The nancialisation of
UK homes
The housing crisis, land and
the banks
We hear so often that house prices are rising
because supply has not kept pace with
demand. But tackling just the supply side of
this equation will not stabilise prices. We also
need to take a closer look at what is fuelling
demand. Demand is a combination of the
desire for houses (the number of buyers in
the market and the strength of preference that
they feel) and the purchasing power that these
buyers wield. Both elements have risen to
unsustainable levels.
1. Why do people want to own homes?
The preference for home ownership has
increased for a number of reasons. Other
housing options are increasingly unviable:
tenants want to escape poor-quality, insecure
and overpriced rental properties, while social
housing is being sold off and not replaced.
The expectation of future price rises has also
changed how we think about property. Houses
are no longer regarded as simply somewhere
to live, but an investment that offers long-term
nancial security in the face of stagnating
wages, dwindling pensions and reduced welfare
provision. Unlike other types of unearned
income, prots made on your home from rising
prices are not subject to capital gains or windfall
taxes.
People wanting to own their own home
increasingly have to enter a bidding war with
speculative buyers. These include not just
wealthy overseas investors, but also asset-rich
baby boomers taking out loans against their
homes to invest further in the property market,
often as buy-to-let landlords.
2. Where do people get the money to buy
these expensive houses?
The prime source of purchasing power in the
housing market is bank loans – in the form of
mortgages – rather than people’s pay packets.
The more banks are willing to lend, the more
UK average house prices are nine times incomes across
England and Wales, and up to 20 times incomes in London and
the South East.
1
Why? In seven steps we explain the role of
banks, supported by government policies - and point to some
ways to cool the crisis.
2 The nancialisation of UK homes: the housing crisis, land and the nancial system
It was the deregulation and liberalisation of
the credit market in the 1970s and 1980s that
kick-started the shift towards this preference
for mortgage lending over other activities, as
banks and building societies were for the rst
time allowed to grant credit to households
against the value of their homes.
4
Previously,
only building societies, controlled by their
members, were permitted to issue mortgages.
Since this deregulation, the UK nance
sector has changed considerably. Banks
have merged and grown bigger, developing
a more hands-off, centralised approach to
their lending activity. Automated credit-scoring
techniques are used to make loan decisions
and alongside this, banks have developed a
strong preference for securing lending against
collateral, in particular property.
The incentive for this preference is clear:
If a bank lends against a property and the
money oods into the housing market. This is
one of the key reasons that prices have been
able to race ahead of most people’s wages.
The credit that banks lend for mortgages is not
money in someone else’s savings account, but
new money created specically to fund the loan.
As banks become more and more willing to
grant large mortgages, the supply of money to
the economy - and therefore purchasing power -
increases.
2
3. Why are banks prioritising mortgage lending?
In recent decades, banks in advanced
economies have begun to lend more and more
against property, mainly in the form of domestic
mortgages. A recent study in 17 countries found
that the share of mortgage loans in banks’ total
lending portfolios has roughly doubled over the
course of the past century.
3
The UK is a prime
example, with domestic mortgage lending
expanding from 40% of GDP to 60% since the
1990s.
The idea that there is an excess of mortgage credit might not chime with people’s experiences
of trying to get mortgages. Since the 2008 crash, stricter requirements for credit checking
and a more cautious approach by banks, have made getting a mortgage more difcult for
some. However the amount of mortgage credit in the economy is still growing because, even
if the number of mortgages awarded within a given period falls, as house prices rise, bigger
mortgages are needed.
To ensure that people are still able to take on these mortgages despite stagnating incomes, the
market has adjusted. For example by allowing people to pay off mortgages over longer periods
– up to 35 years now rather than the previous limit of 25, and through the extension of the
Government’s Shared Ownership scheme allowing people to take mortgages out to buy small
chunks of a property.
