10

I recently moved from the US to the UK and was bewildered by the myriad subtle and not so subtle differences in mortgage products offered by banks.

It struck me that the variety of federal assistance programs in the US surrounding home buying is a little spoken form of socialism. We have a 30 year fixed rate mortgage underwritten by federal agencies Fannie Mae and Freddie Mac. From our federal taxes, we can deduct interest payments and property tax payments, essentially helping to subsidize the local education system and other local services. There are no penalties for early repayment of the loan.

In the UK, in contrast, which is supposedly a "more socialist" country, the longest fixed interest rate period is 10 years. There are no deductions on HMRC taxes associated with interest payments or "council tax" payments. Finally, there are penalties on early repayment.

Are there historical reasons for these differences? Why isn't a sizeable fraction of the US up in arms about their "socialist'' home ownership programs? Why isn't there stricter regulation and oversight of the mortgage industry in the UK? Spiraling house prices, historically low interest rates, and a looming Brexit and consequent inflation makes the situation seem like a bomb ready go off. The central bank raises interest rates, 4 million mortgage holders can't make their mortgage payments, and then...

  • 7
    It is a joke to say UK is a more socialist country after Thatcherism that never ceased. – mootmoot Apr 11 at 12:55
  • 5
    "It struck me that the variety of federal assistance programs in the US surrounding home buying is a little spoken form of socialism." This is highly pedantic, but giveaways from the government do not constitute "socialism" anywhere; socialism requires public ownership of the means of production. – Joe Apr 11 at 14:55
  • "The central bank raises interest rates, 4 million mortgage holders can't make their mortgage payments" Are they variable rate mortgages? Prepayment penalties are more common for fixed-rate mortgages. – Acccumulation Apr 11 at 19:23
  • 1
    @Joe Correct. What the OP is talking about is called "asset-based welfare" or "property-based welfare" jstor.org/stable/41107504 – Fizz Apr 11 at 20:32
  • @Accumulation. My understanding is that there are about 10 million outstanding mortgages in the UK which average about 100,000 pounds a piece. Most borrowers take out loans that have two, five or ten year fixed rates periods and associated early repayment penalties. – user2309840 Apr 11 at 21:18
10

The economics side of this question might do better on PersonalFinance.SE. A possible answer from the Telegraph:

Customers, firstly, are to blame, say lenders. There’s not enough demand because borrowers prefer the flexibility of being able to switch deals.

It has been tried before. In 2007 Gordon Brown, then prime minister, said he wanted to make longer fixes more available.

This seems to be linked to the gradual fall in interest rates over the past 30 or so years - people seem happy to bet that this will continue. Short-term fixes seem to be the cheapest option - at least in the short term (yes this is a bit of a tautology).

Why isn't a sizeable fraction of the US up in arms about their "socialist" home ownership programs?

People like free money for themselves, it's just free money for other people they're upset about. None of this is "socialism". A truly socialist economy would put much more effort into social housing, possibly to the extent of banning mortgage lending or even homeownership, although that's more towards the full communism end.

The central bank raises interest rates, 4 million mortgage holders can't make their mortgage payments, and then

And then the government bails them out somehow, because any other outcome is electorally unacceptable?

  • 2
    Also, the mortgage interest deduction is not seen as "free money" (unlike subsidized housing), but as being able to keep a bit more of your own money out of the hands of the government. – jamesqf Apr 11 at 18:18
  • My understanding is that the current "mortgage welfare" policies in the US grew out of things that happened in the Great Depression. I'm surprised that the UK, which despite Thatcherism I see in many ways as to the left of the US, has not adopted similar policies. Thanks for the link to The Telegraph, where I learn from time to time the UK has tried, but failed, presumably because, unlike their American cousins, the policies did not also include abolishing early repayment penalties. – user2309840 Apr 11 at 21:21
  • The UK also had mortgage interest relief for a while (MIRAS) under Thatcher, who was a big fan of giving away money to homeowners to promote the Tory vote. – pjc50 Apr 11 at 22:05
8

Basically the 30-year FRM is closely related to the government subsidizing the mortgage industry, which most other countries don't do because it's ineffective at promoting home ownership. It's only effective at subsidizing the rich... and that's the opposite of "socialism" (in the sense that the OP construed the term).

