Warning: This is a ludicrously long post that collects together some stuff that has been knocking around my head for a while. Think of it like one of those World War 2 black and white movies they used to show on lazy afternoons when we only had three channels. In other words, if you’re in the mood then I hope you enjoy it, but I won’t be offended if life is too short! ?
I’ve even heard buy-to-let moguls concede the market is out of whack, at least when it comes to London.
On the basis of present yields – and assuming an interest-only mortgage of just 3% – my landlord is actually paying me to live in my rented terraced house in London, with no money leftover for, you know, when the roof caves in.
But it was almost as bad six or seven years ago. And he’s made perhaps £250,000 in capital gains in the meantime.
This is the greater sucker method of investing.
The investment stacks up so long as you believe someone will come along to pay even more for it in the future, regardless of the underlying economics.
My landlord has played it like a pro.
House price graph or blood pressure graph?
We’ve been here for years:
- House prices have never been so high relative to incomes, but interest rates at 300-year lows make them just about affordable – presuming you can get a mortgage, and probably also help from the Bank of Mum and Dad.
- Many pundits say the market will correct when rates rise – but putting it off is just storing up a bigger catastrophe.
- Some blame the banks for making borrowing too difficult – but who really thinks they should be lending more, with house price to income ratios at all-time highs in London and the South East?
This graph from the excellent Economics Help blog shows the mountain faced by first-time buyers in London:
So far, the government’s answer has been a sort of lightweight boom-and-likely-bust.
George Osborne hasn’t quite poured kerosine on the fire, as his predecessors might have in the 1980s.
But actions like Help to Buy and the recent stamp duty changes seem aimed more at shoring up prices, rather than tackling the root of the problem, not to mention its wider consequences.
It is growing inter-generational inequality that is my biggest concern.
People say, “High house prices are not a long-term problem, because the kids will just inherit the wealth from their parents”.
This is awful thinking, in my view.
Firstly, it entrenches inequality. Fine if you were born to parents with property, and tough tomatoes if not.
That’s hardly fair, when most of us aspire to own a home. It’s feudal.
Secondly, a system based around waiting for your parents to cop it doesn’t exactly reward hard work and entrepreneurial flair, which is exactly what we need more of.
Many friends lament that they should have just bought the biggest London property they could manage after we left university in the mid-90s, rather than trying to set up businesses, or even just busting their guts out at a day job.
Of course some did buy – more than not, in fact – but even then they still wish they’d bought still more.
Who can blame them? The gains have been frankly obscene.
The first flat I nearly bought in Clapham in South London would have cost me £70,000 in 1996. Today it would cost more like £700,000. Assuming I’d put down say £10,000 as a deposit, that’d be a nice 70-bagger. (Yes I’d have had to pay off the mortgage along the way, but I was paying rent anyway).
I didn’t buy, and it’s a long story.
The bottom line is I was an idiot – let’s get that out of the way!
But leaving aside the biggest mistake of my financial life, it’s hardly good for the economy when society rewards sitting in London in a house bought with a bank loan over innovation and productivity to this crazy degree.
As for the average professional 20-something getting on the ladder in London today under his or her own steam? Forget about it.
The bourgeoisie of suburbia
In the run up to the General Election politicians will bandy around the usual platitudes about addressing this housing issue, but the fact is while the UK population continues to grow – and people keep divorcing, and living longer, too – we will need more homes and fewer empty promises.
That is not to say the solution is easy.
I just had a big argument on Facebook (not unusual) with friends who think the UK housing market shows that capitalism doesn’t work.
But I think capitalism is giving us what we’re asking from it.
Housebuilders are unable to build as many homes as they want because of a shortage of land with planning permission, particularly in the South East.
Some can’t get even their advanced plots through the final stages of planning without vast delays. Read their reports to the stock market if you don’t believe me.
Restrictions on building on the Green Belt and elsewhere, slow-footed planning procedures, and the power of NIMBY-ism from entrenched homeowners has stifled housebuilding.
And it’d do the same if we had the mass council building that so many seem to yearn for, incidentally.
I happen to love the countryside, and to some extent even the Green Belt.
But I can also see it has a massive impact on the supply of new homes.