Speculation or speculative investment is the practice of putting money into some sort of
tradable good – whether a share in a business, or a property – in an attempt to prot from
uctuations in its market value. It is often deemed a risky way to make a prot, as the amount
you invest could be entirely lost if the market value of the tradable good falls.
However, with regular periods of rapidly rising house and land prices, property speculation is
the most popular form of proteering in the UK. Housing in this country is by far the largest
single source of wealth, making up almost half of total household assets.
5
Isn’t it harder to get a mortgage these days?
What is speculative investment?
3 The nancialisation of UK homes: the housing crisis, land and the nancial system
Is there a breaking point? The process can
continue until there is an economic shock and
people’s incomes can no longer keep up with
debt repayments. Indeed, as the ratio of house
prices and mortgage debt to income increases,
the economy becomes more vulnerable to
any change that would spark a larger portion
of people’s income to be taken up in debt
repayments on their mortgages: such as a fall
in salaries or rise in interest rates.
Such a change, if signicant enough, would
see the whole process goes into reverse:
mortgage defaults, falls in house prices
and therefore in people’s net wealth. This
would spark a contraction of bank lending,
a recession in spending and, potentially, a
nancial crisis.
6. What are the wider economic risks?
For those lucky enough to own homes,
rising prices give the feeling of rising wealth
and encourage more spending (the “wealth
effect”). Unsurprisingly, this wealth is not
evenly distributed across the population.
The wealthiest 10% have an average of
£420,000 worth of property - compared with
the least wealthy half of the population who
have negligible or no property wealth, either
because they are renting, or because their
mortgage accounts for such a large share of
the value of their property.
7
Because of the interrelatedness of house
prices and our nation’s spending patterns,
it is not only home owners who might fear
a change to the current system. Household
spending contributes around two-thirds of GDP
growth in the UK, and therefore the purchasing
power of the population is vitally important for
the UK’s wider economic health.
8
If an unplanned housing downturn prompted
people to tighten their belts, economic activity
is likely to slow.
It is therefore hardly surprising that the rst
thing the former coalition government did to try
and boost spending and the economy post-
crisis, was to boost house prices and home
borrower doesn’t keep up their repayments,
the bank ends up with the house and the land
it sits on. Other forms of lending require more
involvement on behalf of the bank and are
simply riskier: if a bank lends to a business and
the business goes bust, the bank gets nothing.
With the majority of UK loans now funding
mortgages, most new money in our economy is
being pumped into land and housing.
4. How does the demand for houses affect
supply?
The high level of demand in the housing market
has had a huge impact on the price of land.
In fact, three quarters of the rise in UK house
prices since the 1950s can be explained
by rising land prices
6
– and there is a self-
reinforcing cycle at work that keeps these
prices high.
If land costs a lot, stakes are higher for
developers wanting to acquire it to build on,
because the project will cost them more overall.
As such, the prices of the homes they build
have to be higher for the developer to turn a
decent prot. The risk with building lots of new
homes in a particular area is that it could have
the effect of lowering prices. There is therefore
a perverse incentive for developers to trickle out
housing supply, in order to keep local prices up.
5. Can prices keep rising forever?
If the growth of mortgage lending outpaces the
supply of new homes, then prices will inevitably
continue to rise: there is more money chasing
the same number of homes and so prices
inate.
The cycle goes like this: as land and house
prices rise, households are forced to take out
larger mortgage loans to get on the housing
ladder, boosting banks’ prots and capital.
The boost in prots and capital enables banks
to issue more loans, which further pushes up
prices. This process can continue even when
house prices are many times people’s incomes,
sustaining the expectation that prices will rise,
as laid out in Figure 1.
4 The nancialisation of UK homes: the housing crisis, land and the nancial system
ownership by subsidising mortgages via the Help-to-Buy
equity loan scheme.
But the growing preference for mortgage lending comes
at the cost of funds for the productive economy – loans
for business expansion, infrastructure and the job
creation that comes alongside it.
