This is my second blog in response to Civitas’s excellent new report Restoring a Nation of Homeownership. This morning’s post concluded that Civitas’s Peter Saunders was right to draw attention to the demand side of the housing affordability equation – not instead of, but in addition to the growing consensus on the need to build more homes. Even if we do start building the number of homes we need, house prices will stay high unless something is done about the effective demand for those homes. (‘Effective demand’ is economics-speak for the amount of money available and willing to be spent – it shouldn’t be confused with need.)
The most obvious driver of effective demand for homes is the supply of mortgage credit. Even today, most people who buy a home have to borrow to do it – so sensible mortgage regulations can help restrain future house price growth. But the recent Mortgage Market Review reforms (which we support) only targeted hard-pressed home buyers. By leaving Buy to Let lending largely unregulated, the reforms gave investors even more of a market advantage over would be first time buyers. Coming after rocketing house prices had already excluded millions from buying, this forced yet more people to rent privately for longer – and Generation Rent was born. This has left the government stuck between a dwindling, but still politically powerful, majority of aging homeowners who are rather attached to their inflated housing wealth, and a growing cohort of frustrated, younger private renters who have to pay those inflated asset prices. Whichever way house prices move, one side is going to be hurt.
The government’s main response has been to kick the can a bit further down the road. By channelling ever more subsidies to marginal home buyers, they hope to keep the second group quiet while sustaining the housing wealth of the baby boomer generation.
This may or may not work in the short run – but it definitely can’t work for ever. Something else has to be done to stop vast amounts of capital flowing into the housing market, pushing up prices and inflating property bubbles. George Osborne’s recent reforms to the taxes paid (or not paid) by Buy to Let landlords are a positive step. And Civitas’s call to scrap the welter of demand subsidies currently pushing prices up is welcome. But this alone is unlikely to be enough to stop the inexorable upward movement of house prices. So Civitas’s report suggests two further ways that demand could be constrained.
The first is relatively straightforward: the Bank of England could be given a clear house price inflation target or band, in addition to its CPI target. The Bank would then have to use its regulatory and interest rate levers to prevent prices rising – or falling – too fast in future. This is surely a sensible measure – and as Saunders points out, the Bank governor Mark Carney used such tools to suppress house price inflation in his native Canada.
The second is much more radical: to give private renters the Right to Buy their home. This, the report argues, could not only repeat the surge in homeownership that the original Right to Buy achieved in the 1980s, it would also moderate house prices by increasing the number of homes that first time buyers could buy. In essence, Civitas’s proposal is much the same as the existing Right to Buy for social tenants, with two important modifications. As in the social sector, after three years in a home, the renter would be able to buy it at a discount of 35% – up to a cap of £77,900 outside London and £103,900 in London. This would require longer minimum tenancies than the current 6 or 12 months, so Saunders backs Shelter’s call for five year tenancies.
The two modifications are that the discount would never be allowed to mean the landlord actually lost money: in effect, this would limit the discount to the amount that house prices had gone up since the landlord bought the home (or 35% or the cap, which ever was lower). And secondly, new build properties would be excluded from the Right to Buy for 25 years, to avoid discouraging landlord investment in new development.
Saunders is bullish about the impact of this idea, arguing that landlords have made huge gains on their investment in recent years, and so can afford to share some of that gain with their tenants. This may be strictly true – and certainly the evidence suggests most landlords have done very well indeed out of house price growth – but I don’t imagine that would make them particularly happy with this proposal. To mitigate their opposition, Saunders suggests compensating them somewhat through reduced Capital Gains Tax on whatever profit they made from the sale.
This is a brave and radical proposal, and one that deserves serious consideration by the government, if they really are so committed to increasing homeownership. If it is acceptable to sell public assets at a discount under the original Right to Buy, to push housing associations to do the same with their stock, and even to force councils to sell valuable council homes at full market prices, surely the same logic should apply to private rented homes?
We opposed the forced sale of council homes in the recent Housing & Planning Act, and have huge concerns about the ‘voluntary’ Right to Buy for housing association tenants. While benefitting a lucking few, these policies threaten to fatally undermine the chances of those in real need to ever get a secure, affordable, social home. But if they are to be pushed through, the least we can do is provide a level playing field for those left languishing in the expensive and insecure private rented sector. And if a private renters’ Right to Buy could also deliver longer tenancies and more moderate house prices, it would have a lot going for it.