Academic View
Fixing the mortgage market
Sarah Davidson speaks to Cambridge University Professor Susan J Smith about her work on the UK mortgage and housing markets
The housing and mortgage markets in the UK are unbalanced and unequal and unequivocally not working. It is our responsibility to fix it. With that in mind Professor Susan
J Smith, Mistress of Girton College Cambridge and a social geographer by training, has a big idea. Her research is based on the idea that
while housing markets interplay with mortgage markets and mortgage markets interplay with financial markets there is a divorce between the housing and financial markets. “So much of the discussion around the
recent crisis has implicated housing and quite rightly focussed on debt,” she says. “That’s a correct interpretation as far as it goes. “Nearly all the discussion therefore has
hinged on the mismanagement of debt. Nobody has really worked out that none of the policies on which that debt was accumulated and none of the strategies built to contain the crisis fully grasped the equity side to the housing equation. “Part of the reason for this is that the
equity side doesn’t feature in financial and capital markets because they are so bound up with debt. “People think that buying mortgage backed securities or more complex
credit derivatives somehow gives them exposure to the housing market which in fact it doesn’t. It gives them exposure to people’s ability to pay debts. It’s not exposure to the fortunes of the property market itself.” She believes the neglect of the equity
side is implicated in the recent credit crisis and critically she is trying to work out how it could now be used to manage the fallout and provide a “path to the future”. “One of the things the government has
had to do is make it possible for people to afford to repay their mortgages to avoid the bottom falling out of the interbank lending market as well as to avoid a wider social problem if people stop paying for their housing,” she says. Mortgage rescue schemes were born. “These in the main were about bridging
people’s circumstances either by rolling up interest or deferring capital repayments with the hope of better times ahead. At worst they were about easing the path out of homeownership. “None of this recognises that while
people are homeowners they have the title to a property whose future value could be of interest to someone, an institutional investor for example,” she explains. Smith argues that if the government had used the money it paid out to help
44 mortgage introducer AUGUST 2011
avert crisis to instead buy up effectively small proportions of the future value of residential properties there would have been a return on that money when value returned to the market had the person affected moved house. Further she refers to the benefits of
creating a market in housing equity derivatives tied to the value of the UK’s residential property market – house price indices in other words. Don’t be misled by the word derivative.
This product has nothing to do with debt or credit. Homeowners would buy a proportion of the property in which they live and institutional investors would effectively own the remainder. That is, they would share the investment returns through a price-indexed derivative contract. Smith believes a market in this type of
product would also help to address other imbalances in the existing housing market. “People for whom whole home
ownership is unaffordable could pay less for a property if they gave up some of their likely investment return. While people who are content to rent but wish to benefit from future house price gains could simply hold their wealth in a price-linked savings account of bond,” Smith explains. In other words they could invest in the
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