New housing policies are not what they appear to be
The government’s latest wheeze to increase home-ownership is unworkable, but reveals the nature of its new growth strategy
Industrial policy is gone, and levelling up forgotten. How then will the Johnson government seek to support economic growth in the years ahead?
A shift from ‘red wall’ to ‘red meat’ would seem to place tax cuts – and a rebooted Rishi Sunak – at the heart of a new growth agenda. But while a government which has raised taxes to historic levels may want to promise reductions in the future, they will be difficult to achieve in practice. The Conservatives’ ageing support base expects (and requires) public spending to continue to rise, not fall.
It’s quite the dilemma. But not really. The Conservative Party is reaching into its tried and tested box of tricks: inflate the housing market. Ta da!
Bonkers
The government announced this morning that it intends for benefit payments for housing costs (such as Housing Benefit and housing-related Universal Credit) to be used to cover mortgage payments. These benefits at the moment cover only rental payments to private and third sector landlords (including housing associations).
The plan is absurd. First, lenders are unlikely to accept benefit payments as a secure form of income. The announcement is therefore probably a fantasy, aimed at an audience who will never actually need it.
Second, levels of benefit payments are linked to the cost of rent in the area where recipients live. Will the same entitlement apply, even if the mortgage cost is different to the previous rent payments, and indeed the house being purchased is in an entirely different area?
Third, benefit payments for housing costs (for most, now, and for all, in the future) are reduced if the recipient has savings above a certain level. If you want to save for a deposit so you can buy a house, based on your benefit payments, the act of doing so will accordingly reduce your benefit payments.
And fundamentally, the whole plan is just, well, grotesque. The vast majority of benefit recipients can only dream of home-ownership, and this daft and duplicitous idea will bring the plan no closer to reality for most.
Right and wrong
The government also reannounced a plan to offer a ‘Right to Buy’ to social housing tenants in housing association homes. A pilot version of this programme did lead to some tenants buying their homes, but since the social housing stock was not replenished (or only replaced by more expensive properties), the social housing crisis for those in greatest need was deepened.
While we are witnessing a continuation in mortgage subsidies among the Johnson government and its immediate predecessors, a reduced commitment to increasing housing supply (while demand for housing is stimulated) is quite a novel development. I discuss this further below.
It is also worth considering the interaction between the benefits and Right to Buy proposals. What if exercising your right to buy your housing association rental requires an increase in benefit payments, or indeed a new claim for benefits if you are not already in receipt? Is this permissible? Or are only people who were already in receipt of, say, Housing Benefit, at a sufficient level, able to take advantage of the new rules (and therefore exercise their buying rights)?
More help to buy
As you might have deduced, there is a rather bigger story playing out here.
Recent Conservative governments (and, it is worth saying, many Labour governments, historically, albeit to a lesser extent) have consistently sought to inflate the housing market.
Such policies are invariably dressed up as efforts to help younger and poorer people ‘get onto the housing ladder’, as part of an ‘asset-based welfare’ agenda. But they are mainly focused on materially increasing the wealth of people at the top of the ladder, and inducing a wealth effect so that already-comfortable home-owners are willing to spend more money.
Welcome to the UK’s rentier economy, heavily dependent on debt-fuelled consumption by people whose homes earn more than they do.
As I discuss in my recent Competition and Change paper, ‘The substitutive state?’, the willingness of governments to use the fiscal balance sheet to inflate the housing market has become commonplace.
Help to Buy is the most obvious example. The scheme offered interest-free loans to first-time buyers of – crucially – new-build properties, to cover the deposits required by mortgage lenders. There was also a mortgage guarantee element for lenders (on any type of residential property) in the event of default.
Help to Buy has cost in the region of £50 billion (a conservative estimate) since 2013, or double the eventual size of the banking bailout (which itself was necessary to prevent housing market collapse).
Designed to be temporary, the mortgage guarantee element was extended several times, before it was tweaked and renamed by the Johnson government – the new version remains in place.
The equity (i.e. deposit) loan element was also extended several times, but will now eventually end in 2023. Importantly, this was the element which incentivised new-builds, that is, an increase in the housing stock. The coalition and majority governments under David Cameron wanted to inflate the housing market while at the same time supporting the supply of housing.
By allowing the Help to Buy equity scheme to end, and rolling out Right to Buy, the Johnson government is evidently only interested in the former. The rentier class is closing ranks.
Growth model
Help to Buy was always a macroeconomic policy, not the housing or welfare policy it pretended to be.
The scheme has helped many who did not need support, and has been concentrated in regions with lowest housing demand. It did not correct a market failure in the supply of affordable homes, but rather deliberately distorted the housing market to serve macroeconomic ends – at great fiscal risk.
In fact, the Treasury told us at the time about the scheme’s macroeconomic rationale. It was introduced to address the significant decline in residential property transactions which occurred after the 2008 financial crisis, considered by the coalition government to be a drag upon economic recovery. There had also been a significant decline in the proportion of mortgages approved with high loan-to-value (LTV) ratios, from around 10 per cent in 2007 to around 2.5 per cent in 2009 and subsequent years; restoring LTV rates to pre-crisis conditions was an explicit aim of Help to Buy.
Stimulating house prices had the impact of making wealthy home-owners wealthier (or at least restoring wealth lost due to the financial crisis), and making homes generally less affordable. (The higher mortgage costs faced by buy-to-let landlords as a result also makes private rents increase.)
It would be wrong to suggest that the benefits policy announced today is going to have a similar impact, not least because it is unlikely to ever be implemented.
It is a policy focused largely on vibes: the announcement itself injects some heat into the housing market. It is also partly about disciplining the poor, that is, warning them that home-ownership is their only secure path to financial well-being (and that it is their own fault if they cannot achieve it).
Above all, it is a policy characterised by what I call ‘indentured interventionism’: the Johnson government really cannot think of a single other thing to do to generate economic growth, so is compelled to revisit the existing playbook. But the play has been used so often, and it is delivering diminishing returns. So the state is required to intervene in the private economy in evermore imaginative ways.