
Obsession with home ownership is a negative economic influence. Financial markets should be prepared for radical change.
Britain’s housing market is in a mess. Britain’s obsession with home ownership is a principal part of the reason for low growth and social and generational division. The structure of the market drives prices up making ownership increasingly unaffordable for the new generation driving more to rent in an expensive and insecure rental market.
The housing market is just a pointless merry-go-round. Buyers hop on and sellers hop off. House prices march steadily upwards (with few setbacks) and those who own houses feel richer. This creates the illusion that owning a house is a good investment. Actually, it was just good luck. Theoretically it looks clever once the profit has been realised from a sale, but for the period of ownership it generates no current income, but rather costs. An occupied house generates no employment or or prosperity.
There is simply not enough accommodation for an expanding population. Not enough homes are being built either for private sale or social rental. Private rental having experienced a boom with ‘buy to let’ is now in decline, squeezed by higher interest rates and regulation that makes it harder for the ageing population of investors to stay in business; and rents are consequently rising. When shortage of supply meets rising demand prices will rise, and, classically, supply will increase to profit from the higher prices. But a sclerotic planning system that is exploited by naysayers to prevent development denies this economic principle by artificially constricting supply.
The housing game makes no contribution to economic growth or productivity since it is circular. The seller’s sale price becomes the base cost of the buyer who hopes to make a profit by subsequently selling and so on and so on as houses change hands at steadily increasing prices and the merry-go-round goes on.
Too many underlying factors combine to drive prices up
The actual price of a house is a function of its location, demand often being driven by the availability of higher paying jobs in an adjacent town and exacerbated by artificially created shortages that are a result of planning regulations and delays. So, prices are higher where there are better paying jobs. High prices make it harder for first time buyers who are starting their careers and whose earnings have not yet reached the level that allows them to borrow enough to buy the expensive houses available. So how do they afford to buy?
The bank of ‘mum and dad (or grandpa and grandma?)
Increasingly by gifts or loans from parents who can bank their windfall profits either by selling and moving to a cheaper house or by borrowing against a debt free house. So, the merry-go-round continues.
It may be interesting to speculate on how long the ‘bank of mum and dad’ (or even grandpa) will continue to support the next generation of house buyers. This will depend both on a continued rise in house prices but also a pension sufficient to enable such gifts to be made without too much pain, since the generation of outright owners are probably also the beneficiaries of a defined benefit pension. As DB pensions in payment slowly die with the recipients, and if house prices decline, the ageing population may need their capital now tied up in their home to live off. So, the bank of mums and dads with surplus equity will slowly die off too. Future generations of mums and dads may not have the resources to support their kids.
And the wishful next generation may be forced to continue to rent. Price declines will also lead to more recent buyers at high prices either being forced into negative equity or enjoying the increase in equity only as a result of repayment of debt and not the free endowment effect of rising prices.
Renters have rights too
But the housing market is not just confined to ownership. Renting will continue to be useful for many whose work is mobile, and necessary for those who cannot afford to buy.
It is interesting that research from Schroders shows that the ratio of prices to incomes (affordability) declined steadily from 12 time in 1845 to just over 2 times in the early 1920s. The drivers were more houses, smaller houses, and cheaper houses. Even so renting was still the predominant occupancy method until the 1970s. Much of the rental stock was provided by local authorities’ council houses, which were a large percentage of newly built houses from 1919 until 1980 and which provided secure tenancies. Today local authorities are constrained by rules on borrowing and lack of central government funding. This has left the amount of social housing severely depleted and having to be rationed, leading to long waiting lists. While housing associations, the successors to council housing, may appear to offer more flexible tenure – shared ownership for example – their rents are usually higher than council rents and the supply is not expanding rapidly enough to satisfy demand. This has driven renters into the private rented sector, where rents are higher and tenure usually less secure. However, the boom in ‘buy to let’ looks likely to be cooling, as landlords start to sell since their margins are eroded by higher interest rates; and by regulation that will require them to spend money to make their properties ‘green’. Hardly any new council houses are being built. Private rented housing is more expensive and offers hardly any security, given the ability to make no fault evictions.