Squeezed until the UKIPs squeak
I’m no UKIP voter, but it’s still plain to see that we’ve cheerily ramped up demand with unconstrained immigration from the EU and elsewhere.
This is not a political point, let alone a cultural one. It’s maths.
I live in London because all the world is here, and I can’t imagine anything worse than London frozen as it was in the 1970s.
The trouble is though that “all the world is here” is becoming less of a phrase and more like reality.
There are 8.6 million people in London today – the highest on record – and the forecast is for London to grow to 11 million by 2050.
Millions of additional would-be homeowners have arrived in London or are on their way. We can’t stop them, except by making housing unaffordable. (We’re nearly there!)
Yet while demand has surged, there’s been no increase in supply – quite the opposite. So we should not be surprised at the result, nor argue that capitalism isn’t working when it’s actually following the core principles of supply and demand.
Market forces will eventually see the more affluent incomers buy up more of London, and the poorer would-be residents moved out to the provinces – or even overseas.
Perhaps that’s no bad thing if Europe and the UK really are joined at the hip.
But it’s bound to cause frustration and radical change – if not worse – along the way, especially as most UK voters over 25 still wonder when they signed up to it.
The buy-to-let fret
It’s not just new homeowners who want a piece of our restricted stock of property.
For the past 20 years, buy-to-let landlords have been building their own portfolios, too.
In my street in London these days, a Sold sign is almost always replaced by a To Let sign shortly afterwards. And this is a street in classic suburbia, not a gritty inner-city hub.
Is this really a good thing, when we know most UK citizens want to eventually own their home rather than rent one?
Again, policy makers, media columnists, the bulk of the voters, and pretty much anyone who had a decent job 10-15 years ago is in the “I’m alright Jack” camp.
In contrast, my 20-something friends – almost all earning well above the average wage for their age, although not City wages – literally despair of buying their own home in the South East, which is where the jobs are.
So even as house prices have soared out of reach for the young, we have presided over a vast increase in buy-to-let landlords and others who own two, three, four or more properties.
Now, I don’t believe this is a cause for moral outrage, let alone insults.
Buy-to-let investors are just like most Monevator readers (indeed some are Monevator readers!) and most are simply trying to improve their lot, or gather assets to fund an uncertain future.
I also believe that buy-to-let has actually improved the quality of rental stock overall, at least in London. That was partly the aim of the policy in the first place.
Nevertheless, all cycles overshoot.
Perhaps it was too hard to be a landlord 20 years ago. Now it’s far too hard to buy a home if you’re young.
If the market isn’t free – which it’s not – and if policy partly got us here – which it has – then government should intervene again.
Taking a guillotine to high house prices
For basic reasons of democratic fairness, I think such policy should favour the aspiration of the many to own their own home, certainly at the expense of further expansion of the buy-to-let sector.
And if that also means house prices need to fall, so be it.
Of course, most people won’t like it.
As Martin Wolf recently put it in the FT:
“The wealth accumulated by property owners is fundamentally unproductive. Defenders of the system tend to refer to this wealth as the product of savings. It is not. I understand this myself, since I own a house whose nominal value is perhaps 25 times as great as it was when I bought it 30 years ago, almost nine times higher after adjusting for inflation.
This vast increase in wealth is not due to my endeavours. It is overwhelmingly the product of a rise in the value of land, which is the fruit of other people’s efforts, not mine.
Change will come only once people recognise how unjust this situation has become. This is not just about obstacles to becoming an owner occupier. High house prices will also raise rents. They will ultimately force people to live in more cramped conditions than would occur without limits on supply.
What is to be done? If a solution were politically easy, it would already have happened. It is not.
I cannot think of a better example of the way in which controls tend to create a vested interest in their perpetuation.“
In London we have a property market that serves overseas investors, buy-to-let moguls, high-end property developers – and anyone over 40 who is sitting pretty (but perhaps also stuck) in a house that’s soared in value beyond their wildest dreams.
Should policy really be designed to preserve that status quo?
Maybe we need some sort of grand coalition, so that politicians can all take the blame for doing the right thing together.
9 ways to help fix the housing market, especially in London
Having set out my stall, here are a few ideas to address supply, demand, and the basic fairness issue.
Obviously some will rile some of you, which is fine – it’s a debate.
