The central plank of the 2013 UK Budget – boosting house building and sales activity – was both morally disgraceful and criminally reckless. The Government proposes to underwrite mortgages to the tune of 20% of the value for both first time buyers and those with properties who are trying to move up the housing ladder and from 1st April 2013, even more recklessly, to provide loans of 20% of the value of new build properties up to the value of £600,000 for three years from April 2014. The loans will be interest free for five years after which an annual fee of 1.75% will be levied on the government loan, with the fee rising annually by the retail prices index (RPI) inflation plus 1%. The loan can be paid off at any time up to and including the time when it is sold. ( http://www.hm-treasury.gov.uk/10012.htm ). The amount taxpayers will risk on the underwritten mortgages is estimated to be £12bn with the full value of the mortgages underwritten totalling £130bn, while £3.5bn of taxpayers’ money will be committed to the loans.
This policy is morally disgraceful because it is yet again favouring the haves over the have-nots . It is made doubly offensive because it is being done at a time when the Coalition Government’s attitude towards those in social housing is increasingly shrill with a constant portrayal of those in social housing as being parasites on the taxpayer because they do not pay the market rent for their properties while owner occupiers pay their way.
The reality is rather different. Social housing tenants have long received far less subsidy than owner occupiers who have been granted massive benefits by governments since at least 1969 when Roy Jenkins introduced Mortgage Interest Relief At Source (MIRAS). MIRAS lasted until 2000 when it was ended by Gordon Brown. In addition to MIRAS owner occupiers receive or have received these benefits:
1. Right-to-Buy (RTB). The gains from RTB both from a considerably reduced purchase price (way below the market value) and the huge rise in property values in the period 1980 to 2008. The rules to qualify were tightened and the discounts offered were gradually reduced in the period, but have been boosted again by the Coalition Government which announced a discount of up to £100,000 in the Budget (http://www.standard.co.uk/news/politics/budget-2013-100000-off-righttobuy-a-london-home-8540690.html).
2. Private residence tax relief. No capital gains tax is paid on a property used as a private residence when it is sold.
3. No inheritance tax (IT) is paid on a private property when it is inherited by a spouse who is resident in this country. Regardless of who are the beneficiaries, no IT is paid on a property if it forms part of an estate worth less than the inheritance tax exemption limit (£325,000 in 2012-13). No IT is paid on a private property if the private property has been gifted to someone else more than 7 years before the death of the person making the gift.
4. Housing benefit for the interest paid on a mortgage. This could be received by someone unemployed or employed, but with an income so low they qualified for housing benefit.
5. A surprisingly large number of taxpayer funded schemes providing substantial grants, especially for energy saving improvements (http://www.freegive.co.uk/grants.htm).
6. The lax credit policies from the mid-1980s onwards which allowed mortgage providers to grossly inflate property prices before the 2008 crash by granting no deposit mortgages and even mortgages up to 125% of the purchase price. In addition, “light touch” regulation of the banks and their ilk greatly increased the money supply which also inflated property prices. Finally, prices were inflated further by the permitting of massive immigration during the years of the Blair and Brown Governments which added some three million to the UK population.
7. Since the crash of 2008 successive British governments have offered massive direct and indirect aid to those with mortgages. The direct aid has been such things as mortgage payment holidays (http://www.guardian.co.uk/politics/2008/dec/04/brown-mortgage-interest-break-repossessions), and indirect protection, for example, keeping Bank Rate at microscopically low levels.
Whilst all this has been going on social housing has become ever scarcer as several million social housing properties have been sold off under RTB (http://www.politics.co.uk/reference/right-to-buy) and the provision of new social housing since the mid-1980s has been meagre in the extreme.
Morally obnoxious as the policy may be, the fact that it is criminally reckless is even more worrying. The almost certain short term effect of this taxpayer funded largesse is that house prices will rise because there will be more money chasing scarce housing. This will make purchase even with the helping taxpayer hand more and more difficult, especially for first time buyers who will be tempted to pay over the odds because the terms look so easy and the participating mortgage lenders will be willing to lend more in the secure knowledge that the taxpayer will either cover a substantial minority of them mortgage or provide a buffer against future negative equity because of the significant amount of equity resented by the taxpayer funded loan. Suppose a house is purchased for £500,000. The purchaser pays a 5% deposit and the taxpayer makes this up to a 25% deposit with a 20% equity loan to the purchaser. This leaves the private mortgage provider to find £375,000. Provided the property can be sold for £375,000 the mortgage provider will lose nothing. If it is sold for just £375,000, 25% of the original purchase price (the total deposit) will be lost. The taxpayer would lose £100,000.
The intentions of the Government – to boost house building, enable first time buyers to get on the housing ladder and loosen up the property market generally – are likely to be undermined further because it appears Britons buying second homes and foreigners will be able to access the taxpayer funded privileges (http://www.telegraph.co.uk/news/politics/9947031/Wealthy-homeowners-could-use-state-backed-loans-to-buy-second-homes.html and http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/9952998/Foreigners-can-qualify-for-state-subsidised-mortgages.html)
The danger in the longer term is that the housing market will tank as the Irish and Spanish ones have done and property prices halve. This is a significant possibility, because apart from the general economic turmoil in the EU, UK interest rates will have to rise substantially sooner or later and this alone will suppress the market dramatically as very large numbers cannot meet their mortgage payments. If property prices do collapse it will leave the taxpayer taking a severe financial hit. Osborne is effectively betting the national farm on a recovery in the housing market.
What housing policy should the Government be pursuing?
I suggest this:
1. Use the money they have earmarked for the underwriting of risk and the 15% deposits in new build properties up £600,000 to engage on a massive social housing building programme.
2. Put a tax on land held by property developers with planning permission while they refuse to build on the land as per the planning permission.
3. Ban Buy-to-let mortgages.
4. Introduce rent controls on private landlords. If rents were frozen for a number of years this should not impact too seriously on most private landlords, the majority of whom will either own their properties or have small mortgages on them . Even those with large mortgages should be able to survive in the low interest environment which looks as though it will continue to several years at least. If they can pay the mortgage now they should be able to keep in paying it until interest rates rise significantly. By that time
All of those policies could be done whilst we remain within the EU. If we left the EU it would be possible to:
5. Deny all social housing to foreigners.
6. Ban foreigners from purchasing residential property.
7. Put an end to further mass immigration.
These policies will greatly increase the supply of housing in the medium term if not sooner . If even 1-4 were implemented this would do a great deal to bring the cost of housing to a level where those on the average wage could afford to rent in most areas and
Governments bear the responsibility
For thirty years or more British Governments have been almost entirely responsible for the truly dismaying rise in the cost of property both to buy and to rent through a failure to ensure enough housing both private and social was built, by removing rent controls, ending credit controls on mortgages, failing to control mortgage lending generally and, most dramatically, by allowing mass immigration to add between three and four million people to the population in the past 15 years.
To understand exactly how inflated housing costs have become compare property prices today with what they were in 1955. Then the average residential property price was around £2,000. Uprated for inflation the average price of properties today would be around £40,000. (https://livinginamadhouse.wordpress.com/2010/10/24/the-vicious-poison-in-the-british-economy-is-the-outlandish-cost-of-housing/). Makes you think. If that was the case now, even those on half of the average national wage (half of the present average wage would be about £13,000 ) would be able to purchase a property of some sort.