Sir Mervyn King’s weekend criticism of Help to Buy leaves George Osborne looking more isolated than ever in his plan for government mortgage guarantees.
King steps down as governor of the Bank of England at the end of June but even so his comments on Murnaghan on Sky News on Sunday are quite a parting shot. Asked how the Bank of England would end a scheme of which it is the ultimate guarantor, he said that:
‘Well I’m sure that there is no place in the long run for a scheme of this kind, this scheme is a little too close for comfort to a general scheme to guarantee mortgages. We had a very healthy mortgage market with competing lenders attracting borrowers before the crisis and we need to get back to that healthy mortgage market. We do not want what the United States have which is a government guaranteed mortgage market and they are desperately trying to find a way out of that position so we mustn’t let this scheme turn into a permanent scheme.’
Help to Buy has already been heavily criticised on the same and other grounds by the all-party Treasury committee of MPs and it’s next to impossible to find a reputable economist who supports the policy. Mortgage lenders and estate agents are expressing caution and even housebuilders seem faintly embarrassed by this latest example of government largesse. Osborne has even drawn criticism from Migration Watch and the TaxPayers Alliance over claims that foreign buyers will be able to benefit.
However, Help to Buy already seems to be having an impact on buyer demand and on prices. A survey out this morning from Rightmove shows that seller’s asking prices rose by 2.1 per cent in May alone after the strongest start to a year since 2004. The average asking price in London is now more than £500,000.
It’s perfectly possible that Help to Buy will be the long-term disaster that everyone fears at the same time as it is a short term success for the government in boosting activity in the housing market and the wider economy in the run-up to the next election.
King’s comments seem more than a little self-serving. His claim that there was a ‘healthy mortgage market’ stretches credulity when you remember the surge of lending that inflated the housing bubble before 2007 on his watch. To give just one example, half of all mortgages lent in that year were self-certified.
However, his warning also points up just how big a mistake Osborne could be about to make. Ironically, just as the chancellor prepares to offer state guarantees for mortgages in the UK, politicians in the United States are desperately searching for ways to get out of offering them.
The Federal National Mortgage Association (Fannie Mae) was set up in the wake of the 1930s depression as part of the New Deal to provide local banks with federal money to finance mortgages. After 75 years, it is still going, alongside its counterpart the Federal Home Loan Mortgage Corporation (Freddie Mac), showing just how difficult it is for a government to exit the mortgage market once they have entered it.
The agencies were privatised in the late 1960s, invented mortgage-backed securities in the 1980s and were used to expand home ownership to low-income households in the 1990s. In the wake of the sub-prime mortgage crisis and credit crunch, they had to be taken back into public ownership in 2008. They currently guarantee half of all American mortgages worth about $5 trillion.
However, there is another example of a government guaranteeing mortgages that King tactfully (or pointedly) did not mention. Canada has its own equivalent of Fannie Mae: the state-owned Canada Mortgage and Housing Corp set up in 1946 that now guarantees half of all mortgages but the government also guarantees two private sector insurers.
Canada is of course the home country of King’s successor Mark Carney. He got the job at the Bank of England after being credited with rescuing the country from the financial crisis as governor of the Bank of Canada by rapidly cutting interest rates. As he gets set to arrive in London things are not looking nearly so rosy back home. Critics say those mortgage guarantees helped to inflate a housing bubble.
In a survey of the world’s 18 biggest housing markets by The Economist this week, Canada has the most over-valued house prices when judged against rents (by 73 per cent compared to 19 per cent in Britain) and the third most overvalued prices judged against incomes (32 per cent against 11 per cent). Where house prices in Britain have fallen by 11 per cent since the start of the credit crunch, Canada’s are up 18 per cent.
The Economist concludes:
‘On this basis Canada’s market is especially vulnerable. A large bubble now looks set to burst. Home sales in March were 15 per cent down on a year earlier. Buyers are in short supply. A recent poll showed that only 15 per cent of Canadians are likely to buy a home in the next two years, down from 27 per cent last year—the steepest decline in the 20-year history of the survey. After a big boom, the housing bust will be a wrenching affair.’
With Carney finding London house prices so extortionate that he demanded a £250,000 a year housing allowance, is he jumping from the frying pan into the fire or the other way around?
MORE: It’s not just Help to Buy mortgage guarantees that are under fire. Analysis just released by the g15 group of London’s largest housing associations shows that Help to Buy equity loans will be of minimal help to average earners in the capital.
The group looked at all properties for sale across London advertised on the main property portals between January and April 2013 and modelled their affordability based on a 20 per cent Help to Buy equity loan, a 5 per cent deposit and a standard mortgage of 3.5 times earnings.
A single person with an average income of £26,499 would be able to buy a property worth £125,000 but only 2,963 (2.5 per cent) of the advertised homes were in that price bracket.
The choices are almost as restricted for someone on the median income in London of £33,308. They would be able to buy homes up to £135,000 but that applied to just 4,176 (3.5 per cent) of those available.
As Keith Exford, chair of the g15 and chief executive of Affinity Sutton, points out, average earners will be left with the most undesirable property: flats above shops, properties in poor repair and flats with short leases.
The g15 is calling on the government to focus investment on low cost home ownership instead, arguing that the £3.5 billion allocated to Help to Buy equity loans could fund 175,000 affordable homes.
Here are some thoughts on an event I’ve just chaired for the Resolution Foundation yesterday on the scale of the housing crisis and how to fix it.
Rather like most of my blogs, I thought it would be stronger on the first bit than the second, but the debate revealed a new willingness to look for solutions as well as more reasons to be gloomy.
The centerpiece was a sneak preview of some forthcoming research from the Resolution Foundation and Hometrack on the housing plight of low and middle income households. The foundation is a think tank focused on the 5.6 million people caught in the squeezed middle between stagnating wages and rising costs.
