Housing: to the haves shall be given….
Robert Henderson
The central plank of the 2013 UK Budget – boosting house building
and sales activity – was both morally disgraceful and criminally
reckless. The Government proposes to underwrite mortgages to the tune
of 20% of the value for both first time buyers and those with
properties who are trying to move up the housing ladder and from 1st
April 2013, even more recklessly, to provide loans of 20% of the
value of new build properties up to the value of £600,000 for three
years from April 2014. The loans will be interest free for five
years after which an annual fee of 1.75% will be levied on the
government loan, with the fee rising annually by the retail prices
index (RPI) inflation plus 1%. The loan can be paid off at any time
up to and including the time when it is sold. (
http://www.hm-treasury.gov.uk/10012.htm
). The amount taxpayers will risk on the underwritten mortgages is
estimated to be £12bn with the full value of the mortgages
underwritten totalling £130bn, while £3.5bn of taxpayers’ money
will be committed to the loans.
This policy is morally disgraceful because it is yet again favouring
the haves over the have-nots . It is made doubly offensive because
it is being done at a time when the Coalition Government’s attitude
towards those in social housing is increasingly shrill with a
constant portrayal of those in social housing as being parasites on
the taxpayer because they do not pay the market rent for their
properties while owner occupiers pay their way.
The reality is rather different. Social housing tenants have long
received far less subsidy than owner occupiers who have been granted
massive benefits by governments since at least 1969 when Roy Jenkins
introduced Mortgage Interest Relief At Source (MIRAS). MIRAS lasted
until 2000 when it was ended by Gordon Brown. In addition to MIRAS
owner occupiers receive or have received these benefits:
1. Right-to-Buy (RTB). The gains from RTB both from a considerably
reduced purchase price (way below the market value) and the huge rise
in property values in the period 1980 to 2008. The rules to qualify
were tightened and the discounts offered were gradually reduced in the
period, but have been boosted again by the Coalition Government which
announced a discount of up to £100,000 in the Budget (http://
www.standard.co.uk/news/politics/budget-2013-100000-off-righttobuy-a-london-home-8540690.html).
2. Private residence tax relief. No capital gains tax is paid on a
property used as a private residence when it is sold.
3. No inheritance tax (IT) is paid on a private property when it is
inherited by a spouse who is resident in this country. Regardless of
who are the beneficiaries, no IT is paid on a property if it forms
part of an estate worth less than the inheritance tax exemption limit
(£325,000 in 2012-13). No IT is paid on a private property if the
private property has been gifted to someone else more than 7 years
before the death of the person making the gift.
4. Housing benefit for the interest paid on a mortgage. This could
be received by someone unemployed or employed, but with an income so
low they qualified for housing benefit.
5. A surprisingly large number of taxpayer funded schemes providing
substantial grants, especially for energy saving improvements (http://
www.freegive.co.uk/grants.htm).
6. The lax credit policies from the mid-1980s onwards which allowed
mortgage providers to grossly inflate property prices before the 2008
crash by granting no deposit mortgages and even mortgages up to 125%
of the purchase price. In addition, “light touch” regulation of the
banks and their ilk greatly increased the money supply which also
inflated property prices. Finally, prices were inflated further by
the permitting of massive immigration during the years of the
Blair and Brown Governments which added some three million to the UK
population.
7. Since the crash of 2008 successive British governments have
offered massive direct and indirect aid to those with mortgages. The
direct aid has been such things as mortgage payment holidays
(
http://www.guardian.co.uk/politics/2008/dec/04/brown-mortgage-
interest-break-repossessions), and indirect protection, for example,
keeping Bank Rate at microscopically low levels.
Whilst all this has been going on social housing has become ever
scarcer as several million social housing properties have been sold
off under RTB (
http://www.politics.co.uk/reference/right-to-buy) and
the provision of new social housing since the mid-1980s has been
meagre in the extreme.