In aiding the creation of an economy that runs off
mortgage debt rather than through boosting spending
power via increases in wages, productivity and trade,
we’ve become entrenched in a housing affordability
crisis with a great human cost. The burden of mortgage
debt is now increasingly falling on the shoulders of the
young, much more so than any other time in the last 20
years.
9
Soaring house prices are not just a problem for rst
time buyers wanting to buy a house. They create a
When banks reach a certain size
their failure poses such a risk to the
wider economy that governments
must bail them out if they run into
trouble. This creates an incentive for
such banks to take more risks than
they would otherwise, a key cause
of the nancial crisis of 2008.
As the gap between house prices
and incomes gets bigger, the
shortfall is being lled with loans
from a banking sector that, as we
learned during the crisis, is too big
to fail. The result is a dependency
of the economy on rising house
prices – a dependency mediated
by the banks.
£ £ £
Expectation of
future house
price increases
Increased
demand for
mortgage debt
Increased
land and house
prices relative
to incomes
Increased
mortgage
debt relative
to incomes
Increased
supply of
mortgage
credit
Banks
increase
prots and
capital base
£
Stagnating wages,
pensions & social
security increases
demand for home
as nancial asset
£
Speculative domestic
and overseas & buy-
to-let purchases
Government equity loans &
guarantees of house purchases
Financial
deregulation
Figure 1. The role of government policy and the nancial system in inating house prices
Banks that are too big to fail
Financial innovation
- securitisation of
mortgage debt
5 The nancialisation of UK homes: the housing crisis, land and the nancial system
• develop a new tax to capture the rising value
of land for the public good
• support schemes where land is held
by either a public body or community,
separating the cost of land from the cost of
homes
• develop secure, attractive pensions and
alternative savings and investment options,
to reverse the growing dependency on
housing wealth to pay for retirement and old
age care
3 Building a more diverse banking sector and
tackle excessive mortgage credit
• ensure banks hold more capital against
mortgage loans and keep the loan until
maturity, rather than packaging up and
selling on
powerful nancial incentive for people to
“overconsume” the housing we have whilst
directing government spending away from
supporting real housing needs.
The result is a widening of the gap between
the housing haves and the have nots. Families
paying social rents are being shipped out of
areas of rising prices as the land their homes
sit on is sold to developers.
10
Overcrowding is
becoming prevalent and there has been a
55% rise in street homelessness since
2010.
11,12
7. How do we x this?
Mortgage debt cannot outgrow incomes
forever, even if it is subsidised by governments.
At a certain point, people will begin to cut back
as more and more of their wage packets are
taken up with mortgage repayments. Rather
than waiting for this inevitable crash, is a
different path possible?
NEF is working with campaigners, researchers
and policy-makers to develop proposals that
will stabilise house prices and ensure we
have sufcient good-quality homes for the
developing needs of the population. Three
areas we will focus on:
1 Achieving a pluralism of housing models
and improving options for debt-free homes
across the UK
• support the growing tenants’ movement
to professionalise the private rented
sector, making it more secure and priced
according to people’s incomes
• boost the stock of non-market housing
including homes with social rents and
community-led schemes, and develop new
models of no-debt or low-debt ownership
• rebalance demands on space with
regional development strategies and
investment in jobs and infrastructure
outside London and the South East
2 Deterring speculative investment in
property and land
Aside from the fact that government
attempts to stimulate private house building
have largely failed, there is a risk with simply
seeking to expand the supply of private
homes in the context we have described.
That’s
because new builds are likely to
be bought
up by those with capital or an
existing property behind them, without
meeting the real housing need of the
rest. The cycle and effects of rising prices
continue.
Between 1991 and 2011, an extra four
million homes being built did nothing to
increase space for those most in need.
36% of the new rooms created through
this house building went to the 10% of
the population who were already the most
generously housed. On the other end of
the spectrum, the least generously housed
10% of the population (those with the least
rooms per person) gained no extra rooms
at all.
