The housing bill expected in October is surely the time to set out some radical, long-term policies which could truly reform the market. It will be a terrible missed opportunity if instead the bill seeks only to implement the short-term home ownership measures so prominent in the election campaign.
These policies supported an aspiration of doubling the number of first-time buyers compared with the previous five years. “Starter homes” are to be sold at a discount of 20% to first-time buyers under 40, financed by reducing the requirement for infrastructure funding from developers. To deliver the goal of 200,000 starter homes built by 2020, this has been extended beyond the original scope of using brownfield sites not previously identified for housing. So now it amounts to a subsidy for 200,000 fortunate households, at the cost of inadequate infrastructure provision and with less assurance that these units will add to previously planned supply.
The second key policy is the right to buy for housing association tenants. This has raised a large number of concerns, most notably about the forced sale of charitable assets and about the proposed financing method of selling off more expensive social housing.
But there are other worries. Home ownership can be onerous. We know that at some future date there will be another economic downturn, bringing rising unemployment and for some households a struggle to meet their mortgages. It is vital that the mortgages offered to those benefiting from starter homes or right to buy meet the prudent affordability criteria set out in the Mortgage Market Review. A housing market downturn brings costs for government, as well as for borrowers and lenders; we should avoid adding to these risks.
However, the real case against these policies to promote home ownership is that they fail to address the underlying issue. It’s a tempting goal, as the majority of households would like to own their own home. But above a certain proportion of income, high housing costs lead to financial stress for the less well-off. Only reducing house prices relative to incomes will give us long-term, sustainable higher rates of home ownership, as well as easing the burden on hard-pressed renters.
In the July budget, George Osborne announced a sensible housing market measure, by setting out a reduction in the tax relief for mortgage interest for buy-to-let landlords. This should tilt the market back towards homeowners, without driving up demand, and by pre-announcing a gradual reduction the market will not be disrupted.
Now we urgently need a further package of radical but gradual measures, aiming to increase supply and to use the tax system to make housing less attractive as an investment. This would improve affordability for first-time buyers and result in the housing space we do have being shared more fairly. There are 1.1m households in England and Wales in overcrowded homes, yet 8.1m households have two or more spare bedrooms. Nothing wrong with spare rooms – but if a home is underoccupied with a view to reaping the benefit of rising prices, this is a cost to wider society. The planning system implicitly supposes more housing supply has an environmental cost yet owner-occupied homes are exempt from capital gains tax and increasingly from inheritance tax.
What is the least that should be in this package?
- Reinforcing recent planning reforms, to give real teeth to the duty to cooperate between local authorities, ensuring that housing demand, from population growth and rising incomes, is met across housing market areas.
- An immediate start on the search for sites suitable and locally acceptable for new settlements – probably called garden cities/villages.
- Greater financial incentives from central government to local authorities who accommodate higher rates of new housing.
- Reforming council tax, so that it reflects changing property values and phasing out the single-person discount.
- More financial freedom for local authorities to build council houses.
- Better regulation of standards in the private rented sector – a tenure now housing many disadvantaged families.
- Most controversial: taking the opportunity of the council tax property revaluation to introduce capital gains tax on future house price rises.
This would set a clear agenda for the long term. It could command cross-party support. It would be a bill introduced by politicians ready to look beyond the easy headlines of support for a few first-time buyers today. It would be a principled acceptance of the costs of unpopular decisions now, because in the long-run the benefits for younger generations (and indeed for all of us by cutting the housing benefit bill) would be so important. The electoral outlook is pretty good for the Conservatives. It would be such great news to see this political capital used for this package, to support the economy and for many to bring huge gains in their wellbeing.
- Kate Barker is chair of the Society of Business Economists, and a former Bank of England policymaker, with expertise in housing
