“Why you cant afford a home” is the title of a very informative book by Josh Ryan Collins. (Polity, Cambridge, 2019). In the 1950s and 1960s, people bought a property with a mortgage from a building society. Banks at that time did not provide mortgages. In this same period, the state built homes for sale and rent in very substantial numbers. Large council estates were built as well as homes for sale.
Lending for mortgages and lending to business were kept quite separate. This situation meant that lending to households did not get out of control and could not imperil the entire economic system.
Over the past 40 years we moved away from this safe, yet boring situation. Firstly the UK began to take in dollars from across the world in breach of the financial rules. Then we set up a network of tax havens. The big bang of 1986 meant that banks could provide mortgages. Then we had banks selling on their mortgages as securities rather than keeping them on their books. And then finally in the decade prior to the crash of 2008, we had a situation in which banks saw providing mortgages as basically selling. Banks sustained themselves by borrowing from other banks.
In the 1950s and 1960s, house prices did not increase very much or very fast. It therefore seemed fair to exempt a house that someone lived in from capital gains tax. In the past 2 if not 3 decades, house prices have increased massively. We have reached a point where the state needs to capture some of the gain that people make if they own a home. ,
By the end of the 1970s, we stopped building council homes in significant numbers. Council tenants were given the right to buy. The aim was that we would be a property owning democracy. It has not really worked out as planned.
In many parts of the UK you have more people with money chasing a limited supply of housing. You have kleptocrats and despots from around the world. You have high net worth individuals You have overseas investors. the UK A fifth of all foreign investment (in the region of £30B a year) is invested in the UK property market. Plus there are landlords looking for properties to rent out. In a place like London and some other cities, the average home owner is in competition with all of these other potential buyers. It is clearly an unfair fight.
The factor to note is that banks much prefer to lend against property than to businesses. The rules of banking encourage them to do this as lending to property is seen as less risky than lending to business.
The UK economy is 80% services and mainly supported by consumer spending. People who have done well out of the housing market can withdraw equity and fund consumer spending. Wages have stagnated as it is. There is no way that wages can keep pace with rising house prices.
The response to the crisis, namely interest rates at zero and QE, have had the effect of inflating asset prices still further.
Preferential treatment for home ownership
Between the end of WW2 and the 1970s, home owners and non owners were treated more or less equally – the state ensured that houses were built for both groups. There was a housing crash in the early 1990s. Back then home owners were left to their devices and many ended up in negative equity.
The government ensured that there was no repeat of this after the 2008 crash. Interest rates were slashed so that many home owners were able to ride out the storm.
Help to Buy was started in 2012. There may have been a need for the scheme for a year or two. But it is certainly not needed now. The Government itself carried out a review of Help to Buy. The review showed that the scheme was being used by people who a) were not first time buyers and b) could afford to buy without the scheme anyway. It simply adds to the wall of money that is already seeking a safe haven by being invested in property. QE and interest rates at virtually zero have helped home owners at the expense of other groups in society.
In London and elsewhere you see luxury flats being built all over the city. A significant number of these flats are bought by companies based in tax havens. The flats are just an investment. Sometimes they are left empty and sometimes they are rented out through AirBnB and similar sites.
A house or flat is worth whatever someone is willing to pay for it. House builders charge whatever price they think buyers are willing to pay. They know that Help to Buy has had the effect of increasing the amount of money that would be house buyers can afford to spend. The house builders have simply increase their house prices accordingly. New builds have increased by 50% since Help to Buy was started in 2012. Older homes have only increased by 26% in the same period[i].
The Government is spending about £10B on Help to Buy. It spends somewhat less than that on building affordable houses. Help to Buy, imo, is a completely unacceptable subsidy for home ownership. And of course we also have the mad situation where commercial housebuilding companies are also expected to build affordable homes for rent in their developments.
Equity release means that people have more money to spend on stuff. The income is completely untaxed. House prices increase faster than wages. Currently equity release is mainly restricted to older home owners. The Nationwide BS has announced that it will let other borrowers withdraw equity. This seems to me an unwise policy that may well end badly.
The vast increase in house prices over the past decade has strongly reinforced inequality. People whose parents are home owners are able to stay living with their family until such time as they are ready to move out. Young adults whose parents are renters may find that benefits stop, that they become subject to the Bedroom Tax or other welfare changes. They are in a much more precarious situation. When relationships become strained, they are far more likely to find themselves homeless. That will range from sofa surfing, to living in hostels to sleeping in doorways.
Labour claim that they will have a massive house building programme. That is all fine as far as it goes. There are a number of difficulties to overcome. How will local council afford the land given that developers have much deeper pockets. Where will the houses be built? Who is going to build the homes – local councils or private developers as now? There is no reason to assume that anything is going to change any time soon.
[i] James Burton and Samantha Partington, Help to Buy sees the price of new builds soar 50%, Daily Mail, 30 March 2019.