Housing finance has long been recognized as a particular weakness of the UK economy, associated with demand and house price booms and busts for decades. The lack of regulatory response to innovations in housing finance over the past two decades has allowed the system to become even worse. There remains a particular shortage of affordable long-term fixed rate mortgages, the supply of mortgages is influenced by the animal spirits of high yield investors and wholesale funding vehicles directly contributed to the fragility of banks’ balance sheets. In a well-functioning financial system real economic transactions are matched, as far as possible, by funding with similar characteristics.

So, for example, long term utility investment projects are often funded by long term debt contracts. In most advanced economies the same is also true of mortgages; the preferences of young borrowers are matched by those of older savers through long term contracts, often on fixed interest rate terms. The UK stands out as an exception. Prior to the crisis our long term savings funds, such as pension funds and life assurance products, together worth around £1.8 trillion, invested in only 5 per cent of all our mortgage backed securities. And with over 10,000 retail mortgage products on offer, there was negligible take-up of long term fixed rate mortgages.