A research paper “Demographics, house prices and mortgage design” written by Bank of England economist David Miles suggests an increasingly dense population, rising pressure on house prices and a lack of mortgage lender appetite may result in new types of lending.
Shared equity and shared ownership could start to gain popularity while high LTV lending is unlikely to return, he argues.
Miles said: “The upwards trajectory in house values may ultimately become steeper than the rise in real incomes.
“That prompts a question as to the desirability and feasibility of having house purchases largely
financed by debt (standard mortgages).”
Miles writes that some part of the reversal in availability in mortgage finance may be temporary, but some will be permanent.
He said: “It is very hard to imagine that the availability and cost of mortgages in the US and the UK will return at any foreseeable point to what it was like in the years just before the financial crisis in 2007.
“In the UK banks and building societies are now requiring that house purchases are financed with more equity – the supply of high loan to value ratio mortgages has dried up.
“The lack of availability now of very high LTV loans is clear. But it should not – I think – be seen as a sign of a damaged market, one that is not functioning properly.
“It probably never made sense for there to be 100% mortgages. There may be no price at which it makes commercial sense for such a loan to be available.”
He argues new home owners in the future may need to have more equity than was normal in the years leading up to the financial crisis which will permanently change the pattern of home-ownership and – at least transitionally – on the demand for housing.
The first effect is likely to be for prospective buyers to postpone their purchase, while they save more to accumulate a larger deposit.
As a result the average age at which people would buy their first home will rise, and the share of owner-occupied houses will fall.
To an extent this is already happening but Miles suggests the change in the pattern of home-ownership this generates will be very large if the required equity is only provided by the prospective home-owners themselves.
But saving – the provision of internal equity – is not the only source of equity.
Miles said shared equity may become more common in the future.
Equity loans are hybrid instruments, with characteristics somewhere between straightforward debt and equity and enables a buyer to take out a smaller traditional mortgage.
He said: “Equity type funding of house purchase has major attractions – at both the micro and macro level.
“At the micro level they have the potential to allow more efficient sharing of house price risk.
“The purchase of a very expensive asset by means of high leverage is not – to put it mildly – self evidently the optimal contract.
“At the macro level a useful feature of equity loans is that effectively the interest rate paid on the loan is linked to the rate of house price inflation – the higher is house price inflation the higher is the effective interest rate on a portion of the funding of houses.
“That could be a stabilising force.”
Russell Quirk of online estate agents, eMoov, said Miles’ research whether equity loans are the solution remains to be seen but the reduced risk to the lender and potentially cheaper finance for the homeowner mean they may well break what could become a fundamental deadlock.
And he added: "David Miles' musings drive home how we may be waiting for a mortgage market to come back that may never come back.
"The mortgage market could well have crossed the rubicon over the past year or two, but people just don't know it yet.”
