The U.K. government should set up a body to buy homes to help Britons reduce their debts and increase spending, according to Royal Bank of Scotland Group Plc economist Richard Barwell.
Current policies are limited in their ability to stimulate the economy as Britain is being held back by a “balance-sheet recession,” London-based Barwell said in an e-mailed report to clients today. The proposal would target homeowners who are holding back spending because their mortgages are worth more than the value of their property or who don’t have much equity in their homes, he said.
“If that fraction of the mortgage population is sufficiently large, then when coupled with those households struggling with the burden of unsecured debt, we could arrive a material fraction of the population that may be unwilling to increase spending in response to monetary stimulus,” he said.
The program would see authorities setting up an institutional buy-to-let investor to which individuals could sell their property, remain as rent-paying tenants and use the proceeds to pay down their mortgage, Barwell said.
“In most cases, this process will release some equity tied up in the property,” he said. “The hope is that those individuals will become debt free and may then be more likely to spend. There might be a significant impact on consumption.”
The plan could be funded by either the issuance of government bonds, or by a state guarantee and private-sector finance, the economist said.
The program may also provide a new macroprudential tool for policy makers seeking to reduce imbalances in the housing market by increasing or decreasing the rate at which properties are put back onto the market, he said. It would also allow banks to lower leverage and their reliance on wholesale funding as mortgage debt is paid off, Barwell said.