Paul Hunter, Head of Research, The Smith Institute
The chancellor dedicated his budget to those who want to work hard but his headline grabbing announcements were less to do with work and more with homeownership. Property owning democracy has been a popular Conservative tune since it was coined by Noel Skelton and if the front of the Telegraph and Times are to go by it continues to be so. However, whether it will help boost the housing market, whether it will help ease the undersupply, and whether it is sustainable are all questionable.
The first of the announcements – previewed in the all knowing Evening Standard… – was the government’s continued push to reinvigorate the populist right to buy scheme. Take up over the last year (since the cap was increased to £75k) was minuscule compared with 1980s levels. This is a result of difficulties getting a mortgage (house prices have been unstable and falling in many place outside the south), the fact that many of the most desirable homes have already been sold, prices to earnings have widened and those in council housing mainly do not work (they are retired, carers, ill or unemployed). So will increasing the cap in London to 100k make a difference? Given the average right to buy price was £142k (with market value of £162k – so not many are bumping up against the £75k limit) in London the problem for many tenants who wish to buy is ability to meet the repayments, something which increasing the cap rather than percentage discount fails to address. On a 25 year mortgage the average tenant would be looking £900 a month in repayment bill – something which most tenants would struggle to meet. And the buyer would have to meet the often expensive costs of maintenance and of course find the deposit.
This leads neatly on to the second announcement. Osborne’s homage to Thatcher came also in his Help to Buy scheme – a clever way of grabbing a headline whilst not hitting the government’s borrowing targets. The first part of the scheme for new build properties has boosted Barratt’s share price but it remains to be seen how many additional homes it will provide (is it providing discounts for people who could already buy?) and may take some time to deliver. As studies have shown on share ownership it is fast becoming a long term tenure with problems due to the complexity of the schemes selling on the secondary market and not to mention negative equity. Too little, too late comes to mind.
The second part of the scheme (the mortgage guarantee) essentially reduces the amount someone needs to put down as a deposit in the secondary market and not just for first time buyers. In theory this could enable many potential buyers to step onto the housing ladder. However, again the problem like RTB may well be affordability of repayments and willingness of mortgage lenders to lend. If it is a success it could well inflate the housing market which many still feel should be going in the opposite direction – whilst doing little for low demand areas. And if the property market does deflate (or worse crash) we could well see homeowners losing their, albeit smaller, deposit and it would end up being a very expensive initiative for government with nothing to show for it. It is also worth remembering that it was the sub-prime lending in the US that led to our prolonged economic downturn, something which both policies seem to encourage.
These policies cost the government little now but (barring the first buy scheme which sees increased capital spend) don’t do much to enable house building something which is needed to make housing affordable for younger people and those on low to middle incomes. Whilst the budget may have been a paean to property owning democracy, it will do little to reverse the trend away from homeownership, which is lower now than it was under Labour. To achieve the goal of mass house building and bucking the trend towards the PRS would require a return to large scale grant. And that is something which the chancellor seems unwilling to consider with his eyes firmly fixed on deficit reduction through cuts rather than stimulus.