled, from 5 per cent to 15 per cent. Remarkably, Edwards shows that despite house price rises, home ownership would still be as affordable for today’s first-time buyers as in 2009 as a share of income if we had stuck with 95 per cent mortgages.

The result is that millions of people have been locked out of home ownership. Instead, properties have been snapped up by buy-to-let investors. Between 2005 and 2015, first-time buyers received 2.2million fewer mortgages – and landlords ended up owning 2.1 million more homes. It’s not hard to do the maths.

The problem is so bad that the number of properties acquired by landlords during that decade exceeded the number of homes built. In other words, if we’d banned landlord purchases, and built no houses at all, we’d have ended up with higher home ownership. And a quarter of those who are getting on the housing ladder are only doing so because they have access to the Bank of Mum and Dad.

This isn’t a recipe for a fair society – or a happy one. It’s one of the reasons young voters turned to Corbyn: because they saw themselves condemned to worse lives than their parents. Home ownership is at the heart of aspiration. And that so many people are being denied it is not just a scandal, but a tragedy.

So what’s the solution?

As Edwards argues, the mortgage regulations were put there for a reason: to guard against future financial shocks. But what if you could cut out the stress – and the stress test – altogether?

Interest rates are at historic lows. Borrowing has never been cheaper. So Edwards’s prescription is to lock those ultra-low rates in permanently, by offering long-term, fixed-rate mortgages where you know today what you’ll be paying for the next 25 years.

This would eliminate the stress test, because there would never be a jump in mortgage costs. It could slash deposit requirements, because of the certainty involved. And Edwards’s modelling shows that it could enable 1.9million extra households – with solid prospects and good employment records – to get on the property ladder.

As he acknowledges, you would still have to build more houses – and persuade buy-to-let landlords to sell up. The last thing any of us want is more credit chasing the same number of properties, driving prices up.

His suggestion is a capital-gains tax holiday for landlords who sell, with priority given to the sitting tenant.

The really exciting thing about this scheme, however, is the opportunity it offers. These kinds of long-term investments are exactly what pension funds and others are crying out for – which is why Edwards’s report has been warmly welcomed by Aviva Investors. The scheme wouldn’t even need government underwriting, just its benevolent oversight.

The Conservative Party committed in its manifesto to encouraging precisely this kind of market.

If we get it right, we can give millions more people the gift of home ownership – and of a secure future.

There are 3.6million people under 65 who would have been homeowners before 2008, but now are not: the Resentful Renters