Posted by: Jules Birch11/09/2012
The government is missing the chance to tackle housing market volatility and its damaging consequences for households and the wider economy.
Co-authors of the report, senior housing academics Mark Stephens and Peter Williams, say that the government has demonstrated it can take tough decisions in other areas ‘but it continues to be too timid concerning actions that are needed to bring about greater housing market stability’.
The report measures progress on tackling volatility since the taskforce published its main report last year. In the long run that will come through increasing housing supply and in the short run through financial regulation and the tax system, protecting homeowners from the consequences of volatility and developing alternatives to home ownership.
And it may be time to look at the short run more urgently because things do not look too good in the long run: ‘The serious shortfall in housing supply has worsened, exacerbating our exposure to housing market cycles, with all the consequences this has for households, communities and the economy.’ (I have some more on the supply shortage and one more possible reason for it on my other blog here).
First up is financial regulation and taxation. Its failings made a significant contribution to the financial crisis and the government is in the midst of replacing the FSA with a new financial policy committee (FPC) at the Bank of England. The FPC’s remit includes the control of systemic risks but consultations so far under the FSA’s Mortgage Market Review (MMR) have backed away from counter-cyclical credit controls such as maximum loan to value (LTV) ratios amid fears that this would squeeze lending still further on those locked out of the market.
The report argues that there is a good case for using LTV limits as part of macro-prudential policy and that it is vital that the government and regulators keep a full range of instruments available. It warns of the dangers of neglecting sectors like housing with ‘great destabilising potential’ and it goes on: ‘The continued neglect of the role that property taxation might play is an obvious concern. The taskforce report showed how the council tax could evolve into a national property tax. By neglecting the management of the housing market as a whole there is a danger that it will reveal the next hole in the system of regulation.’
The taskforce recommends that there should be a council tax revaluation followed by its gradual transformation into a national land and property value tax. Both would be politically contentious: successive governments have backed away from council tax revaluation for fear of creating too many losers (even though an estimated 3.7 million households are worse off as a result of the failure to revalue); and new planning minister Nick Boles joked last year when he publicly backed a land value tax that he was ‘committing career suicide’. His prediction proves untrue but tax reform still seems to fall into the category that civil servants in Yes, Minister would call ‘brave’ and that Malcolm Tucker in The Thick of It might have a stronger word for.
On protection for homeowners, the report says that the current safety net is ‘inadequate’ and it warns of that it is important that discretion given to lenders under the MMR ‘does not facilitate a return to any irresponsible lending’. It concludes that; ‘A a rethink is required to find a solution that improves security for home-owners faced with reductions in income, whilst also meeting the Government’s objective of making work pay.’
On alternatives to owning, private renting is growing rapidly while any scope for expansion of social renting and shared ownership is limited. The report welcomes the prospect of REITs and the Montague review’s call for more institutional investment but argues that any concessions on section 106 and affordable homes should be conditional on tenants getting greater security. And it argues that housing subsidies should be switched away from a reliance on housing benefit and back towards housing supply ‘as part of a new model for financing new affordable housing’.
Stephens and Williams believe that ‘the downward trend in homeownership may be hardening into a structural change’, highlighting the need for alternatives. However, there are serious problems with all of them: ‘The government’s efforts have focused on identifying ways to attract institutional investment into the private rental sector, which even if successful, does not address the chronic insecurity that prevails there. Moreover, the housing benefit cuts will serve to make tenants less, rather than more, secure. With low-cost home-ownership always likely to be a minority tenure and with the security that is traditionally associated with social renting being diluted, this is an area where we are rapidly moving backwards. A key challenge remains to find ways to make private renting more secure without prompting mass landlord exits from the sector.’
The warnings in the report are all the more striking for being expressed in such measured language. With the housing market flat-lining and the deficit the key political priority, the temptation for the government will be to do nothing that rocks the boat, especially on housing market taxation, but the history of successive boom and busts and their damaging consequences suggests that would be a serious mistake that we will all come to regret.
From Inside edge
Housing commentator Jules Birch puts the latest news in context