Mortgage Market (RLE Banking & Finance)

Theory and Practice of Housing Finance

Mark Boleat

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136272981
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Beginning with a theoretical analysis of housing finance in the context of housing markets and financial intermediation generally, the authors then analyse, drawing on international experience, each of the main types of housing finance system: informal, deposit taking, contract and mortgage bank. Various aspects of the market are covered using examples drawn from the UK and elsewhere, including the regulatory framework, contemporary developments and securitization and secondary markets. Critical public policy issues, such as housing and the real economy, and housing subsidies, are analysed in detail. Finally the authors examine the future for housing and the housing finance market.

PART I

Introduction

1 Housing Tenure and Housing Finance

This book is concerned with the finance of owner-occupation, and it is therefore helpful to begin with a brief analysis of types of housing tenure and patterns of tenure, comparing the position in Britain with that in the rest of the world. This chapter also includes a discussion of the relationship between housing tenure, which can be regarded as a real economic variable, and finance for house purchase, which is a monetary variable. Obviously the two variables are linked, but, as will be shown in this and the next chapter, the links are somewhat tenuous, with the housing finance market being more affected by fiscal and monetary factors than by housing factors.

Types of Housing Tenure

There are two basic forms of housing tenure: owner-occupation and renting. In simple terms the owner-occupier owns the dwelling in which he lives while the tenant has an agreement to occupy the dwelling, perhaps for a limited time, for which he pays rent to the owner. While this broad categorization is sufficient for many purposes, including for this book, it should be noted that within the two categories there are a number of subdivisions, and at the margin the dividing line between owner-occupation and renting is blurred. Moreover, the characteristics of owner-occupation in one country may not apply in others, and, indeed, the perverse situation can occur of owner-occupation in one country having the characteristics of renting in another and vice versa.

In most industrialized countries owner-occupied, single-family dwellings and flats or apartments have slightly different forms of legal tenure. For single-family dwellings, including terraced and semi-detached houses, there are generally no shared parts, and therefore no problem in the owner-occupier owning the land on which the dwelling stands, nor, in the normal course of events, does the occupier have to share any services with his neighbours. In Britain the vast majority of owner-occupiers in single-family dwellings own their dwellings freehold, meaning they own the land on which their houses are built. However, in some parts of the country (notably South Wales) some single-family units are owned on long leases with a fairly small ground rent being paid to the owner of the land. For most practical purposes this form of tenure is identical to freehold tenure and often it is possible for the owner of a long leasehold house to purchase the freehold.

Flats cannot be owned in the same way because provision has to be made for the maintenance of the common parts. The normal arrangement in Britain is for flats to be owned on a leasehold basis, the lease initially running perhaps for 99 years or in some cases 999 years. The owner of a flat pays a ground rent and service charge to the landlord. The owner is free to sell his interest in the flat at any time and thus can benefit from any capital appreciation. This is therefore clearly owner-occupation although the owners of such dwellings have less control over their homes than do those living in self-contained units. Moreover, as the lease approaches the expiry date, so the property will begin to lose value and ultimately ownership will return to the owner of the land. It is difficult in Britain to obtain a mortgage loan to purchase a leasehold property unless the lease has at least twenty years to run beyond the mortgage term.

In other countries - Australia, the USA and Sweden, for example - many owner-occupied flats are held in a different way by which the owners of the flats jointly own the common parts. This removes many of the disadvantages of the leasehold form of tenure, such as the owner of the land often not properly fulfilling his responsibilities as landlord, and also the problem of depreciating leases as the leasehold term expires. The system is called ‘strata title’ in Australia ‘condominiums’ in the USA and ‘tenant ownership’ in Sweden. This form of tenure is nearer to full owner-occupation than the British leasehold system.

Rented housing is generally quite distinct from owner-occupied housing in that the tenant has no right to any of the capital appreciation of the dwelling, and generally no responsibility for the maintenance of the structure. However, this is not always the case. In Britain expensive flats are sometimes made available on short leases with a fairly modest rent, but a substantial premium has to be paid to acquire the lease. When the lease has been acquired it can then subsequently be sold and the owner of such a lease can be regarded in some senses as an owner-occupier. However, this is partly a consequence of legislation with respect to rented housing and the tax system. Mortgage finance is generally not available to purchase a lease of this type.

