The Intermediary – September 2026 - Flipbook - Page 45
RESIDENTIAL
Opinion
The missing
principle in
housing finance
F
or British households,
property is not merely
somewhere to live. It
is oen their largest
financial asset. The Office
for National Statistics
(ONS) estimates that net property
wealth accounts for 40% of total
household wealth in Great Britain. Yet
that wealth is typically concentrated
in one dwelling, on one street, in one
local market. No pension fund or
asset manager would regard that as
prudent portfolio construction. For
homeowners, it is treated as normal.
American economist Harry
Markowitz showed that diversification
can reduce risk without sacrificing
return. His insight reshaped
institutional investment and banking,
but it has never been applied at scale to
owner-occupied housing.
A household in Manchester, Cardiff
or London remains fully exposed
to the fortunes of one property and
one local economy, with no practical
means of offseing a local decline
against gains elsewhere in the country.
There is no single British housing
market. National averages conceal
sharp regional and local differences.
The Bank of England found
considerable variation across the
English regions and the devolved
nations, including different
sensitivities to mortgage rates and
housing supply. Two borrowers can
have comparable incomes and credit
histories, yet experience very different
outcomes because their homes happen
to be in different places.
The conventional response is to
manage the mortgage more tightly:
require a larger deposit, stress-test
affordability, restrict higher loan-toincome (LTI) lending and insure some
high loan-to-value (LTV) risk. Those
safeguards have value, but they do not
MARC BIRON
is co-CEO at Home Diversification Corp
address the underlying concentration.
They regulate the borrower around
the risk rather than diversifying the
risk itself.
A new model
A different approach is to embed
diversification in the housing-finance
structure. Under a model we have
analysed in published research, a
homeowner exchanges the individual
price performance of the property for
the weighted average return of a broad
pool of homes.
If the property outperforms the
pool, the homeowner gives up the
excess when the home is sold; if it
underperforms, the pool compensates
the homeowner. The family retains
ownership, occupancy and all the
everyday benefits of the home. What
is reduced is the financial loery
created by postcode.
Our empirical work used more
than one million US mortgages
originated between 1999 and 2020, so
the results should not be presented as a
calibration of the UK market.
They are, nevertheless, powerful
evidence of the mechanism. In the
model, a zero-deposit diversified
mortgage produced expected annual
credit losses of roughly five basis
points, compared with about 29
basis points for conventionally
structured prime mortgages. Even
under a replay of the Global Financial
Crisis, modelled losses were about
25 basis points. The principal driver
of catastrophic mortgage loss – a
severe local fall in house prices
combined with high leverage – had
been substantially reduced. The
homeowner can gain as well. Lower
risk supports lower required returns
and potentially beer mortgage
economics. In our modelling, the
present value of the risk reduction
STEVEN SIEGEL
is co-CEO at Home Diversification Corp
was approximately 14% of the home’s
value. It is not a cash payment,
guaranteed return or increase in
resale value. It is the modelled value
of reducing a concentrated risk that
households currently bear without
compensation.
On UK soil
Britain may be unusually well placed
to test the idea. It has sophisticated
mortgage lenders, a strong buildingsociety and mutual sector, established
second-charge and shared-equity
structures, high-quality property
data and regulators that have created
pathways for controlled innovation.
Housing policy repeatedly asks how
to expand access without recreating
excessive credit risk. Diversification
offers a different answer: do not
simply ask households to borrow
more safely while leaving them
exposed to one undiversified asset.
Change the structure of the risk itself.
The remarkable fact is not that
housing risk could be diversified.
It is that, more than 70 years aer
Markowitz, the largest asset in
millions of British household
portfolios remains largely untouched
by the organising principle of
modern finance.
The UK mortgage industry, its
mutuals and its regulators should
examine whether that omission can
finally be corrected. ●
September 2026 | The Intermediary
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