To end our crippling housing crisis we first need to dispel the myths about its causes. Housing costs haven’t soared simply because there “aren’t enough homes to go around”: this narrative is popular with anti-migrant campaigners and landowners/developers seeking to tear up planning red tape, but it is not supported by the data. In fact, the number of dwellings in the UK has grown faster than the number of households throughout the decades of house price inflation.
House price booms and busts in the UK are explained far better by studying drivers of housing demand, than by looking for shortages of supply relative to housing need. Specifically, demand has been inflated by institutional changes – property tax breaks, Buy To Let mortgages, repression of tenants rights, and so on – that have encouraged the treatment of land and homes as financial assets.
The result is that ordinary buyers have increasingly found themselves in a bidding war with landlords, speculators, second home owners, even international money launderers. Importantly, this bidding war has been fuelled by seismic deregulation of the UK mortgage market, which increased the supply of easy mortgage credit, and created a dangerous feedback loop between the finance and house prices.
One aim of our Land For The Many report, commissioned by the Labour party, and published today, is to explain how such inflationary forces can be brought under control.
We recommend major tax reforms to discourage the use of land and homes as financial assets and share out some of the eye watering unearned windfall gains from house price inflation.
We recommend measures to reduce to the exploitation and insecurity in the private rented sector – reforms that make sense on their own terms, but have the added benefit of dampening demand from Buy-To-Let landlords.
We recommend interventions by the Bank of England to reduce risky and inflationary forms of mortgage lending. We propose planning restrictions on holiday homes. And we recommend a total overhaul of the housing development model, so that builders compete on quality rather than on their ability to navigate the speculative land market.
What stands in the way of such reforms is not just the power of vested interests, but a fear among policy makers that such reforms will trigger a house price crash. This is not an unreasonable concern: debt-and speculation-fuelled house price rises are always going to be vulnerable to reversal.
Any reform that makes housing less attractive as a financial asset could result in a sudden withdrawal of demand from investors, and potentially prompt some to try and sell. The resulting price drop could in turn make mortgage lenders more cautious about lending at high loan to value ratios, which would suck even more purchasing power out of the market, putting further downward pressure on prices.
Although many aspiring homeowners would welcome a reduction in house prices, there are political and macroeconomic risks associated with falling prices that must be avoided. In particular, a house price crash would be punishing for households who bought for the first time at the height of the boom, and could push some into negative equity, making it impossible to move or re-mortgage.
On the other hand, a more timid approach to housing reform will leave a whole generation locked out of homeownership: it will take decades to regain a “normal” house price-to-income ratio if we merely slow the rate of house price inflation and wait for wages to catch up.
Is there a way to reconcile the apparently conflicting interests of homeowners and non-home owners? In today’s report for Labour we float one possible way out of this conundrum. The proposal is to set up a new body – the Common Ground Trust – with three functions.
The first is to support people locked out of home ownership, who would approach the Trust when they have found a house they wanted to buy and ask the Trust to purchase the land underneath the house. The buyers would cover the upfront costs of the bricks and mortar only (which on average account for just 30 per cent of the price of a property), and then pay a land rent to the Trust. This would enable many more people with small deposits to enjoy a form of home ownership, and with it greater security and control over their living space, without taking on imprudent levels of mortgage debt.
The second function is to facilitate the gradual transfer of land into common ownership, so that the associated unearned land rents can be pooled and distributed according to need, rather than captured by private landowners and banks at society’s expense.
The third function is to stabilise house and land values. If prices are falling too quickly, the Trust would bid slightly above market prices for the land, to slow the price decline. In other words, the Trust would be a lever for supporting stable and sustainable forms of demand in the housing market, to offset the withdrawal of volatile and socially damaging forms of demand. (Importantly, if prices were rising, the Trust would cease to bid at all, until government had brought the inflationary forces under control.)
The Common Ground Trust is an idea in early stages of development, but we believe it is a useful provocation. If we want bold measures to improve the lives of renters, tax property more fairly and avoid a violent house price crash, then we must develop a plan for deflating the housing bubble in slow motion. The Common Ground Trust is a solid starting point for that discussion.
Source: By Beth Stratford