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Speaking to the Conservative Party faithful in Manchester last week, George Osborne declared: “We are the party of home ownership and we’re going to let the country know it.” The conference may have been festooned with messages about “hard-working people” – and dire warnings for the feckless millions unable to find work in a recession – but at the heart of the Chancellor’s speech he was appealing to a British obsession: houses.
That the “dream” of homeownership has turned into a nightmare for so many after the sub-prime mortgage crash just six years ago doesn’t seem to concern the Chancellor unduly. Indeed, in his March Budget, Osborne unveiled a scheme that has seen the government actively involved in inflating house prices.
Under Help to Buy, prospective buyers south of the Border can avail themselves of interest-free loans worth up to 20 per cent of the purchase price. The second stage of the scheme – which began yesterday, ahead of the original schedule – will provide mortgage guarantees for buyers of properties valued at £600,000 or less with just a 5 per cent deposit. In all, the government is expected to be guarantor on around £130 billion worth of mortgages. The Scottish Government runs its own Help to Buy scheme, with a limit of £400,000 purchase price. Both schemes apply only to new-build homes.
Leaving aside for a moment the political contortions involved in a party committed to privatising everything from the NHS to the postal service putting the state on the hook in the property market, there are very real fears that Help to Buy will only serve to further inflate the UK housing market.
Business Secretary Vince Cable has warned: “We don’t want a new bubble.” But it may already be too late for that. In London, house prices are up 10 per cent year-on-year. It’s not just the south-east that is starting to look frothy: prices are up 10 per cent in Manchester, and 8 per cent in Newcastle-upon-Tyne. The Bank of England announced a five-year high for mortgage approvals for August of 62,226.
What we need is more houses, not higher prices – but it has taken a man of God to say publicly what many politicians will only admit privately. “Help to Buy is like tackling a food shortage by issuing food vouchers rather than getting more crops planted,” said David Walker, Bishop-designate of Manchester, recently.
Osborne himself tacitly admitted that Help to Buy is a flawed policy when he announced recently that he has asked the central bank’s Financial Policy Committee to review the programme every year – initially this was to be every three years. But the first review is not due until next September, and by then the housing market is likely to be a whole lot boomier.
Howard Archer, UK and European economist at HIS Global Insight, has warned of a “mounting danger that house prices could really take off over the coming months, especially as a shortage of new properties for sale could be a significant factor in some areas, notably London and the south-east.” Archer cited Help to Buy as a significant factor in the escalating house prices expected over the next 12 months.
Help-to-Buy – and the wider government rhetoric on home ownership – betrays a simple, but increasingly politically uncomfortable, fact: our houses are already overpriced. And not just in the south of England.
British house prices are 31 per cent too high compared with rents and 21 per cent over-valued against incomes, according to a study by the OECD. In the decade from 1997 to 2007, UK house prices trebled. At the same time, the length of mortgages increased dramatically: between 1993 and 2000, less than 2 per cent of mortgages were for more than 25 years. Now a fifth are for 30 years or more.
As home ownership becomes the preserve of those willing to take out mortgages far in excess of income or those fortunate enough to be born to home-owning parents, maintaining rising house prices becomes a political imperative. If UK house prices were to fall (as they should, according to OECD statistics) millions would lose out in the “investment” they call home. The political imperative for policies that appeal directly to those either on the housing ladder, or those scrambling for a toehold, is clear.
Adam Posen, a former member of the Bank of England Monetary Policy Committee, has written of the economic folly of giving an incentive to “middle-class households to leverage the bulk of their savings into a highly volatile, difficult to price asset, which is subject to disaster risk both idiosyncratic (fire, tree falling on the roof) and general (flood, local industry closure), and which – based on the economic fundamentals – should return at best the average rate of local wage and population growth”.
Houses are not productive assets. In encouraging yet more investment in the property market, Osborne et al are diverting away capital that could be used to create jobs and growth in the real economy.
At the root of this lies a facile assumption that renting is “throwing money away” and a person’s house is their “castle”. This belief in the economic and existential value of home ownership is not a singularly British phenomenon, but among developed nations it is more pronounced in the Anglo-Saxon world. Home ownership in the UK and US stands at around 65 to 70 per cent, against around 50 per cent in France, Germany and Japan.
The OECD’s Better Life Index shows that no relationship exists between home-ownership levels and average housing satisfaction and quality. Germany and the Scandinavian states, in particular, enjoy a more diverse housing market, with the state playing an important role in the rental sector, and a concomitant fear of the rising house prices so lauded by British politicians and, too often, the press.
There are more creative ways, too, for government to increase revenue from property beyond the stamp duty that accrues from a booming housing market. There is much to commend a Land Value Tax (LVT) levied not on the value of a property but on the value of the land on which it sits. After all, it is not houses that are expensive but the land on which they are built: house prices reflect more the value of social goods (transport links, schools, infrastructure, location) than they do the cost of bricks and mortar. A house is scarcely more costly to build in London than Linlithgow.
The Scottish Government is working on a land and buildings transaction tax that could see aspects of an LVT subsumed within it. The idea of an LVT is not new – indeed, it found favour with one of George Osborne’s predecessors: Winston Churchill. He once said that rising land values “are derived from processes which are not merely not beneficial, but positively detrimental to the general public”.
Creative solutions to the problems in Britain’s housing market are possible. But to work they need a government willing to move away from a regressive vision of home ownership based on rising house prices. As this past week demonstrated, that is one essential building block not yet in place.