Reeves mortgage overhaul to drive up house prices for first-time buyers by £20k

Rachel Reeves’s mortgage overhaul risks driving up first-time buyer house prices in London by as much as £20,000, analysis shows.

Higher house prices would be an “inevitable consequence” of proposals to relax rules on mortgage lending as the Chancellor tries to find new ways to boost economic growth, according to Savills.

In the capital, where affordability is most constrained, it is feasible that rule changes could push up first-time buyer home prices by 4pc to £494,122, the estate agent found.

Ms Reeves has backed plans put forward by the Financial Conduct Authority (FCA) to loosen restrictions on mortgage lending put in place in the wake of the financial crisis.

Earlier this month, the Chancellor summoned regulators to the Treasury to urge them to deliver a “mindset shift on regulation”.

On Jan 16, FCA chief executive Nikhil Rathi wrote to Ms Reeves laying out the FCA’s plans for growth, which included proposals to “begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.”

Lucian Cook, head of residential research at Savills, said: “Clearly it is an inevitable consequence that some of the relaxation in mortgage regulation will feed through into higher house prices, and therefore it is inevitable that it is not going to be a completely efficient measure.”

It is not yet clear exactly how the FCA will ease the rules, but any measures that will open up the mortgage market to more buyers will increase demand and drive up prices unless there is a corresponding jump in supply.

Savills’ analysis was based on what could happen if the changes increased the average loan-to-income ratio among first-time buyers from 3.22 to 3.47.

In London, this change would reduce the size of an average first-time buyer deposit from £142,349 to £123,360, meaning that a first-time buyer would need less cash up front to purchase the property.

However, by making it easier to buy with a smaller deposit, the rule changes would increase demand, which in turn could drive up house prices by an extra £18,989.

The impact would be biggest in London where higher house prices mean more people are constrained by loan-to-income stress tests, Mr Cook said.

Across the UK, the rules changes could drive up house prices by around 3pc, adding to £7,679 to the average first-time buyer home.

Mr Cook said: “The challenge for policymakers is to design it in such a way that that impact is minimised and you genuinely make it easier for people to get into the property market.”

Story Continues