Housing and the crises: From the Global Financial Crisis to COVID-19

Professor Mark Stephens argues that responses to the Global Financial Crisis weakened the resilience of the housing system and that the initial responses to COVID-19 may be just the start of longer-term change.

The COVID-19 crisis prompts parallels with the Global Financial Crisis (GFC). This blog explains how he GFC unfolded, the government’s response to the crisis, and explains how the housing system changed during the subsequent decade of austerity. It then examines the initial responses to the COVID crisis.

How the GFC unfolded and its legacy

The GFC began with the upswing in defaults on US sub-prime mortgages with losses very efficiently transmitted around the world by virtue of they having been financed by securitisation – and the risks undetected by the credit rating agencies.

In August 2007, wholesale credit markets froze overnight, and the credit crunch began.

Attempts to recapitalise banks – and the UK experienced its first run on a bank in a century when Northern Rock failed – were nullified when the US government allowed Lehman Brothers to fail in 2008, sending bank shares around the world into freefall.

Leading economies responded by bailing out the banks, slashing interest rates, and implementing huge fiscal stimuli. When these weren’t enough, central banks turned to “unconventional” monetary policy in the form of bulk bond purchases known as Quantitative Easing, designed to inject liquidity into the banking system.

But the banking crisis morphed into a sovereign debt crisis in Ireland and southern Europe, and, in turn, into a Eurozone crisis, as “bailouts” from the troika (EC, ECB and IMF) stretched the Euro – which had removed the safety valve of currency devaluation – to its limits, most notably in Greece.

By the time COVID-19 arrived on the scene, Europe had not fully recovered from the GFC. Growth rates remain slow, productivity growth has stalled (and no one really knows why), and earnings have stagnated.

The northern European countries stepped up fiscal rectitude whilst the southern countries struggled to emerge from the “bailouts”.

If anything connects the two crises, it is the weakened and often threadbare social infrastructure left behind by the GFC and governments’ responses to it.

Initial responses to the GFC

Given the origins of the GFC – and its precipitous impact on the housing market – it is unsurprising that housing featured prominently in the initial response.

The social rented sector was boosted as a means to assist the beleaguered housebuilding industry, and most of the largest housebuilders remain supported (if not dependent) on the Help to Buy shared equity scheme, which has now left the government with a vested interest in avoiding a house price collapse: the government is first in line for losses.

At the time (2008) the government was haunted by the mortgage arrears and repossessions surge that occurred in the early 1990s, when, in the worst year, 75,500 households were repossessed. As the housing market recovered in the 1990s the state safety net was cut back in an effort to encourage homeowners to take out private mortgage insurance. Consequently, borrowers had to wait for six months before they could receive support.

Faced with a collapse in the housing market and fears of rapidly rising unemployment in 2008, and with many home-owners having failed to take out private insurance, the government stepped in and filled the resultant gap – at least until a new loan-based system could be introduced.

Strengthening the safety net for home-owners doubtless helped – although the context of tumbling interest rates was in marked contrast to the early 1990s when they were relatively high. Further, the labour market was less severely impacted than had been feared, as many people switched to self-employment in preference to the dole.

But it was forbearance, prompted by government advice to judges that seems to have brought about a sea change in how mortgage arrears were handled. In any event a repossessions crisis was avoided.

What’s changed in the decade since the GFC?

The decade since the GFC has been associated with austerity. But how did the institutions of the UK’s housing system change?

There was an attempt to strengthen the resilience of the financial system, with the Mortgage Market Review leading to the introduction of a more demanding conduct risk regime, mandatory affordability and stress tests for mortgages, and balance sheet restrictions on high loan-to-value mortgages, along with a range of buffers. Such micro- and macro-prudential regulation was the only serious piece of system change undertaken in the aftermath of the GFC, albeit a substantial one. Mortgage finance is still more restrictive than before the GFC, but ultimately there is a trade-off between access to finance and risk.

In contrast, the housebuilding industry has been left unreformed, and supported by Help to Buy (HtB). As we demonstrate in the UK Housing Review, HtB represents support to housebuilding on a grand scale. It will have involved £30 billion of government support by the time it is due to end in 2023  and accounts for between 36 per cent and 48 per cent of the total sales of five large housebuilders in England over the 2013-18 period. The housebuilding industry was some way from reaching pre-GFC levels of output on the eve of the Covid-19 crisis, whilst the numbers of units completed persistently lagged behind the numbers given planning permission – by more than one million units in England between 2011 and 18. We concluded that “the current model of housebuilding is unlikely to meet needs and a different business model is required.”[1]

Declining resilience of the housing system

In two crucial respects, the housing system became significantly less resilient than it was in 2008.