‘Right to buy’ was good for some but not for most others
The availability of affordable (usually subsidised) rented property has declined, starting in 1980 when Margaret Thatcher introduced the “right to buy” policy. That allowed social tenants to purchase their homes at a deeply subsidised price, with the effect that some of the best social housing stock moved from socially rented to privately owned, as large numbers of council tenants quickly grabbed the freebie. Right to buy was a crucial factor in explaining the significant rise in home ownership from 1980 until 2002.
Second and holiday homes drive prices up in many areas
Second homes are also a factor in some areas. Who are the main buyers of second homes and rental properties? Even if owners do not play the role of bankers to the next generation, how are they most likely reinvest part of the net proceeds of a sale (after moving to a cheaper house) or use their tax-free pension lump sum or the money they have inherited? Unsurprisingly they will invest in an asset they understand and that has served them well in the past in the belief that its price can only rise – namely another house. This may either be a ‘buy to let’ or a holiday home. This drives up prices in places where lettings are easy, usually the less prosperous districts in towns, or in pretty spots by the seaside or in the countryside for holidays. Both have consequences for those unfortunates who cannot get on the ‘property ladder’ either by driving up rents and/or prices; or in holiday spots entirely preventing local people buying in their home area.
Too much wealth tied up in houses
One long term side effect of this is the inability of indebted house buyers to save – for example for pensions – out of incomes increasingly burdened by the need to save up for a deposit or by loan repayments. The unfortunate results of this will only be seen in the longer term as the effect of the shift from generous defined benefit pensions, which are in terminal decline, to thinner defined contribution pensions starts to make an impact on retirement incomes. It is mathematically almost certain that annual contributions of 8% are quite inadequate to provide a decent pension in retirement. The reduction in pension saving is a consequence of obsession with housing and has a negative economic impact by absorbing too much of personal wealth, leaving less to be deployed in productive investment.
What could lead to a more stable and less frenetic housing market?
A resumption of building more affordable council housing with security of tenure would put pressure on the private rental market as the supply of subsidised housing increases, leading to more sales by private landlords. In turn this will bring prices down. This will need a relaxation of local government borrowing rules in a financing system whose purse strings are almost entirely held by central government.
Two other significant developments could be even more influential on house prices. Reform of an outdated and oppressive planning system will allow construction in the private sector to grow rapidly particularly in areas where there are shortages. like green belts. This coupled with the increase in subsidised housing will bring prices down at the entry level. And ensure that houses are built where they are most needed.
So far just tinkering. But a complete overhaul of property taxation would really shake up the housing market by relating tax on properties to current value and enabling differential taxation on unoccupied, rented or second homes, which would free up markets in parts of the country where they are common. A system, unchanged for 30 years, which charges the same to the owner of an averagely priced house as to the owners of a £10 million pound house is clearly out of kilter with reality. Putting pressure on prices in the middle to top end of the market would free up larger family homes by encouraging their older inhabitants to downsize.
A radical idea – perhaps too radical even for radicals
Indexed capital gains tax on owner occupied houses? Making certain assumptions, it is possible to calculate that, if an averagely priced house bought in 2012 was sold in 2022 with a purchase price adjusted upwards for inflation the total annual ‘profit’ would have been £51 billion across the 1.4 million transactions in 2022. Taxed at marginal rates? The amount raised would more than fund the abolition of inheritance tax by taxing the potential inheritance at source as it were. Think of the revenue that could be applied to building more social housing. But imagine the political impact. Perhaps a step too far even for a government of the left, although funding the abolition of inheritance tax might sugar the pill by enabling the claim that it was unavoidable and so’ ‘fairer’.
Would any government have the guts to do the right things?
These solutions are pretty obvious, although some would need time and careful planning and coordination, rather than tinkering round the edges, to implement. The net effect is that house prices, something of a national religion, would fall or at least stop rising, bringing great benefits to almost everyone. Certainly, the present government has neither the intelligence nor the will to tackle the issues raised here. Will an incoming Labour government dare to demonstrate its social credentials, while simultaneously stimulating economic growth in a radical manifesto? Perhaps, given that the measure would upset nimbies in Tory constituencies and benefit millions of the less well off. Isn’t that what a radical left of centre government should do?