I welcome any comments, but please keep them civil or I’ll just delete them.
Also I’m not saying these are all great ideas. Probably they each have flaws!
Read mine, then let’s hear yours in the comments below.
1. New savings tax breaks for would-be first-time buyers
First-time buyers need more help to compete for properties with landlords who can buy with an interest-only mortgage and set their rental income against it.
Sure, if landlords over-stretch they may face a day of reckoning in the future, but it could be years if not decades until that happens. In the meantime a couple of generations miss out on the surest way most people know of building up some assets, and we’ll all have to deal with the future bursting of the bubble anyway.
For starters I’d look at rewarding young savers. I’d create new First-Time Buyer Bonds that pay say 4% interest, tax-free, to enable first-time buyers to more easily build up a deposit for their first home.
A bit like the pensioner bonds, but better, and aimed at the generation that actually needs helping.
There’s probably even more that can be done here. The fact that residential property is free of capital gains tax is a huge bonus that makes it even harder for a non-owner to keep up with owners – made far worse by the fact their tax-free gains are geared up with borrowed mortgages.
(Believe me, I’ve tried – and I’m someone who is so capable with money and investing that I’ve ended up writing a blog about it. The average non-owner has no chance).
Any ideas you have are welcome below.
2. Buy-to-let rental income no longer allowed to be offset against mortgage interest
At a stroke this move would render much buy-to-let landlording unprofitable at current prices. It would probably cause a house price crash at the lower end of the market in the South East.
Would that really be such a bad thing?
Landlords would eventually re-enter the market once it had corrected, but it’d be easier for would-be homeowners to compete with them for the same properties.
Since most people would agree it’s fairer that more people get to own their own home than that a smaller number of people get to own 5 or 6, given that we live in a country with very limited housing supply, then to me that seems a fair trade-off.
3. Tax breaks for investment in new property developments
Of course, encouraging supply would help too. I happen to believe the problem lies more with planning and regulation than with a lack of appetite among builders, but nevertheless if house building was made more attractive then perhaps more smart people would find ways to get around the problems.
A good example of a problem solver is Tony Pidgley at Berkeley Group (disclosure: I own the shares). He has been finding his way around the brownfield/regeneration landscape for years, to the boon of shareholders.
Berkeley recently did a deal with National Grid for instance to turn lots of its old unwanted land into property. That’ll bring 7,000 new homes online.
How many more might be built if there were more tax breaks to encourage a housebuilding boom? (As opposed to tax breaks to create yet another a house price boom…)
4. Incentivise local communities to find and approve new in-fill and brownfield sites
Note I said communities – i.e. real people – not local authorities.
If local people got cash payments when new homes went up in their area, I think local opposition would plummet.
Such payments could be linked to average house prices, say, which presumably reflect demand. The money could be repaid to government by a special levy on the first sale of the property after its new build buyers move on.
Please note that I’m not talking here about knocking over ancient woodland to build another identikit estate.
There’s plenty of surplus old industrial land, unwanted pubs, builders yards, and that kind of thing that get turned down for new housing.
I don’t think in the South East that it can get turned down any longer.
5. A wealth tax on second homes
People will say “why a wealth tax on homes and not on shares or sports cars?”
The answer is that there are plenty of shares to go around, and sports cars are not a concern of government. Enabling people to buy and live in their own homes is (or should be) and there are too few homes to be careless with them.
I don’t mind so much holiday homes that are let out for say 50% of the year. That’s just a hotel by another name.
I mean little cottages in beautiful villages that are used for 6 weekends and a fortnight a year.
Tax them hard.
6. Make London taller…
All this moaning about skyscrapers in London is ridiculous. London is too flat as it is, with a sprawl to rival Los Angeles (albeit with better back gardens!)
Anyone who has lived in Paris or Barcelona knows that dense housing does not need to mean bad neighborhoods. Quite the opposite.
Heck, anyone who has visited Bath or South Kensington knows the same.
The key is to plan it right from the start, to make higher-rise living aspirational, and to build in features like green roofs and central courtyards and the like.
Builders are already doing this to some extent, and crazily some chastise them for it. These sorts of developments are the future.
London’s true villages are fabulous, and I’m all for protecting the good stuff.
