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With all the effort the Government has put into spin over the years, one would think it would by now have begun to boast about how much help it is delivering to first-time house buyers.
If the now-commonplace forecasts for this recession of a 30% drop in house prices prove to be correct, Gordon Brown will rightly be able claim that no government in 15 years will have done more than his to make housing affordable to people on low incomes. Instead of embracing the brave new world, the Government seems still to be a prisoner of the recent past - seeking to breathe life back into a model of housing finance we should be grateful to see the back of. It has not grasped that the only effect of too much easy money chasing limited supply is to push prices up until they get to levels where they are again unaffordable. It then tries to address this problem with planning nonsense which demands people build tomorrow's slums today under the umbrella of affordable housing. And elsewhere towns are littered with charmless flats no one wants, and which are only saleable in the height of a boom. There is another way - the way most of the rest of the world organises itself - but it does require a shift in thinking. Ever since the thatcher era there has been a belief that home ownership is right for everyone. All sorts of daft ideas have been spun in an effort to make this possible, or to disguise the fact that the thesis is fundamentally flawed. The fact is, though, that home ownership isn't the right thing for everyone. For many, renting makes much more sense - financially and socially - given the flexibility to move around in search of work rather than to be tied to one place. In other societies, Germany being one, young people go out of their way not to buy. They pay reasonable rents and save the extra in sensible diverse ways rather than having to plough every last penny into a mortgage.
So instead of seeing their house as their pension and security for old age, they accumulate a range of other assets. the difference, of course, is that everyone in this country thinks house prices will always go up in value - or did until recently. In Germany they don't expect that at all.
We could turn the current housing disaster into something good. We could step back from the blind pursuit of 100% home ownership and seek to develop a properly managed, institutionally financed rented sector. Pension funds and others would supply the capital to build properly designed and managed accommodation for rent, just as they currently finance the development of office blocks and shopping centres. The asset would yield an income and, as domestic rents are closely linked to inflation, it would be perfect for pension funds. There would be some capital growth, too, but the buildings would be valued on a yield basis - as the rest of the property sector is at present. As a wonderful by-product, the growing availability of good-quality, affordable rental accommodation would mean we could scrap the planning nonsense about affordable homes. There would be plenty of affordable homes - and you would not have to buy them. There are many models of how this works overseas. There is even one in embryo in the UK with Unite, a specialist firm providing student accommodation. With wider adoption, the potential exists for a whole new asset class.
Currently we have the worst of all worlds - tacky homes, built to minimum standards, which poor people think are a step on the ladder but betray them as unsaleable in a downturn. This is matched by a buy-to-let sector which is amateurish, under-managed, precariously financed and is in the end letting out homes not built for that purpose. The first rule of holes, as Denis healey once said, is, when you are in one, stop digging. There is no sane way we would choose this mess. But there is a sane way to get out of it if politicians and investing institutions have the boldness to embrace it.
Reader views (5)
What a refreshing view! I totally agree with you Mr. Hilton. I live in London but come from Belgium. Stamp duty there is around 10%. 25% deposits are an absolute minimum, equity withdrawal unheard of. That caps the house growth, and leaves no-one panicking of not getting on the 'property ladder'. Very honourable people rent for many years without any issue.
The problem in the UK is that the regulation around the rental market is totally inadequate. I know something about it given that I am having the worst experience of my life renting here, where in Belgium it had always been so hassle-free. Some flaws:
- council-tax incentives on leaving houses empty (in France you pay a penalty in that case)
- lack of regulation of estate agent creates an oversupply of agencies, which makes agents willing to sell their souls and encourage turnover. No ethics by EA and carelessness about reputation => landlords get no pressure if they misbehave
- incentives to make short-term contracts, creating bargaining power imbalance i.e. landlord can decide arbitrary rent increases knowing that even if they are above-market, the tenant may prefer avoiding the hassle of moving.
- tons of amateur landlords who do not behave rationally, creating a lose-lose benefiting mostly to estate agents.
In Belgium, France, Germany, renting *is* a viable alternative to buying, in the UK it is not. Renting is made a hassle by the system and therefore motivates people to buy, creating the bubble we have kn
- Jh, London, 06/08/2008 10:11
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Perhaps the solution would be a rating system for mortgages similar to that used for bonds, based purely on the loan to value ratio. Many mortgages in the UK have a loan to value ratio of less than 0.5. By giving these loans a “AAA” rating, they could be packaged and sold to investors as relatively safe investments. All of this rubbish that banks have been selling recently, 100% mortgages, buy-to-let and interest only would get a rating of “junk”! They would have to raise the rates on such loans if investors knew what they were really buying. And a transparent system of ratings would make it easy for the FSA to legally restrict banks from holding more than a sensible amount of junk mortgages on their books. As investors would expect more reward for taking higher risk, the rates charged for high loan to value mortgages would have to go up. A system like this would encourage mortgage holders to have a higher percentage of equity in their homes and restore the risk vs. reward relationship. And, as you said, anyone who can’t provide the required deposit must rent until they can. This will naturally put downward pressure on house prices and provide stability.
- John Hoffman, London, England, 06/08/2008 09:36
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Excellent article.
People focus on the house price inflation numbers...what we don't see in the stats is the cheaper build quality and smaller living spaces as prices rise.
For that we have to use our eyes.
- Hotairmail, London, 06/08/2008 07:08
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Owning is a privilge, not a 'right', I'll agree there. But having lived in rented accommodation in Germany I can tell you that the grass is not totally green over there. Flats rather than houses are the main rental, lazy landlords who are rarely monitored by the town councils is another reality. The one advantage Germany has, is it's cheaper, but only because there is an oversupply of flats. Renting a house is another matter...
Here in the UK, I rent. That means any changes I make, even so much as wallpaper or putting a better carpet down are left behind if I want to move, or if I am forced to by the landlord selling up - not to uncommon these days.
Currently I have a leaky toilet, a mouldy cupboard I cannot use and several other problems with my rented flat. I complain to the landlord, but he does nothing at all.
And anyways, didn't we used to have social housing? Weren't they called council estates... This all just looks like a con. The house builders cannot sell houses straight to the people, so they will sell them via the government. People still pay for them, but now twice, once for the government funded build and once again to rent it!
Nice!
- Peter, Oxford, 05/08/2008 23:20
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Bravo! The first article in the UK to state the obvious and propose a sensible way forward. It is the only real solution. I bet it will never happen because if you take away the dreams shared by millions in the UK that a house is the way to riches and the life style you could not otherwise afford - an ATM to subsidise your low paying job - then what does the govt replace those dreams with? There is very little in the UK that creates wealth. Reallocating all of this unproductive mortgage money into productive ventures might change UK misconception that there is an easy way to wealth without producing things the world wants to buy or that you can borrow your way to wealth. I doubt a UK govt has the courage to do the right thing. Better to rely on boom and bust - at least you get 2 or 3 terms in office before the inevitable bad times.
- Kr, London UK, 05/08/2008 12:46
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