Stop trying to make home-ownership happen

The housing affordability measures in Philip Hammond's budget yesterday were no good. That's the consensus of the Office for Budgetary Responsibility, which publishes a report alongside the budget, and of most housing commentators. He could have done better - but maybe not much better without giving up on the core of Britain's current approach to housing.


The package in the budget has some demand-side measures to help young people afford the sticker price of a house, and some supply-side policy to bring down those prices. On the demand side, first-time buyers will pay no or reduced stamp duty on homes worth up to £500 000. Stamp duty is pretty expensive, so it'll be a noticeable change, but here's a graph from Neal Hudson:


The overwhelming driver of houses being unaffordable is that the houses themselves are extremely unaffordable; in the scheme of things, stamp duty makes almost no difference. So it's not shocking that the similar measures in the past have mostly just given a windfall to people who would have bought a house anyway. In fact, the OBR reckons the demand boost will just feed through into prices, cancelling any benefits and maybe even making houses more expensive.

On the supply side, Hammond announced a bevy of measures aimed at increasing house-building, with a target of 300 000 new homes per year by the mid-2020s. The target is ambitious - higher than the UK has achieved since 1970 - but there's good reason to doubt that the relatively small amounts of money and toothless attempts to encourage more private building can come close to achieving it, given that almost the entire fall in house-building over that time is explained by plummeting public sector construction.

So these policies are almost certain to be ineffectual. But the reasons they won't work, followed through, suggest there may not really be many better options - if the goal is to bring down house prices and boost home-ownership. Stamp duty relief falls in the same category as Help to Buy: policies that try to ease the pain for young people by putting more money in their pockets but end up helping to inflate prices. Meanwhile the broader demand-side picture is very bleak, with real incomes forecast to stagnate for most of the next decade. Supply and construction measures face the immediate hurdle that the current government doesn't really want to do them, but there's also pretty good evidence that it'd be hard to do them on a scale that matters. Ian Mulheirn at Oxford Economics has estimated that even the ambitious 300 000 a year target would only lower house prices by one percent.

The reason is that house prices are high, in large part, because a decade of record-low interest rates has made borrowing easier and inflated the cost of all financial assets, and houses in the UK are financial assets par excellence. If interest rates stay low, the house-price-to-income ratio will stay high (as Neal Hudson points out). Why is that a problem, if the running costs of housing - either in rent or in mortgage repayment - haven't risen? Many people won't be able to afford to own a house, but many people also can't afford to own a large share portfolio - it's not exactly something to be sanguine about, but it is basically inevitable in an unequal society that not everyone will own valuable financial assets.

Of course it is a problem because in the United Kingdom, a secure housing situation is dependent on being able to own your house. But that is a policy choice. In France and Germany, landlords are straightforwardly not permitted to evict tenants without cause, and have longer notice periods even for with-cause evictions. There are rent controls, of varying stringency. Tenants have much more extensive rights to modify and redecorate their homes, and in some situations a right to unilaterally withhold rent if there are serious maintenance issues. When I describe these rules to people in the UK (or Australia), they are often taken aback, but that is just the result of a culture and policy regime in which rent is not expected to be a secure or long-term fact of life. It can be: the average residential tenancy in Germany lasts eleven years.

Broad home-ownership is a nice policy goal, but in the society we actually have it may just be a mirage. We want everyone to be able to own a house because it's a good route to secure tenure and because houses are a better-than-average investment. ('Safe as houses', the saying goes.) By their nature better-than-average investments are in high demand and in the very unequal economy we're stuck with, they will not be affordable to everybody. It's sticking with this goal that makes politicians averse to anything that would bring down the value of existing houses, since part of the point is that house prices steadily increase. It's time to untangle these two objectives. Let people get secure housing without needing to own. Meanwhile, make the much wider-reaching changes that are necessary to stop incomes stagnating and ensure that steady rises in asset prices are a cause of shared prosperity rather than staggering wealth inequality.

And if that doesn't sound like something that a party of austerity, more than a quarter of whose MPs are private landlords and many more property-owners, is likely to pursue... then that is quite bad news for the Conservatives.



x

Comments