Will Rachel Reeves’s mortgage reforms help to ease the housing crisis?

As Labour promises an extra 36,000 mortgage approvals, Sean O’Grady examines whether relaxing the rules is a good idea

Did somebody say “populism”? As part of her “Leeds reforms” to financial services, the chancellor wants to make it easier for first-time buyers on relatively modest incomes to own their own homes.

Echoing the complaints of a generation of younger people, Rachel Reeves argues that tenants shouldn’t be helping other people to pay their mortgages through exorbitant rents, and instead could be making themselves more financially secure in the long run. It all sounds very appealing, but there are problems, too...

What does Reeves want to change?

She wants to allow banks and building societies to lend money at 4.5 times a person’s income, whereas the norm was once about two to three times, and to lower the minimum salary qualification from £35,000 to £30,000 per annum. She will also make permanent the government’s mortgage “backstop” guarantee scheme, which protects banks from default. The Bank of England is also ready to permit the banks to make riskier loans.

Who is it designed to help?

The government says some 36,000 additional mortgages will be approved in the first batch alone. So, quite a few potential voters.

Will it solve the housing crisis?

Obviously not; arguably, it might even make matters worse. In the first place, it is a small move, and there will still be many who don’t earn enough, or have the capital available, to take advantage of the looser regulations. They will continue to rent (though the government is introducing the Renters’ Rights Bill to give them some new protections).

However, insofar as it does increase demand, it will make housing dearer. As has been well observed, the problem with the property market overall isn’t a lack of demand but a long-running shortage of supply. Angela Rayner’s drive to build 1.5 million homes in this parliament will help matters somewhat, but it will take time.

Are there any dangers?

Yes. Memories of the financial crisis of 2008 are clearly fading, because it was the excessive provision of mortgages to sub-prime customers, and relaxed financial regulation, that led to the collapse of the world banking system, triggering a sharp recession and a long-term hit to global economic growth. It could happen again.

For example, if there is a recession, people lose their jobs and the property market slumps (which it will one day), then these overstretched new borrowers are forced to sell their homes at a loss, which will often be suffered by the bank or building society. This in turn will reduce the capacity of financial institutions to lend, and send the economy into a credit squeeze and a downward spiral – not to mention bankrupting the unlucky first-time buyers.

If the government effectively guarantees the loans, losses will be suffered by the taxpayer, and the national debt could be substantially inflated. Eventually, a large portion of the mortgage market could end up nationalised, which carries unacceptable risks.

Is it a good idea?

Not unless the housing market is in a permanent upswing. If not, then it is a potential catastrophe, and one that no government could (or should) survive.