Mortgage Market Deregulation and its Consequences

Abstract

One of the key aims of housing policy has been to extend homeownership. This paper examines the role that mortgage market deregulation has played in extending access to homeownership. It also examines its social and economic impacts. Deregulation is characterised as an unfolding process, rather than an explicit policy with identifiable objectives. It is identified as involving the ending of direct controls over building society lending, the opening up of the mortgage market to competition as a consequence of the abolition of exchange controls and the ‘corset’, the creation of a level playing field between banks and building societies, and a shift towards regulatory convergence between banks and building societies. Institutional, social and economic consequences of deregulation are identified. Deregulation led to a much more competitive mortgage market, facilitated the shift of the bulk of mortgages from the mutual to banking sectors and contributed towards the polarisation of the industry between specialist providers of savings and mortgage products and diversified financial institutions. Deregulation widened access to homeownership by widening access to housing finance, but also introduced more risk into the system. However, the risk-choice trade-off has been tilted in the direction of risk by the inefficiency of the supply-side. This has caused many of the benefits of deregulation to be lost in higher house prices. Deregulation also altered the relationship between the housing sector and the economy by making housing wealth more liquid, and this has had important implications for economic management. The pricing out of many people from owner occupation and the importance attached to spreading housing wealth are driving the design of current policies designed to increase homeownership further still.