High mortgages at heart of housing market problems, says BoE’s David Miles

High mortgages at heart of housing market problems, says BoE’s David Miles

“But more fundamentally, use of outside equity might be a way of bringing down reliance upon debt financing,” Mr Miles said, taking up an idea he floated in another speech two years ago.

Switching 20pc of funding for house purchases away from mortgages to outside equity investors could reduce the probability of a house being worth less than the value of the loan from 10pc to 4pc, Mr Miles estimated.

Extrapolating this to the US housing market, the share of homeowners caught in a so-called negative equity trap could be reduced from 14.5pc now to 10pc, he said.

That could have meant fewer people walking away from their debt during the 2008 crisis, lower mortgage-servicing costs, fewer foreclosures and less severe losses for banks. “The Great Recession could have been less severe,” Mr Miles said.

While Australia has developed shared equity funding, Mr Miles acknowledged there were significant barriers to creating such a market. But he cited demand for the original part of the British government’s Help To Buy scheme, which offers similar equity loans in a bid to spur new home building.

Mr Miles said the downside of raising interest rates to prevent a housing bubble would be the impact on a broad range of asset prices and savers. It would also have a disproportionate effect if applied when house prices were rising faster than consumer prices, given the low weighting of housing in inflation indexes.

“That problem with using monetary policy to stabilise the housing market would be acute if housing markets were overheating when the wider economy was not,” he said.

(Edited by Andrew Trotman)

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