The mortgage subsidy program tanked in the UK in the '80s and it isn't as successful as one might have hoped in the rest of Europe either, as The Economist thundered (in 2017):

IN THE 1980s Margaret Thatcher and Ronald Reagan were both proud of their efforts to expand home ownership. In Britain, Thatcher presided over a fire sale of state-owned homes to tenants. In America, Reagan deregulated financial markets and expanded mortgage lending. At the time both countries provided generous mortgage-related tax breaks, making it easier to flog homes to the masses.

Britain’s 1980s housing boom turned to bust; the mortgage subsidies that helped to fuel it were abolished. America still subsidises mortgages to the tune of $64bn a year, by allowing homeowners to deduct interest costs from their tax liabilities. [...]

Twelve European Union countries also include some form of mortgage-interest deduction (MID) in their tax code. The average European subsidy, however, is around a tenth of America’s—about 0.05% of GDP. The Netherlands is much the most generous, at 2% of GDP.

Evidence that MID schemes boost home ownership is scant. Recent research covering rich countries suggests it has no effect. Moreover, subsidising mortgages might actually hurt economies by helping inflate housing bubbles. The European Commission blames Sweden’s generous MID scheme for encouraging a household-debt binge and inflating house prices.

All but three EU countries have either reformed or repealed their MID schemes since the 2007-08 financial crisis. Ireland, Spain and Greece, for example, withdrew subsidies after suffering property busts. But withdrawing MID cannot on its own prevent property-market bubbles. According to The Economist’s round-up of global house prices, Australia, New Zealand and Canada all have overvalued housing markets despite the absence of mortgage subsidies [...].

Interest deductibility might be more defensible if its benefits were more evenly spread. In the Netherlands and elsewhere in Europe, the biggest benefits accrue to the richest householders, although many European countries tend to combine MID schemes with other generous housing welfare. In America 70% of the subsidy is claimed by the top 20% of earners. The country spends more on housing subsidies for 7m households earning over $200,000 a year than it does on the 55m making less than $50,000.

There is also the big fear that abolishing it (in the US) will lead to housing prices to fall. Which will be more of a problem there because of the lower welfare provisions in general

When the Netherlands adjusted its mortgage subsidy in 2012, house prices fell by 10%, but they are now climbing again at a decent clip. Prices in Britain are partly buoyed by the private rented sector where landlords have been able to deduct interest expenses from their rental income. The government began phasing out that deduction in April. That will have a big effect on the market.

And if you what The Economist writes on this is left-wing, you should read the New Yorker's article "The Mortgage Mistake". That's probably why the "more socialist" Europeans don't dig these measures as they mostly subsidize the rich.

Since the nineteen-thirties, the U.S. government has been committed to the idea that homeownership is an unalloyed good. The list of things the government does to support the housing industry is long. The Federal Housing Administration offers low-interest mortgages. Fannie Mae and Freddie Mac, by repurchasing and guaranteeing mortgages, help hold down interest rates. Homeowners get a variety of tax breaks, including a mortgage-interest deduction and a property-tax write-off, which add up to more than two hundred billion dollars a year in lost tax revenue.

Yet it’s far from clear that these programs actually do much to increase the over-all number of homeowners. Other Western countries don’t have anything like our range of pro-housing enticements, and their rates of homeownership aren’t much different from ours. The main impact of the mortgage-interest deduction and other subsidies is not that they get people to buy houses. It’s that they get people to buy bigger, costlier houses than they otherwise would.

The bigger your mortgage, the larger the tax deduction you get. This is why real-estate agents, during the housing boom, advised their clients to buy as big a house as possible, since the government was helping them pay for it. The result is that almost all the economic benefits of the mortgage deduction go to people earning more than a hundred thousand dollars a year. The average middle-class homeowner saves little or no money. As Dennis Ventry, a tax expert and law professor at U.C. Davis, told me, “It’s a classic upside-down subsidy: it goes to all the wrong people. If you really want to help people buy homes who otherwise wouldn’t, we’ve chosen exactly the wrong tool.”

A 2015 paper noted that:

Government and quasi-government entities dominate mortgage finance in the U.S. Over the past five years, the government-sponsored enterprises, Fannie Mae and Freddie Mac, and the Federal Housing Administration have stood behind 80% of the newly originated mortgages.

The two GSEs held about 50% of the risk in the US mortgage market before the 2008 crisis according to one analysis. It looks like no Freddie and Fannie, no long fixed mortgages. Financial Times has a lot of articles deploring these two US institutions, by the way, so it's not only a left-wing critique.