13
Why building more homes for private
sale will not solve the affordability crisis
6 The nancialisation of UK homes: the housing crisis, land and the nancial system
Endnotes
1 Ofce for National Statistics (5 August 2015). Housing summary
measures analysis [webpage]. Retrieved from http://www.
ons.gov.uk/peoplepopulationandcommunity/housing/articles/
housingsummarymeasuresanalysis/2015-08-05
2 Ryan-Collins, J., Greenham, T., Werner, R. & Jackson, A. (2012, 11
December). Where does money come from? Retrieved from http://www.
neweconomics.org/publications/entry/where-does-money-come-from
3 Jordà, Ò., Taylor, A., & Schularick, M. (2014, 12 October). The great
mortgaging. Retrieved from: http://www.voxeu.org/article/great-
mortgaging
4 The Thatcher government, elected in 1979, took a number of steps to
liberalise and internationalise credit markets – a deregulation process that
continued under the Major, Blair and Brown governments.
5 Bank of England. (2013). Financial stability report, November 2013, p.60
6 Knoll, K., Schularick, M. & Steger, T. (2014, 30 September). No price
like home: Global house prices, 1870-2012, p.34. Retrieved from:
http://www.piketty.pse.ens.fr/les/Schularicketal2014.pdf
7 Ofce for National Statistics. (2015, 18 December). Main results from the
Wealth and Assets Survey: July 2012 to June 2014, p.10. Retrieved from
http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.
ons.gov.uk/ons/dcp171776_428683.pdf
8 Muellbauer, J. (2008, 20 July). Housing wealth and consumer spending.
Retrieved from: http://www.voxeu.org/article/housing-led-recession-
making
9 Rostom, M. (2015, 18 September). A lifecycle story of housing debt in
Blighty. Bank Underground. Retrieved from: http://bankunderground.
co.uk/2015/09/18/a-lifecycle-story-of-housing-debt-in-blighty/#more-558
10 Allen, K. (2016, 25 January) Only 200 houses built on public land
that could have held 100,000. Financial Times. Retrieved from http://
www.ft.com/cms/s/0/a0a85c84-c38a-11e5-b3b1-7b2481276e45.
html#axzz433vwDpQO
11 Ofce for National Statistics. (2014, 29 May). Households and household
composition in England and Wales: 2001-11. Retrieved from: http://www.
ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/
families/articleshouseholdsandhouseholdcompositioninengland
andwales/2014-05-29
12 Crisis. (n.d.) Rough sleeping [webpage]. Retrieved from:
http://www.crisis.org.uk/pages/rough-sleeping.html
13 Tunstall, B. (2015, 13 January). Relative housing space inequality in
England and Wales, and its recent rapid resurgence. Retrieved from: http://
www.tandfonline.com/doi/abs/10.1080/14616718.2014.984826?journal
Code=reuj20
• build a mortgage market that serves
principally to enable people to organise their
nances for the long term, for example by
removing teaser rates, interest-only periods
and by favouring loans with long-term xed
interest rates
• reduce banks’ preference for mortgage
lending by diversifying the nancial sector to
include public and other stakeholder banks
This brieng builds on analysis in the Foresight
report “Prospects for land, rent and housing in
UK cities” by Michael Edwards, Bartlett School,
UCL (June 2015) and subsequent roundtable
discussion hosted by NEF and UCL in October
2015.
Follow our work and join in the conversation at
www.neweconomics.org/housing
Written by: Alice Martin and Josh Ryan-Collins
Thanks to: John Stammers, Annie Quick and Beth Stratford
Cover Image: stevekeiretsu via Flickr (CC BY-NC-ND 2.0)
Design: the Argument by Design – www.tabd.co.uk
New Economics Foundation
www.neweconomics.org
+44 (0)20 7820 6300 @NEF
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