“Homes fit for heroes” is what vote-seeking politicians used to promise our brave lads as they returned from the wars. Today’s government does not discriminate in favour of heroes and is far more ambitious. Homes for All – A five-year plan from the ODPM is the title of the housing document that John Prescott launched into the pre-election vacuum last month. I’m not sure that the vacuum looks much less empty as a result.
At least it will probably do less harm than earlier government interventions in the housing market. These really began during the first world war, with the Increase of Rent and Mortgage Interest (Restrictions) Act. It was intended as a temporary wartime measure to hold down rents and interest charges, but its shadow has never left us. Once governments got the taste for interference they simply couldn’t stop.
The virtual freezing of residential rents led, after the second world war, to millions of rented homes decaying beyond the point of no return simply because their often far from affluent landlords could not afford to keep them up.
Shaky foundations
Today’s housing market problems are very different, but again there’s trouble ahead. When prices have risen so far and so fast (an average of more than 15% a year over the past five years) that most would-be first-time buyers cannot hope to buy a home in most of our towns and cities, there’s trouble brewing. The whole edifice of house prices rests on the foundation of those new buyers.
And remember that many of the coming generation of would-be buyers will be saddled with student loans that will further restrict their purchasing power. If they can’t come in, something has to give. The simplest answer would be a price collapse to bring housing within the range of the first time buyer again.
And this, of course, is what the government wants to avoid at all costs. It is the reason for the many tinkerings with the system that John Prescott proposes. Pride of place goes to a new first time buyers initiative that will help 15,000 people get onto the housing ladder by allowing them to buy part of the equity of a home. Existing schemes to help key workers to get onto the housing ladder are revamped, and social housing tenants will get further help in buying their homes through the Homebuy policy, perhaps a slice at a time.
Real problem remains
Such tinkerings are good pre-election stuff and might even help a few individuals into home ownership. What they singularly fail to do is to tackle the housing market’s underlying problem: the rampant price inflation that has taken the price of the average home up to about six times average earnings, against 3.5 times as recently as 1999.
Yes, I know that falling interest rates have made it easier to service any given housing loan. But would you confidently bet on low interest rates over the next 30 years or so?
I really do not see what Prescott hopes to achieve by making it easier for a relatively small number of people to pay too much for half a foot on the housing ladder. If anything it will add to the problem by delivering a further upward push to prices at the bottom end of the market.
Home ownership has been too attractive for too long for too many Britons. The problem might be addressed through the tax system, but measures such as further increasing stamp duty or abolishing the capital gains tax exemption on principal homes would damage the liquidity of the market in unhelpful ways.
Perhaps it is time to revisit the idea of abolishing CGT in favour of an annual wealth tax that would apply to homes as well as to other assets. A progressive rate that spared owners of starter homes but reduced the investment attractions of higher-priced houses might restore some sanity to the market. Unfortunately, you’d probably need a government with suicide in mind to do it.
In the meantime, Prescott might do well to remember that the old board game had snakes as well as ladders. The 70,000-odd people whose homes were repossessed in the housing slump of the early 1990s don’t need reminding.
Michael Brett is a financial journalist and author of Property and Money and How To Read The Financial Pages
