Labour Party report proposes mortgage crackdown
The Labour Party-commissioned ‘Land for the Many’ report has proposed a fresh crackdown on buy-to-let market as well as tightening loan-to-income and loan-to-value mortgage lending.
The study proposed making buy-to-let landlords show that their existing income is sufficient to cover mortgage costs rather than stress testing based on rental income. It also said mortgage interest relief should be scrapped.
The report blamed house price inflation on the availability of cheap mortgage credit and ‘the buy-to-let frenzy’, while it raised concerns over the proportion of loans at high income multiples, which have risen to higher levels than 2007.
The report said: “If, in spite of the improvements to tenants’ rights and property tax… first-time buyers continue to be outbid by prospective landlords, Labour should more heavily regulate or reduce the availability of buy-to-let mortgages, by requiring that borrowers would need to show their existing income was sufficient to cover monthly mortgage costs.
“Arguably, it is unfair for first-time buyers to have to compete against purchasers able to rely on projected rental income. Regulating or reducing buy-to-let mortgages would dampen speculation-driven house price increases.”
The report added: “Banks currently have a strong incentive to lend against housing collateral, since capital requirements for mortgage loans are lower than for other types of lending, including loans to small business, collateralised by commercial property.
“This bias could be reversed by, for example, raising the riskweightings for mortgage lending, and lowering the risk weightings for productive forms of lending, or by enforcing a maximum ratio of mortgage lending to productive lending.
“Reducing the house-price-to-income ratio will have strong distributional benefits by widening access to housing. However, additional measures may be needed to prevent tightening mortgage access disproportionately impacting on poorer households.
“Once house prices are stabilised, and the house-price-to-income ratio starts to fall, we recommend that the maximum loan-to-income and loan-to-value ratios should be correspondingly tightened, to prevent any future debt-fuelled reinflation of house prices.”
It proposed for the Bank of England’s mandate to be expanded to ‘stabilise’ house prices, though it said changing the base rate is unsuitable for this role, since raising it could discourage investment.
The report noted that reform to make residential land and property less attractive could prompt investor flight, causing falling houses.
To combat this, the study proposed establishing a Common Ground Trust, a publicly backed institution that would purchase land beneath houses and lease it back to those who own the bricks and mortar, which account for 30% of the price of property.
This, the study added, would allow people to put down lower deposits and take on a lower mortgage debt.
The report added: “The Trust is a vehicle for bringing land into common ownership… to expand the number of people ready and able to buy a house, offsetting the reduced demand from landlords and speculators.
“This would make it safe to introduce the necessary reforms to the private rented sector, the tax system and the mortgage market discussed in the previous chapter, so that land and house prices can be stabilised.”
Labour will consider the report’s recommendations ahead of the next general election.
David Hollingworth, director of communications at L&C Mortgages, said: “It’s not happy reading for a landlord, as you feel beaten up as it is.
“We haven’t seen the full impact of the rest of the changes that have taken place, to then start talking about imposing tougher measures.
“You would have to be careful and measured around how quick that pace of change would happen.
“There would need to be a building programme to provide an alternative supply to the rented sector in tandem.”
He added: “A lot of the measures are about levelling off or reducing house prices, so we get them to a more affordable long-term level, and I think a lot of people will think that’s a worthwhile effort. It’s how you go about doing that.
“Putting extra weighting on mortgages would push up the cost of borrowing, which potentially doesn’t help that affordability that you are trying to foster in the longer run.
“It’s clearly meant to be challenging and thought provoking rather than a policy statement, but there are elements which people will agree with the general thrust of.
“But when you start to see how those might be implemented, you’d quickly run into concerns, particularly from existing homeowners but potentially those who are looking to get on the ladder.”
Martin Stewart, director of London Money, thought the report made some good points regarding issues with the housing market, though he felt the conversation should be steered away from radical socialist solutions.
He said: “There are some valid points made in the report, particularly in reference to the first-time buyer struggling to compete against the unregulated landscape that is buy-to-let.
“There is a risk that we need to steer the narrative away from too socialist an approach to what is in effect a capitalist, free market but at least some people are prepared to open the dialogue about the inequalities that sit within the housing and mortgage sector.
“The hidden message within the report is that lessons don’t appear to have been learned from the past and I tend to agree with that point.”