What the budget should have said

Another budget, another missed opportunity to build the homes we need.

Housing was once again prominent – just as it was when Help to Buy was launched in 2013 or Stamp Duty cut in 2014 – but the main policy announced was yet another gimmicky scheme not even close to facing up to what’s needed. Instead of bold plans to build affordable homes, we had more government cash to prop up high house prices.

What really frustrated me yesterday was the fact that the government are clearly willing to spend significant money on housing, just not on building homes. It simply won’t wash in the future that ‘there’s no money’ for housing. There is, so spend it in a useful way.

The Help to Buy ISA will cost at least £2.1bn according to the government, which could rise to well over £3bn if the scheme has high take up (and with free cash, why wouldn’t it?). That money could instead build north of 65,000 new homes, with a priority for low Social Rents.

If the take up of Help to Buy ISA is high, then by 2020 we’ll spend the same amount on Help to Buy ISAs as is needed to plug the affordable housing gap. What a wasted opportunity.

I’m not even that convinced it will help those it’s intended to help. It will take nearly 5 years to save enough through the scheme to claim the full £3,000 subsidy from the government, by which point house prices are expected to be £40,000 higher. For those truly priced out without a deposit then, this won’t take them any closer to their own home. Unless we deal with the reason it’s so hard to save a whopping deposit – high house prices – there’s no light at the end of the tunnel for struggling renters who can barely save anyway.

In reality then, Help to Buy ISAs are more likely to provide a bit more cash to those who are already fortunate to have help from the Bank of Mum and Dad. Should that be a priority for public investment? As John McDermott at the FT argues, the Treasury knows this weakness and that’s why this sort of scheme has been rejected in the past. Most of the people it helps would have been able to buy anyway.

So what should the budget have done for housing?

  • The money spent on Help to Buy ISAs should have been spent on building homes instead. The government should increase the Affordable Homes Programme by £1.2bn per year and the extra cash should prioritise funding for desperately needed Social Rented homes. Combined with other measures, this would double affordable home building over the next parliament.
  • A better savings scheme would be Help to Build ISAs. Capital Economics have shown how using ISA accounts to provide value loans to Housing Associations could help build thousands of affordable homes. This is how the majority of affordable housing is funded in France.
  • We should create a Housing Investment Bank, within the Homes and Communities Agency. As well as running the Help to Build ISA scheme, this bank would provide long-term finance to England’s growing cities and new Garden City Corporations to buy land and build the sustainable new communities we need.
  • We should allow councils to borrow prudentially against their assets, in order to build new local affordable housing. Raising the artificial caps on their borrowing to a fair level could help build nearly 10,000 extra affordable homes per year.

A package like this, combined with far greater devolution of powers and budgets to city-regions to tackle their own housing problems, would have been a far more credible plan.

There were a few glimmers however. Buried in the detail is a bold plan for the government to take the lead in a major housing scheme near Cambridge – a move that’s desperately needed after years of stalling. The government shouldn’t be afraid of targeted intervention on the supply side, when it seems so enthralled with intervention to prop up demand.

There was also more cash and priority for Housing Zones, a concept that’s going down the right lines (local leadership, public/private joint working) but needs rocket boosters. We would argue city-regions and developers should be able to negotiate lower land prices and plough the savings into affordable homes and infrastructure. That’s a way to build affordable homes without upfront public investment.

Overall, this budget was not what we needed to solve the housing shortage and that’s a disappointment. But if it has proved one thing, it’s that politicians can’t ignore housing any longer: they just need to pick the right solutions.

  1. Spending a billion directly on ‘affordable home building’ sounds great, though if the rest of the market remains as distorted as it currently is, then the £1.2bn isn’t going to provide as much bang-for-the-taxpayer-buck as it should.

    Instead, the budget should have tackled the causes of these distortions and inflationary factors. The usual suspects being: Property hoarding by landlords, BTL, availability of BTL mortgages, foreign ownership, NIRP, and of course the unwillingless of the govt to ever allow banks’ current inflated mortgage books to fall in value. A multiple property ownership tax and a foreign ownership tax could be introduced (gradually) to tackle some of this.

    Nobody should ever need ‘help to build’ subsidies if the land prices and building costs only increase in line with inflation. Discouraging any entity or micro econmic behaviour that increases land prices, building costs, and property prices above inflation is the key element here.

    First fix the unwanted behaviour, then if required encourage the wanted behaviour.

    As you are no doubt aware, back when homebuilding worked correctly, there were barely any planning laws, and the government would approve an extension to a train or tube line, and a stack of houses would be affordably built by housebuilders, and affordably purchased by homeowner-occupiers, without government (taxpayer) subsidy. There was no BTL mortgage, less hoarding, no negative real interest rates stealing from savers to pay for BTL mortgages, and no promotion of UK property as an investment to foreign investors.

