The Housing Minister, Grant Shapps and the Prime Minister have announced a range of measures attempting to revitalise the construction sector and help people to buy homes. The most eyecatching of the proposals is the government-backed indemnity scheme to enable people to borrow up to 95% of the value of a new home. This seems to be worryingly similar to the schemes in the US to enable the lending of sub-prime mortgages to purchasers who were unable to meet ordinary credit requirements. From the broader perspective of the state of the UK economy this looks to be the wrong approach.
Other proposals include giving bigger discounts for social tenants to exercise the right to buy and a variety of methods to ease planning problems, encourage building on publicly owned land and to restart development projects that have stalled in the recession.
There clearly is a long-term problem about providing adequate housing in the places where it is needed and at a cost which is affordable both for people looking for a home and for the public sector. However, the proposals are crippled by the fact that they look at the issue from the wrong perspective. Building more homes and removing artificial restrictions on people buying are good ideas. Removing reasonable and good restrictions like the understandable caution that banks have lately found over lending to people who are high credit risks is a less good idea.
Buying a home is appealing as an aim because, even without substantial windfalls from increasing value, the money that goes towards the equity in the home rather than as interest still remains in the householder’s assets. There is a real sense in which money paid as rent is lost forever to the renter and if there’s not a great difference between the cost of renting and buying it means that buyers get a better deal.
However, this is to look at housing as a largely economic choice for householders and puts too little emphasis on what ought to be the primary purpose of a householder in choosing where to live. That is, the decision to make a home somewhere. Buying only makes sense even in the coldly economic sense (in the absence of rapidly rising house prices) if the householder intends to stay in the home for a number of years. The way that mortgages work means that the first few years of a mortgage involve only a small amount of capital repayment and a large proportion of interest payment. In those first few years, the buyer is throwing money down the drain just as the renter is, just that the drain is marked “mortgage interest” rather than “landlord”. Effectively, the mortgaged homeowner is renting from their bank to start off with.
This is another reason why subsidies and guarantees for purchasers is economically risky – they effectively put the mortgage lenders in the position of landlords for a range of properties and “tenants” who they would not necessarily choose to be involved with without those subsidies and guarantees. This compares with an ordinary landlord who has chosen the property and sets the rent on the basis of making a profit balanced against the risks of default. Those risks are relatively low when tenants are guaranteed only 6-12 months tenure. Even the worst-paying tenant will be gone in a small fraction of the time for which the landlord will hold the property.
A better approach would have been to look at property as homes and to build a policy from there.
It’s all or nothing at the moment
The average length of time in which a homeowner stays in one house is around 3-5 years. That is somewhat skewed upwards by those who have found their “final” family home after a number of moves and stay in it for a long time. What most people really want, I believe, is a home that they feel is their’s for enough time to be home. At the moment, the choice is between very short-term and forever. Either you are on an assured shorthold tenancy or you are a homeowner who can stay for as long as you keep up the mortgage repayments. Either you are in temporary accommodation (whether a B&B, your parents’ home or a private rental) or you have a tenancy for life in social housing.
This creates obvious bottlenecks in mobility. There’s a big leap from the temporary forms of housing where you are both likely to be unwilling to invest personally in the accommodation and discouraged from laying down roots there by your landlord up to either owning or getting a “Council House”. Similarly, once you are in either of the more permanent forms of housing, moving somewhere else is heavily constrained. As a homeowner it depends on being able to sell and being able to afford to buy somewhere else if you don’t want to step back down to impermanent renting. For the social tenant, it means going from heavily subsidised permanent accommodation to temporary private accommodation or the big leap to buying.
The right to buy was and remains popular amongst social tenants in that it does at least address one of those problems – how a social tenant can move on rather than being trapped in one place if they want to keep a home of some permanence. The discount gives them a state subsidy to let them move on elsewhere in the homeowning sector in the future. Unfortunately, in the absence of a strong policy of reinvesting the proceeds of sales of social housing in building more social housing it means that the stock of social housing for those in need who are incapable of providing for themselves dwindles.
My suggestion would be to introduce a new form of tenancy that bridges the gap between the permanent and temporary forms of housing that currently exist. I’d call it “Middlehold” but perhaps a catchier name could be devised. See here for a more detailed sketch of what this might involve.