But London is also full of ‘meh’ suburbs and housing stock that could and should be replaced with better.
7. And make London bigger…
I’m sorry, but we need to let a couple of notches out of the Green Belt. London has just grown too bloated.
Much of the Green Belt is arid industrial farmland, anyway. The UK’s savannah it ain’t.
Many times I’ve sailed through these empty millions of acres on a train, only to arrive at a friend living on the other side who asks without irony how I can stand to live in over-crowded, overpriced London?
Anyone who knows the formula for the area of a circle (Pi times (the radius squared)) will appreciate that the radius doesn’t need to be made much bigger in order to bolt a lot of new homes on to London.
Actually, I bet a few tactical incursions here and there could unlock the value of lots of currently rubbish brownfield/urban areas on the fringes, too.
Again, seizing the nettle and planning the roll-out rather than whistling and looking the other way could mean we end up improving the South Easy, rather than impoverishing it.
8. If not inheritance tax or capital gains tax, then a Rebatable Property Transfer Tax on all home sales
Regular readers will know that I’m the only person left in the UK who supports very high inheritance tax.
Lower tax rates on the productive workers and the old living on their slender savings, and more tax on the dead, that’s what I say.
Let Tarquin and Tabitha make their own way in the world.
This is a debate I regularly have with friends. I’d say I
bludgeon win one in five around, for an evening. (They usually revert).
However I’m often told – not least here on Monevator – that inheritance tax is unenforceable.
So I thought perhaps there should be capital gains tax on residential property – currently it’s the biggest tax-free perk going, as already discussed above – but sadly I agree with those who say this would just gum up mobility, and make the market worse.
So then I thought, why not combine these two astronomically unpopular taxes into one even more logical tax?
Ladies, gentlemen, I have just invented and give you the Rebatable Property Transfer Tax.
Here’s how it would work.
When you sell any house, you would pay tax on the gain – say at your current rate of capital gains tax.
However you get also get a Rebatable Property Transfer Tax Certificate!
This is transferable when you buy a new property in your own name. It is effectively an IOU from the government.
This IOU means the government pays off an equivalent amount of the purchase price of your new home, perhaps working through the bank as an intermediary.
Example. You sell a house for £400,000. You pay £112,000 as capital gains tax, and get a Rebatable Property Transfer Tax Certificate in return.
You then buy a house for £500,000, of which £112,000 is paid off by applying your Certificate.
So no extra tax has been paid by you in the end.
Now you may be thinking: Huh? What’s the point?
The point is you can only apply it when you buy a house in your name (or together with your partner, in their name too, if applicable).
And you cannot buy a house in your name when you’re dead.
So the tax only impacts you when you’re dead and a property is sold. Which means it doesn’t impact you at all – it impacts your heirs.
Until then you can move freely to your heart’s content without being tithed by capital gains tax, just like you can today.
But when you’re dead, the Certificate has teeth.
And the heirs can’t dodge the tax, because it’s paid when the property is sold. (Or transferred. Or moved into trust. Or whatever. Look, it’s a first pass. It came to me in the bath. Eureka!)
Note: You probably don’t actually get a certificate. It’s all done on computers, which makes it easier to apply in chains and so forth. (And maybe we could sort out the ludicrous system of tardy solicitors at the same time).
9. Revamp the North. REALLY revamp it.
For all I’ve spoken about London, the fact is we need a true second city. Not a pretend one like Birmingham.
Human bodies have two of most things for a reason, and a sort of similar principle should hold true for countries.
One of the best ideas I’ve heard in a long while is to join Liverpool, Leeds and Manchester together via fast trains to make a new megacity in the North.
I don’t think centralized planning really works, but there are some things free markets can’t do on their own – at least not now the days of the railroad barons are long gone.
If Government really wants to revitalize the North then it should stop measly attempts here and there, and do something truly big.
Nobody in Seattle or Los Angeles frets that their city is not as important as Washington or New York.
Heck, nobody in Munich minds too much about Berlin.
You may be happy with Hull, but the world is not.
We need another London.
Ideas, comments, and so on are very welcome below. From experience though I know that house posts can generate nastiness from all quarters (landlords, frustrated young people, capitalists, communists…) so please play the ball, not the man or woman. And be aware I will delete nastiness on my whim.