In the 1970s and 1980s the UK’s social security system was gradually transformed from a predominantly social insurance model into a means-tested “safety net” providing a near comprehensive but basic level of protection for the poorest. The social rented sector also assumed a safety net role, providing secure housing for a substantial part of the country’s low-income population. Housing Benefit became the glue that held together the social security and housing systems, in many cases paying the whole of tenants’ rents at increasing cost as the market rented sector grew.

However, the safety net was weakened in the austerity years. Cuts to housing support including Housing Benefit, Local Housing Allowance and the housing support provided through Universal Credit have left gaping holes in the safety net. The cuts initially fell predominantly in the private rented sector, notably in the form of limits to the levels of rent eligible for support: from 50 per cent of local median rents to 30 per cent; and this level was then frozen in 2016. The Crisis Homelessness Monitor for England commented, “The safety net once provided by Housing Benefit…. ended for the bulk of private tenants in receipt of benefit across the country…” Overall benefit caps then worked their way through housing support, first in London and then throughout the country as the cap was lowered.

And investment in social rented housing – in England – was for a time abandoned in favour of “affordable” rents, whilst Right to Buy was “enhanced.”

The period following the GFC also witnessed the continued growth in private renting, which has now outgrown social renting in England. The effect has been an increase in insecurity as landlords are able to reclaim property through “no fault” evictions – the most common trigger of statutory homelessness in England. Private renting was reformed in 2017 in Scotland where the scope for no-fault evictions has been much reduced; in England reform has been promised.

Responses to COVID-19

So it is with a weakened housing system that the country has entered the COVID-19 crisis: the “end to austerity” promised by the new Johnson government just came too late.

The UK government has responded to the COVID-19 crisis, as it did in 2008, with a large fiscal stimulus, and the monetary policy committee with a cut in interest rates (not that there was much scope for this) and another round of QE.

The fiscal stimulus has been aimed at supporting businesses effectively shut down by government in order to slow the spread of the virus, and by the workers suddenly without a source of income.

It is an indictment of the social security safety net that a much more generous systems of income support have been introduced.  The 80 per cent wage subsidy for “furloughed” workers is reminiscent of the kind of benefit rates that are not unusual in European social insurance systems. Universal Credit rates have also been enhanced by £20 a week, as 500,000 new claims were made in nine days – in effect acknowledging that they have become too low.

The 2016 freeze on eligible rents has effectively been reversed, which restored the maximum eligible rents to the 30th percentile of the local market rate – but not to the median that existed previously.

Forbearance has been negotiated between government and lenders – with a three months’ mortgage holiday for home-owners unable to pay their mortgage.

The UK government promised a “complete ban” on evictions arising from COVID-19, but the reality appeared to be much weaker, in effect increasing the notice period from two to three months.[2] Shelter has warned of some 20,000 evictions in progress, but the MHCLG claims there will be no new possession actions begun in the next three months – a period that could be extended. Further, guidance has been issued to judges that are intended to discourage or halt possession proceedings over the next few months. In Scotland, the number of months’ rent arrears that were required before possession was sought is being increased from three to six months, and in any case all evictions become discretionary. There are also likely to be delays in hearing cases as the Housing and Property Chamber (where cases are heard) is closed at least until 28 May.

A question is how much forbearance the predominantly retail private rented sector can absorb. This consideration undoubtedly prompted the extension of “mortgage holidays” to buy-to-let landlords.  The Scottish Parliament has gone further and is establishing loan scheme for landlords whose tenants are unable to pay the rent.

These are the initial responses to the crisis.

They are framed in terms of a response to the sudden shutdown of much of the economy.

They are also framed with the assumption or at least hope that the lockdown will be short, and the economy will bounce back quickly.

But a forecast by CEBR suggesting that the economy will shrink by 15 per cent this quarter (compared to just over 2 per cent in the autumn of 2008) suggests that this is a crisis on a scale that is difficult to comprehend.

These interventions are almost certainly the first few lines of a very long story.

Professor Mark Stephens is a Co-investigator at the UK Collaborative Centre for Housing Evidence and lead editor of the UK Housing Review.

[1] Stephens, et al (2020) The UK Housing Review, Chartered Institute of Housing, Chapter 1

[2] Inside Housing, 24 March 2020


Date: April 14, 2020 2:58 pm


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