    Frustration, as you mentioned, is no doubt being felt by huge swathes of the population, who already recognise the causes of property price inflation and wonder why no political party seems to to have formed any basic policies (i.e multiple property ownership tax, foreign ownership tax) to discourage it.

    The property investors and hoarders really do need to get another hobby, there are so many other things for them to invest in.

    1. None of that is right though. What happens to all of us that currently rent privately and don’t want to buy or can’t? Stopping people owning multiple properties is irrelevant- those properties are still homes to people. What we need is more housing. If someone has told you changing BTL rules will change anything, they lied. There are not enough houses. That is the simple fact. Who owns them isn’t important. What is important is building more.
      Why would you possibly think that who owns the property would change the price. It won’t.

      1. Thankfully, a property price correction, back to correct income multiples, would be beneficial to renters too.

        The current high rental prices are only sustainable because property prices are high, and thus mortgage payments for property are high. If they were much lower (after a correction) then landlords would be dismissed if trying to charge high rental prices, and would have to sell up, or lower their rental charges to the new market norms.

        In real terms, those BTL landlords who are currently over-leveraged on property which they are trying to pay via rental income (i.e. having BTL mortgages) and who would have to sell up — would potentially be selling to new or different landlords buying at a lower price, and those new landlords would be seeking lower rents!!

        i.e. When you get a correction, it will be a total market correction, correcting all inflated areas, rental and purchase.

        You cannot separate-out the private rental sector as if it were unaffected by market property prices and income multiples. The private rental market operates within the entire property market, not apart from it.

        As I already said, more affordable homes sounds great, but at the current distorted prices, any money thrown into that black hole would not return much new affordable property, and would simply amount to subsidising the current bubbled entities such as housebuilders, landowners, mortgage lenders, etc.

        Shelter has actually complained that the cause is the high price of land. This is simply tracing the highest cost of housing up the cost chain to where they see a high cost. HELLO??? This is economics. They need to look down the chain to see who paid the high price!! The answer will be the property investors.

        Deflate the bubble. Correct the markets. Regulate and discourage the investors. Property is not an investment.

        1. Utter rubbish. Mortgage payments are currently low. Once interest rates return to their average levels, not the 1% that I am currently offered, property prices will reflect that. BTL landlords are irrelevant.
          You honestly believe mortgage payments are high? They are the lowest they have ever been or will ever be. We may not see a return to the 15% of the past but the long term average is nearer 7%. Many people won’t be able to afford their mortgages at that point, and we MAY get a correction.
          Of course, the real reason that property prices have risen has nothing to do with BTL. It is because the population of London over the last decade has grown enormously thanks to the opening up of the EU. Personally, I think that’s a good thing, but there is an unintended negative that the demand for housing has grown with the population so prices have risen. At the same time, mortgage rates plummeted so people could afford to borrow more. BTL had nothing to do with this.

          1. High selling prices enable high rental prices.

            I’m not saying mortgage payments are high because of interest rates, I’m saying they are high for new borrowers because the selling prices of property are outrageously high (in major bubble territory).

            If the property prices themselves were lower, the mortgage payments for new borrowers would be lower.

            The landlord is letting out the property at a price in competition with the price of mortgage payments for new borrowers.

            You admit the prices are demand led (immigration), so BTL mortgages which were introduced in 1996, must have contributed to that demand. If you look at a chart of UK house prices vs RPI you will see that 1996/1997 was a point at which the two lines begin to depart more significantly. Here is one chart just found via Google (see attached image).

            Yes I agree that immigration has also contributed to demand and HPI, especially as those immigrants are often the ones renting, and paying landlords who in turn pay their BTL mortgages. (Immigration feeds demand for BTL.) And yes I also agree the ultra-low interest rates contribute to high prices.

            Immigration, low interest rates and low building levels are significant contributors, but I think it is naive to not admit the major role BTL has played.

            “The number of Buy-to-Let mortgages increased tenfold from just 3.5% of house purchase mortgages in 1999 to 28.9% in 2006” – Council for Mortgage Lenders data

            It is not only a supply side problem, the market is distorted by BTL. If you don’t believe me check the hundreds of books available on the subject of making money from BTL property; the current market rules support that investment model. Introducing a property hoarding tax is a mechanism to make those investment models less appealing so they move on to other investments. Of course the other alternative you mentioned of raising interest rates would also have a cooling effect, but that would also affect normal homeowners.

            BTL investors should note that even Kevin Green, the property mogul who owns hundreds of rental properties admits that BTL landlording has become a problem, but he also admits there is nothing stopping anyone from doing what he did (i.e. there is no market regulation or significant tax discouragement).

            I think BTL investors really need to ask themselves whether what they are doing is right and good, or whether it is simply greed and occupying an important resource that someone else should own.

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