Housing market recessions and sustainable home-ownership

Mark Stephens (editor), Janet Ford, Peter Spencer, Alison Wallace, Steve Wilcox, Peter Williams

15 July 2008

Drawing on evidence from previous periods of instability, this study reviews how the government might respond to housing market recessions in the short term, and what longer-term measures it might take to promote sustainability through the housing market cycle.

Summary

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This round-up considers how the government might respond to housing market recessions in the short term, and what longer-term measures it might take to promote sustainability through the housing market cycle. The authors ask what lessons can be learned from past experiences that could inform the current period of instability.

Key points

  • The housing market recession of 1989–93 had far-reaching social and economic consequences, arising from the adverse impact of possessions on households and the impact of declining housing wealth on consumption.
  • The rise in mortgage arrears and possessions prompted short-term government intervention that included:
    • the payment of mortgage interest payments as part of the state safety net directly to those lenders that agreed to exercise greater forbearance;
    • the suspension of stamp duty on nearly all house purchases;
    • a boost to the housing association development programme to take properties off the market.
  • Home-ownership has changed since the last recession:
    • levels of home-ownership have stagnated, but home-owners’ risk profile has deteriorated;
    • the government has introduced new low cost home-ownership schemes to support its expansion, but safety nets have weakened;
    • new products, such as sub-prime mortgages, have emerged;
    • lenders rely more on international wholesale markets for funds.
  • Home-ownership faces immediate challenges arising from the ‘credit crunch’ and rising possessions, which have prompted short-term responses:
    • the Bank of England has extended liquidity to lenders to stimulate the market;
    • lenders have agreed to review their voluntary codes of practice on arrears management;
    • government has announced a comparatively small housing market package to take properties off the market;
    • lenders and advice agencies have called for the state safety net to be strengthened.
  • Home-ownership faces longer term challenges that require a balanced debate about what level of home-ownership is sustainable under current conditions, and how this might be increased with improved mortgage products and safety nets. Specific issues include:
    • how to enable people to access to owner-occupation;
    • further consolidation and regulatory change in the mortgage industry;
    • the need for longer-term mortgage products;
    • the need for safety nets that mesh with actual risks and distribute costs equitably and responsibilities appropriately so as not to encourage irresponsible behaviour.

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