David Miles: Housing, Leverage and Stability in the Wider Economy
| Date Published | 11/14/2013 |
| Author | Marja Hoek-Smit |
| Theme | Housing Finance and the Economy, Housing Finance Policy |
| Country |
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.