Regional banks could be a real Help to Buy
Joe Wright, 2 October 2013
Mortgage is believed to come from the Old French ‘Mort’ and ‘gage’, literally “dead pledge”, to signify a loan which ended upon full repayment or when payment failed. Today, it could be better interpreted as a pledge to ‘pay until death’ with an ever-increasing gap between house prices and wages. Help to Buy is no solution: fresh thinking is needed to make the housing market function again and regional banking could be the answer.
The government recently announced it would bring forward the second phase of its Help to Buy scheme. Phase one was designed to support buyers (not exclusively first time ones) with the deposit for newly built houses and was pitched as an incentive for construction companies to build more houses. Phase two offers a government guarantee for ‘higher-risk mortgages on any kind of home’.
Lloyds Bank (newly separated from TSB) and RBS have today agreed to sign up to the scheme. But, according to the Financial Times (£), HSBC are still considering, Santander remains hesitant and Barclays are very worried claiming money back off the government will look like another bailout. The remaining – and majority of – lenders are nervously waiting to see how the scheme will play out.
It has already received strong criticism – not least by the Business Secretary – as a quick-fix that will aggravate an already dysfunctional market by increasing house prices further and encouraging ever riskier borrowing. The worries are with good reason: low deposits and high loan-to-value ratios were the toxic cocktail that fatally poisoned Northern Rock, which tried to circumvent deposits with interest-only and 125% mortgages. Lloyds and RBS, have already said they will be offering loan to value ratios of up to 95%.
The housing crisis is not about the size of deposits, but the affordability of houses. It is evident they cost too much for many people. Help to buy suggests nothing has been learned from the financial crisis and a dearth of fresh thinking.
One solution could be regional banking, similar to the German Sparkassen, which has been proven to better provide for businesses, especially in disadvantaged regions and during recessions. It is conceivable they could do the same for the housing market. Construction companies and house buyers would greatly benefit from a more focused understanding of regional supply and demand for housing, especially in areas of the UK where supply is low. They could forge relationships with the local authorities to encourage and provide housing projects in the interest of the local area. If nothing else, they would provide better competition for mortgages and break up a heavily centralised and rigid business.