Htydjtk

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...

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?

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.

Probably because 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.

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.”

No Freddie and Fannie, no long fixed mortgages.