|Theme||Housing Finance and the Economy, Housing Finance Policy|
David Miles: Housing, Leverage and Stability in the Wider Economy
November 14, 2013
In a speech at the Dallas Federal Reserve, David Miles, external member of the Monetary Policy Committee, Bank of England, considers some of the policies – including monetary policy – that might be used to reduce the risks of turbulence in the housing market causing widespread damage. He argues that one factor is particularly significant in accounting for the degree of volatility in housing markets and the harm that it can do – leverage: that is the fact that houses are bought with such a high proportion of debt. In that context his paper considers the advantages of (and obstacles to) greater use of outside equity in financing house purchases.
He notes that variations in permitted loan to value (LTV) and loan to income ratios, as well as in capital requirements, are likely to have some impact on leverage. But greater use of outside equity funding could permanently reduce the average level of gearing and might much reduce the need to rely on macro prudential or monetary policy levers to be pulled hard in cyclical upswings because those upswings, and their consequences, would be less severe.
Rather than requiring home-owners to provide more equity through limits on LTV ratios, which could push back the age at which individuals could become homeowners, Miles argues for mechanisms to an increase in outside equity funding to be developed . This would allow outside investors to share the risk – and rewards – of home ownership. He considers forms of funding where the repayment value is explicitly linked to the value of the home, where the return to the outside funder comes in the form of a final payout which is linked to the value of the property at an agreed horizon, such as when a property is sold.
Miles concludes that while getting a market in equity loans established is not easy, and some shared equity products have an uneven success rate, the recently launched equity loan product provided by the UK government for new build homes under its Help to Buy has already proved popular.
For full presentation, click here.
For David Miles' speech, click here.
For more details on the conference, click here.