Housing: A summary of what needs to be done
This is the summary of my 8th February strategy paper for Policy Exchange with policy recommendations on the U.K. housing market
Summary and policy implications
The Government needs to seize the initiative in the housing market and shift its policy focus. If it does then there is every reason to expect future success, with more houses being built and with generation rent becoming generation buy as more first-time buyers are able to access the mortgage finance that they need.
Addressing the UK’s housing challenge needs to figure prominently in any Government policy reset after the pandemic.
The solutions to the housing crisis can be found on both the supply and on the demand side.
On the supply side, more properties need to be built. This is the biggest challenge facing the housing market. Not enough properties have been built of the right type and price in the areas needed.
But building more properties, while vital, will not be enough. As this need for more supply is widely acknowledged, the focus here is on the challenges on the demand side.
This Briefing’s contribution to the policy debate is that it outlines the policies that are needed on the demand side.
Too often, on the demand side, the Government’s policy interventions have resulted in higher house prices, exacerbating the challenge facing buyers. Now, there needs to be a shift away from direct interventions such as help to buy or temporary freezes in stamp duty.
The policy implications are:
a. The biggest and most immediate issue that needs to be addressed is more supply of affordable properties and on a massive scale. A house building boom is needed.
b. Challenges on the demand side need to be addressed and overcoming them will complement the building of new housing that is needed. If more properties are built, then people need to be able to afford them and be able to access the finance to buy them.
c. There needs to be a fundamental shift in policy away from measures that, while helping some, have tended to boost housing prices, pushing them more out of the reach of many. Official interventions in the housing market often can push prices higher and not provide lasting solutions to those who wish to get on the housing ladder. The Government needs to move away from intervening directly in the market through Help to Buy (HTB) or temporary changes in property taxes.
d. The Government’s focus should shift to facilitating the market in the provision of sustainable market solutions that help first-time buyers (FTB) gain access to mortgage finance. This support should not be financial1 but should be to draw attention to market success and remove any barriers that may exist. The biggest problem is that many potential buyers cannot afford the deposit needed, but can afford the mortgage payments. Indeed, many may have been paying rent regularly for some time, demonstrating an ability to pay. Challenges have been exacerbated during the pandemic by a collapse in the choice of mortgages available to FTB with a low deposit. This is a worry, particularly as the mortgage market has been characterised by a lack of innovation and new product. The problem is access to very high Loan to Value (LTV) mortgages. The Government should embrace, and perhaps
actively draw attention to, both existing and new market developments that address the challenges facing FTB.3 The growth of what might be called a blended mortgage product is an example of the innovation that is now occurring and that is needed as the main way to meet the aspiration of creating a new generation buy. There is no need for the government to intervene financially, either directly or indirectly through the provision of a guarantee.
e. The current stamp duty holiday should become permanent with stamp duty being abolished on lower valued properties. Temporary freezes in stamp duty are not a solution as they prompt a spurt in demand as people try to buy before the tax is raised again, pushing prices higher, out of the reach of many FTB. More generally, as there is a need to improve turnover in the housing market, stamp duty on housing transactions is a bad tax. Ideally, stamp duty should be abolished, but as a first step it should cut to zero permanently on lower valued properties and reduced on higher valued properties.
f. An easing of macro-prudential regulatory requirements makes sense - particularly an easing of the current stress test requirement where before people can borrow, they need to show they can afford repayments in the very unlikely scenario where interest rates were to rise by three per centage points. This unnecessarily precludes some from being able to borrow. More generally, there needs to be a reassessment of lending rules and criteria, to ensure that they are conducive to increased
innovation and lending.
g. It is always possible that in the face of a shortage of high LTV mortgages that the Government could reintroduce, even in the forthcoming Budget, the HTB Mortgage Guarantee Scheme that it closed in 2016. While we could understand this given the present lack of high LTV mortgages, it is not our preferred solution, as it competes with rather than compliments market solutions that appear to be emerging. Indeed, while it has played an important role, HTB does not need to be extended beyond the currently announced schemes. HTB has played a vital role in plugging a gap left by mortgage providers who shied away from FTB and helped many aspiring homeowners onto the property ladder. Government interventions through HTB cannot meet the scale needed for FTB. Moreover, in a post pandemic world, there is no reason why the new builds that the current HTB equity scheme have favoured are in locations where FTB will wish to live.