And for the real fuming, The Atlantic says:

Federal housing policy transfers lots of money to rich homeowners, a bit less to middle-class homeowners, and practically nothing to poor renters. Half of all poor American families who rent spend more than 50 percent of their income on housing costs. In May, rental income as a share of GDP hit an all-time high. Meanwhile, in 2015, the federal government spent $71 billion on the MID, and households earning more than $100,000 receive almost 90 percent of the benefits.

Since the value of the deduction rises as the cost of one’s mortgage increases, the policy essentially pays upper-middle-class and rich households to buy larger and more expensive homes. At the same time, because national housing policy’s benefits don’t accumulate as much to renters, it makes it harder for poor renters to join the class of homeowners.

But the MID isn’t just a symbol of housing policy falling prey to plutocracy. It’s a broader moral indictment of the tax code. [...]

These high-income households don’t consider their tax benefits to be a form of government policy at all. 60 percent of people who claim the MID say they have never used any government program, ever. As a result, rich households can be skeptical of public-housing policies while benefiting from a $71 billion annual tax benefit which is, functionally, a public-housing policy for the rich. As Desmond writes, “a 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way.” In short, an asset-building, wealth-creation, or welfare policy that’s run through the tax code can hurt the overall push for more direct forms of welfare—like simply giving money to the poor.

More data on comparative home ownership from an article not dealing with mortgages:

Homeownership allows families to build wealth, obtain a measure of financial security, and reduce financial risk in retirement. But in a recent paper published in the Journal of Economic Perspectives, we found that the United States’ homeownership rate has lost ground compared with other developed countries for which we could obtain a full dataset.

In 1990, the United States ranked 10th of the 18 countries, solidly in the middle of the group and, with a 63.9 percent homeownership rate, just above the average. By 2015, however, the US was the fifth lowest, with a rate of 63.7 percent, well below the 69.6 percent average.

Why is the US homeownership rate on the low end in the developed world? Between 1990 and 2015, 13 of the 18 countries increased their homeownership rates, while the US rate remained unchanged. Global interest rates fell, making access to homeownership easier.

[...]

Homeownership rates in the UK and the US are similar, even though the US has a mortgage interest deduction, while the UK subsidizes renting through its large stock of social and affordable rentals (about 17 percent of housing units are classified as “social or affordable rental stock”).

That's not the whole picture though because US houses are certainly bigger. On the other hand, assuming the Daily Mirror is reliable on this much:

In the UK the average house price is £242,415, compared to £122,073 in America.

If that's correct then the equal ownership in the US and UK is even more damning for the US system.

2

Why isn't a sizeable fraction of the US up in arms about their "socialist'' home ownership programs?

Because a sizeable fraction of the US benefits from this "socialist" home ownership programme. You are right to put "socialist" in scare quotes: there is nothing socialist about subsidising the wealthy. The socialist approach is for the government to own housing and for people to rent this from the government at below market rent.

There is a similar situation in The Netherlands, where the major right-wing parties are major defenders of the tax deductibility of mortgage interest payments. This has nothing to do with ideology (after all, it is a major intervention in the free market), and everything with the fact that their well off voter base benefit a lot from this subsidy of the rich and would economically lose out if it were reduced (it would also reduce the artificially inflated housing prices, thus affecting even those who own houses but who do not have mortgages). The generous rich people's subsidy has been reduced in recent years; IIRC you can now only deduct interest payments corresponding to at most 100% of the purchase value of the home (no 120% mortgage to fund major improvements), and only for the first home.

1

Up here in Canada, things are not necessarily as clear as they could be.

For example, we get headlines from reputable news sources like this: The end is here for 40-year mortgages which might lead the reasonable person to conclude that 40-year mortgages are no longer being offered to Canadians.

But it turns out that isn't true. If you manage to get past the headline and read down into the article, you'll see that "The government said the measures will apply to new government-backed, insured mortgages."

If you don't care about your mortgage being government-backed or insured by the Canada Mortgage and Housing Corp. (CMHC), which is a Crown corporation, you can enter into whatever sort of mortgage contract you might be able to negotiate (sort of.)

To get to the underlying question of why the government, through the CMHC, might decide to insure 40-year mortages, then stop, then reduce that further from 35-years down to 30-years, then consider raising it again -- these sorts of decisions are made to further social, economic, and other political goals, such as stimulating or dampening the economy, encouraging or discouraging home ownership, influencing household debt levels, etc etc. This paper from the Bank of Canada provides a useful overview.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.