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Why politicians misdiagnose the issues facing FTBs

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Enra-134-modified-1 Lucy Waters - Managing Director of Aria Finance

Writer Sir Ernest Benn once reportedly said: "Politics is the art of looking for trouble, finding everywhere, diagnosing it incorrectly and applying the wrong remedies." 

This pithy one-liner was first attributed to Benn - and often incorrectly to the late comedian Groucho Marx - in the 1940s, but it arguably still rings true today.

With an election now less than a year away, the battle to win the hearts and minds of the British public has kicked up a gear. MPs from both sides of the political divide will spend the next few months testing potential policy ideas and quietly discarding the duds.

The sensible thing then, would be to treat what MPs say with a pinch of salt until the election is confirmed - after all, there's a chance what they say won't become policy anyway. But for today, let's indulge a little.

Long-term fixes

Recently, both the Conservatives and Labour have teased mortgage policy ideas that they presumably believe will go down well with younger voters.

First, Shadow Chancellor Rachel Reeves proposed that we move to a more continental system, of 25-year fixed-rate mortgages. Following that, reports suggested that the Conservative Party is keen on introducing a scheme allowing for 99% loan-to-value (LTV) mortgages. 

Let's take these proposals one at a time, starting with Reeve's 25-year fixed-rate plan, an idea that resurfaces from time to time - floated last year by Housing Secretary Michael Gove.

Reeves argues that long-term fixed rates, popular in parts of Europe and the US, would leave UK borrowers less exposed to interest risk, so there would be no need to stress test the loan. It would also make for a more stable housing market. On both accounts, she's right. 

However, there are plenty of reasons why 25-year mortgages would not take off in the UK, the first being demand. 2-year and 5-year fixed rates are by far the most popular products, with only a tiny portion of borrowers fixing for longer. It is baked into our culture to hunt out a good deal, hence the desire to remortgage every few years.

Second, while you remove interest rate risk with a 25-year fixed rate, you also tend to pay a lot more for the privilege. In the US, you'll pay north of 6% on a 30-year fixed rate, according to Freddie Mac.

By contrast, you can pick up a 5-year fixed rate for well under 4% now in the UK. If you're a borrower, you have to ask yourself: is the added peace of mind a 25-year fixed rate offers worth paying thousands of pounds in additional interest? 

It's also unclear whether it is even possible to offer 25-year mortgages at scale in the UK. It would require a radical overhaul in the way lenders fund themselves, and I'm just not sure the appetite is there to do so.

Moving onto the idea of 99% LTV mortgages - is that really a path we want to go down again, given that no or low-deposit loans are still widely blamed for fanning the flames of the Global Financial Crisis? 

Getting to the bottom 

What's the one thing both these policies have in common? They don't address the root cause of the problem. It is not a lack of suitable products stopping first-time buyers (FTBs), it's the difficulty of raising a large enough deposit. 

Proponents of 99% LTV mortgages may argue they are the antidote to that problem, but at what cost? Overheating in a property market that has already spent most of the past decade at boiling point?

Unless 99% LTV loans went hand in hand with a significant expansion of our householding capabilities, the likes of which we haven't seen since the '70s and '80s, then it would just make things worse. 

It is encouraging that Labour has pledged to build roughly 1.5 million homes over the life of the next Parliament. however, our poor record when it comes to building enough homes in this country suggests this is unlikely. 

The Government has also previously promised to build 300,000 new homes a year in England by the mid-2020s. it's currently not on track to meet that aim.

A root-and-brand reform of the planning system, something Labour says it will make a priority, would be a sensible first step. But politically, that has proven difficult for many Conservative backbenchers and their continents to swallow. What's to say Labour will have better luck?

Put simply, if we relax credit conditions without major planning reform, we will simply store up problems for the future. We would make it even more difficult for the FTBs of tomorrow.

I understand this period in the election cycle is about testing potential manifesto ideas. However, it's time MPs started focusing on the right solutions to the real problems facing the market. 

aria (10)

Published in The Intermediary - February 2024

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