Criminal recklessness
Morally obnoxious as the policy may be, the fact that it is criminally
reckless is even more worrying. The almost certain short term effect
of this taxpayer funded largesse is that house prices will rise
because there will be more money chasing scarce housing. This will
make purchase even with the helping taxpayer hand more and more
difficult, especially for first time buyers who will be tempted to pay
over the odds because the terms look so easy and the participating
mortgage lenders will be willing to lend more in the secure knowledge
that the taxpayer will either cover a substantial minority of them
mortgage or provide a buffer against future negative equity because of
the significant amount of equity resented by the taxpayer funded
loan. Suppose a house is purchased for £500,000. The purchaser pays a
5% deposit and the taxpayer makes this up to a 25% deposit with a 20%
equity loan to the purchaser. This leaves the private mortgage
provider to find £375,000. Provided the property can be sold for
£375,000 the mortgage provider will lose nothing. If it is sold for
just £375,000, 25% of the original purchase price (the total
deposit) will be lost. The taxpayer would lose £100,000.
The intentions of the Government – to boost house building, enable
first time buyers to get on the housing ladder and loosen up the
property market generally – are likely to be undermined further
because it appears Britons buying second homes and foreigners will be
able to access the taxpayer funded privileges (http://
www.telegraph.co.uk/news/politics/9947031/Wealthy-homeowners-could-use-state-backed-loans-to-buy-second-homes.html
and
http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/9952998/Foreigners-can-qualify-for-state-subsidised-mortgages.html)
The danger in the longer term is that the housing market will tank as
the Irish and Spanish ones have done and property prices halve.
This is a significant possibility, because apart from the general
economic turmoil in the EU, UK interest rates will have to rise
substantially sooner or later and this alone will suppress the market
dramatically as very large numbers cannot meet their mortgage
payments. If property prices do collapse it will leave the
taxpayer taking a severe financial hit. Osborne is effectively
betting the national farm on a recovery in the housing market.
What housing policy should the Government be pursuing?
I suggest this:
1. Use the money they have earmarked for the underwriting of risk and
the 15% deposits in new build properties up £600,000 to engage on a
massive social housing building programme.
2. Put a tax on land held by property developers with planning
permission while they refuse to build on the land as per the planning
permission.
3. Ban Buy-to-let mortgages.
4. Introduce rent controls on private landlords. If rents were frozen
for a number of years this should not impact too seriously on most
private landlords, the majority of whom will either own their
properties or have small mortgages on them . Even those with large
mortgages should be able to survive in the low interest environment
which looks as though it will continue to several years at least. If
they can pay the mortgage now they should be able to keep in paying it
until interest rates rise significantly. By that time
All of those policies could be done whilst we remain within the EU. If
we left the EU it would be possible to:
5. Deny all social housing to foreigners.
6. Ban foreigners from purchasing residential property.
7. Put an end to further mass immigration.
These policies will greatly increase the supply of housing in the
medium term if not sooner . If even 1-4 were implemented this would
do a great deal to bring the cost of housing to a level where those
on the average wage could afford to rent in most areas and
Governments bear the responsibility
For thirty years or more British Governments have been almost entirely
responsible for the truly dismaying rise in the cost of property both
to buy and to rent through a failure to ensure enough housing both
private and social was built, by removing rent controls, ending
credit controls on mortgages, failing to control mortgage lending
generally and, most dramatically, by allowing mass immigration to add
between three and four million people to the population in the past 15
years.
To understand exactly how inflated housing costs have become compare
property prices today with what they were in 1955. Then the average
residential property price was around £2,000. Uprated for inflation
the average price of properties today would be around £40,000.
(
http://livinginamadhouse.wordpress.com/2010/10/24/the-vicious-poison-
in-the-british-economy-is-the-outlandish-cost-of-housing/). Makes you
think. If that was the case now, even those on half of the average
national wage (half of the present average wage would be about
£13,000 ) would be able to purchase a property of some sort.
Read more at
http://livinginamadhouse.wordpress.com/2013/04/04/housing-to-the-haves-shall-be-given/