Housing in the UK has not been a truly free market for the past 100 years. The ambition of Great War Prime Minister Lloyd George to build “a land fit for heroes” kicked off the mass construction of publicly-owned stock which addressed a huge area of national need but also, by implication, provided subsidised “competition” to builders in the owner-occupied sector.
Conversely, government policy also boosted the private sector when home-buyers were granted tax relief on mortgage interest, encouraging growth of endowment mortgages because borrowers received the benefit of this relief for the entire term of the loan. This led to a situation whereby council tenants – much derided for their “subsidised” rents – through their taxes actually contributed to the costs of home-owners’ appreciating assets.
With the eventual abolition of tax relief to home-buyers, the tenant subsidy on council housing greatly reduced (if not eliminated) and a thriving private rental sector, the market began to mirror the “level playing field” that had existed before 1919. But with housing being such a hot potato it was inevitable that politicians would be unable to keep their fingers out of the pie and the result has been various “help to buy” schemes which, though laudable in themselves, have effectively reintroduced a public subsidy to parts of the owner-occupation sector. And it is not just certain members of the public who have benefited – several house-building firms have credited help to buy for boosting annual profits.
There is nothing intrinsically wrong with help to buy; like mortgage tax relief it is a scheme of its time and will no doubt be eventually abolished and something else will appear in its place. However, I am unable to feel so sanguine about the most recent political proposal for the housing market, from a Labour Party aspiring to form the next government. I refer to the idea that the rise in house prices could be curtailed by giving the Bank of England power to restrict the issue of mortgages, rather than using interest rates as has been the favoured policy up to now.
There are various ways this would be detrimental to the market and to the general public but one is that it would curtail the development of new private housing – and, by implication, actually increase prices by widening the gap between supply and demand. While it is generally accepted that runaway house prices are not in anyone’s interest in the long-term, without manageable price growth the incentive for developers to build new units will be lost. On a different but still related level, static or low-level price growth will become a disincentive for existing home-owners to update their properties – which by implication will mean less business for small contractors and self-employed electricians, carpenters, plumbers etc.
Also, restricting mortgage advances will simply mean more people having no alternative to rent and without any consequent boost in supply, rental rates are likely to go through the roof. And if politicians attempt to counter this with some form of rent control, landlords will withdraw from the market in large numbers, thus making a bad situation even worse.
How would such a policy deal with regional variations? A temporary restriction on mortgages might be appropriate for Inverness but totally inappropriate for the situation in Merthyr Tydfil.
As if to prove my point, restrictions of a sort on mortgages have already been in operation for several years with the Bank of England ordering a curtailment on interest-only arrangements and the ratio of annual earnings to loan value capped at 4.5 on all but 15 per cent of home loans, yet prices have still soared beyond pre-recession levels.
As stated, government initiatives do have their merits as long as they do not outstay their usefulness but Labour needs to slam the door on this one before it becomes official party policy.
- David Alexander is MD of DJ Alexander