Introduction

Housing is an investment in addition to providing services as a place to live. However, both depend heavily on the cost and availability of mortgage finance. This chapter is, therefore, firstly concerned with the growth in mortgage finance, monetary policies more generally and their effects on housing demand. In the UK, the mortgage stock as a percentage of household disposable income is now more than three times higher than it was at the start of the 1970s when the market was heavily regulated. Other countries have also experienced sharp increases as a consequence of liberalization of national mortgage and more general finance markets, the expansion in international finance and the wider securitization of mortgages. Yet, some groups – notably aspiring first-time buyers even with unimpaired credit histories – struggle to obtain mortgages or at least are required to provide deposits beyond their means. Therefore, there appears to be an anomaly or at least a distributional problem. One increasingly important reason arises from the use of housing as an investment at times of low yields on financial assets and as a hedge against inflation. Chapter 4 showed how rising volumes of mortgage credit allow existing owners and other investors to purchase additional homes without increasing their debt relative to the market value of their property portfolios.

In principle, the increased availability of mortgages may generate changes in real house prices and, under some conditions, may squeeze out potential first-time buyers from the market. Therefore, are rising prices primarily occurring from credit-fuelled investment? Furthermore, macro stabilization policies disproportionately affect first-time buyers because current owners are less affected by controls on loan to income or loan to value ratios. These problems require us to look closely at the relationship between house prices and monetary policy, a topic also explored in Chapter 8. This is an area of the literature which has expanded rapidly in recent years. In the UK, the relationship between house prices and debt is complicated by the Buy to Let market and, in the US, by the sub-prime market and the increase in lending to non-conventional borrowers. In other words, the nature of the market and its customers has changed as the more conventional market in loans has become satiated.