Recently, hybrid schemes have been introduced in Britain which combine elements of both renting and owner-occupation. Housing co-operatives come into this category. These are schemes by which participants jointly own all of the dwellings and jointly participate in the capital appreciation. However, the individual dwellings are rented from the co-operative. Shared ownership schemes are another hybrid category. Under these a person purchases part of a dwelling while simultaneously paying rent on the remainder; at a later stage (or stages) he is able to acquire the rented part. This is seen as being an easy entry into owner-occupation and a number of such schemes have been developed in Britain in recent years, generally with housing associations or local authorities owning the rented part.

In Britain it is accepted that one of the characteristics of owner-occupation is that the owner is free to sell the dwelling to anyone he wishes. This is not the case throughout the world. Hungary provides an interesting contrast. Although there is a high level of owner-occupation, higher than in Britain, often an owner-occupier can sell only with the consent of the local authority. Moreover to acquire rented housing it is often necessary to pay a premium and it follows that the occupier can benefit from any capital appreciation. This is a cautionary note when making international comparisons.

Notwithstanding these various complications, it is still generally the case that there is a fairly sharp division between owner-occupation and renting. Basically owner-occupation means that the occupier benefits fully from any capital appreciation (and similarly faces the risk, generally low in Britain, of capital depreciation), and is able to obtain a loan secured on the house by way of a mortgage to purchase it. This obviously applies to single-family dwellings, but also to flats, acquired on a leasehold basis in Britain or on a condominium-type basis in other countries.

Housing Tenure: Theoretical Considerations

Before considering statistics on owner-occupation it is helpful to analyse on a theoretical basis the demand for particular types of housing tenure, and therefore the patterns of housing tenure which one would expect to exist both within countries and between countries. This theoretical analysis can be considered by reference to major variables, in particular, wealth, age and location.

In Britain it seems to be accepted that owner-occupation is associated with wealth and certainly the statistics show that the richer people are, the more likely they are to be owner-occupiers. This pattern exists in many other countries, but is particularly pronounced in Britain, partly resulting from tax and housing policy considerations. There is no particular reason why owner-occupation should be associated with wealth, or renting with lower income groups. It is not a case of owner-occupied housing being more expensive, because the same dwelling must cost exactly the same whether it is rented or owned, unless there is some distortion through the tax system or through restrictive legislation. Owner-occupation and renting are merely different ways of paying for the same commodity and they do not alter the basic price.

The very poorest people, in the third world countries, are unable to pay any rent because they have no income. They will, therefore, be classified as owner-occupiers even though they are inhabiting very basic accommodation. As incomes increase in developing countries so the proportion of the population renting can be expected to rise as some of those who can afford to rent a dwelling do so and hence transfer from owner-occupation.

In industrialized countries there is no reason to expect an exact correlation between wealth and housing tenure. If people can afford to buy or to rent, then the decision as to which tenure they have will depend on a number of factors of which income or wealth is not particularly significant. Probably the most important is whether the household intends to live in the dwelling for a long or short period of time. Owner-occupation inevitably carries with it substantial transaction costs, and, moreover, it generally takes a period of weeks, if not months, to complete the purchase of a dwelling. By contrast, rented housing, even though it may be more expensive, carries with it few transaction costs and can be acquired and disposed of very easily. In practice, it is often possible for a tenant to walk out of a dwelling with no loss to himself even if this is in breach of the tenancy agreement.

The general conclusion on this point must be that wealth is of direct importance in determining housing tenure only to the extent that people who have no income o...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Title Page
• Copyright
• Contents
• List of figures and tables
• Preface
• Part I Introduction
• Part II Housing Finance Systems
• Part III The British Housing Finance Market
• Part IV Policy Issues
• Part V The Future
• References
• Index