With its new majority and a date for the Budget now fixed in the diary, Boris Johnson’s government will be planning to press ahead with its political agenda this year.

After more than three years of Westminster focusing on the nature of the Brexit withdrawal agreement, the time is ripe for Boris’ administration to place housing policy firmly towards the top of its priorities. The new government must bring together lenders, intermediaries and regulators – alongside other key stakeholders – to tackle the key issues facing the property market.

Housing supply has certainly been woefully low in recent years. In the year to September 2019, constructions started on fewer than 158,000 new homes. As a result, Downing Street’s approach to housing policy will most likely include the typical promises to build thousands of new homes up and down the country.

However, while housing supply is an issue that must be addressed, it’s increasingly clear that the struggles facing those looking to become homeowners go beyond the gap between supply and demand. Imla’s recent report into the intergenerational divide in the housing and mortgage markets suggests that the biggest barrier to homeownership for first-time buyers could be tighter affordability criteria. This was echoed in UK Finance’s report on the Changing Shape of the Mortgage Market, which also suggested that stricter mortgage regulation in the wake of the financial crisis, including stress testing, could actually be preventing those with smaller deposits from stepping onto the housing ladder.

Innovation in the mortgage market has certainly helped to provide consumers with more product choice, particularly those with smaller deposits. There were around 380 95 per cent and 774 90 per cent LTV mortgages on the market towards the end of 2019. Competition and record-low rates also mean that mortgages have never been more affordable than they are now, yet homeownership, particularly amongst the would-be FTBs, is in decline. Less than 40 per cent of 25 – 34-year olds owned their own home in 2016, compared to 61 per cent in 1996.

Stringent affordability tests, which were initially implemented in 2014 as part of the Financial Conduct Authority’s Mortgage Market Review, and later updated in 2016 to comply with the EU’s Mortgage Credit Directive, mean that more mortgage applicants are being rejected – even though some may be paying more in monthly rent than they would if they were making monthly mortgage repayments.

The Financial Policy Committee has also raised the bar for mortgage applicants by requiring lenders to stress-test applicants’ ability to repay at 3 per cent above the lender’s normal standard variable rate.

For some borrowers, that could equate to a nominal rate of 7 per cent or 8 per cent. In the current low interest rate climate, when a borrower’s actual rate could be 1.9 per cent or 2 per cent. this appears excessive, because FTBs will often be eligible for discounted products – yet they are being subjected to stress tests set at rates much higher than they would realistically be expected to pay.

Imla’s recent research found there could be significant long-term detriment to those consumers who are unable to make the move into homeownership. For instance, an individual who borrows to buy an average priced property could be £352,500 better off than the average private renter over the next 30 years – even if house prices don’t rise.

Our report also showed that, as a result of stricter criteria and stress testing, some borrowers who might have been expected to have stepped onto the housing ladder have not been able to do so. This could have significant implications for society in the future, as a lost generation of homeowners reach retirement having been unable to accumulate housing wealth throughout their adult lives. This tranche of people would subsequently miss out on the potential benefits that housing equity could bring in the future too, such as the opportunity to unlock property wealth in retirement.

Both Imla’s and UK Finance’s reports conclude that the challenges facing the housing market require long-term coordination of housing policy and mortgage regulation, which must evolve slowly, rather than change abruptly in order to avoid market disruption. Addressing the big challenges facing the housing sector will demand considerable focus and the collaboration of all major political parties. It may even require the assistance of a dedicated housing body that doesn’t fall foul of party politics – in order to lay the groundwork for a longer-term solution.

Ultimately, we must avoid sleepwalking into a situation where there is an ever-larger financial divide between owners and renters. If we do not, we could be storing up problems for future, particularly for those who have no other choice but to rent and who will be unable to draw on the benefits of their housing wealth later in life.

Kate Davies, Executive Director, Imla