The conclusion is that 1.3 million of them face unaffordable housing costs. That is a very conservative estimate as it is based on some cautious assumptions such as lower quartile house prices. Of these, 590,000 are private renters, 585,000 are owners with a mortgage and 100,000 are social renters.
Almost half of them (570,000) are younger families where the head of the household is under 35 and two thirds are outside London and the South East. One particularly dramatic graphic in the final report shows how unaffordable housing (defined as more than 35 per cent of net household income) is spreading rapidly to other parts of the country.
A key message is that, while a deposit on home ownership remains out of reach (the average time needed to save for one is now 22 years), private renting is now more expensive than paying a mortgage in all but a handful of local authorities in Britain. Another is that shared ownership – the often forgotten form of tenure – is the most affordable and warrants fresh scrutiny.
That was followed by responses from three panelists that revealed some serious doubts about whether the solution to the crisis really is more investment in private renting (even if it comes from institutions rather than buy to let landlords). After all, as Vidhya Alakeson of the Resolution Foundation pointed out, it emerges from the research as ‘overwhelmingly the most expensive tenure’.
Keith Exford of Affinity Sutton and the G15 group of housing associations made a powerful case for more investment in social renting. He said the Treasury’s discounting of investment by 50 per cent significantly undervalues the real impact and cited research showing that it offers the best value for money in the long term. He was also sceptical about Build to Rent delivering enough new supply quickly enough.
Natalie Elphicke of Million Homes, which aims to find ways to harness new social investment with little or no government grant and mixing private and social renting, argued for ‘progressive ownership’ that would allow people to move from renting to owning. She also had some harsh words for buy-to-let landlords who allow their tenants to pay their mortgage while offering them no security in return.
Campbell Robb of Shelter said debates were needed on what we want out of home ownership, what we really mean by affordable, more freedom to borrow for council housing and, above all, land. If compulsory purchase can be used for the HS2 rail line in some of the safest Conservative seats in the country, he asked, then why not for new homes?
The debate that followed ranged far and wide from the banks to Nigel Farrage, self-build to tax and the role of local authorities to rent control. The encouraging thing for me was not so much that magical solutions are appearing – that would be expecting too much – but that people are looking at all the issues in new ways.
That’s a reflection of the fact that things are changing around the country too. For one example, see Gentoo’s launch this week of its Genie structured home purchase plan. For another, see this week’s report of the London Finance Commission. This comes up with the remarkable stat that the last 10 years have seen £17 billion investment in affordable housing in the capital while £50 billion in housing benefit has been paid to landlords. Who would have thought a couple of years ago that a report for a Conservative mayor would argue that ‘the relaxation of borrowing controls is the only obvious solution to enable the delivery of greater supply’? For more on the report, see Steve Hilditch’s blog for Red Brick.
The big question is whether this new thinking is going to be enough to counteract the damage caused by George Osborne’s reckless Help to Buy policy and whatever he has in store for us in the spending review. Fans of it were certainly in short supply at the Resolution Foundation event yesterday. For a sneak preview ahead of Mark Carney’s arrival at the Bank of England, see this Money Week blog on the housing market consequences of Canadian state guarantees for mortgages.
As for the spending review, there are crucial issues to be settled not just on the prospects for housing investment and housing benefit, but on social sector rents and investment in private renting too.
New thinking on the housing crisis is tantalisingly within reach but, as yet more dismal housebuilding figures underlined as the event was taking place, the crisis itself is getting worse all the time.
‘She was fine before this bedroom tax. It was dreamt up in London, by people in offices and big houses. They have no idea the effect it has on people like my mum.’
I’m not sure how the architects of what ministers prefer to call the spare room subsidy will react to the words of Steven Bottrill or the tragic suicide of his mother Stephanie. A spokesman for the Department of Work and Pensions (DWP) told BBC radio news yesterday that it would be ‘inappropriate to comment’ on an individual case but that did not stop a ‘source’ from adding that the government had made discretionary help available.
You can read more about the awful story in yesterday’s Sunday People and a fuller interview with Steven Bottrill in today’s Mirror. With her two children grown up and left home, Stephanie Bottrill, 53, faced a £20 a week under-occupation penalty on her three-bedroom home in Solihull. She left a notes to family and friends including one telling her son ‘don’t blame yourself for me ending my life, it’s my life, the only people to blame are the government’. Then she left the house and it’s believed she walked into the path of a lorry on the nearby M6.
Among the many heartbreaking details, one that really sticks in my mind was the way that she had her things packed in boxes marked ‘kitchen’ and ‘bathroom’ even though she had nowhere else to go. She wanted to be prepared in case the council found her a smaller place.
From the reports, it’s not clear what advice and support or what offers of alternative accommodation she received. What seems a little clearer is that she was under severe financial strain even before having to find that extra £20 a week and facing the prospect of having to leave her home of 18 years. Perhaps more will emerge at the inquest.
In the wider context of welfare reform, will there be more individual tragedies like this? As I blogged in November, there have already been several awful cases and more look both inevitable and predictable.
However, the sad story of Stephanie Bottrill illustrates particular problems with the bedroom tax. Her circumstances were not those of the worst cases that have attracted all the publicity so far: the couples with a ‘spare’ room given over to medical equipment or who needed to sleep in separate rooms; the families with disabled children living in specially adapted homes; the victim of domestic violence facing a penalty for her panic room; or the fathers who have their kids to stay three days a week.
According to the reports, despite a debilitating illness that meant she could not work, she was not registered as disabled. After her daughter moved out, she was under-occupying her house by two bedrooms. It’s not clear whether she was offered discretionary help or whether she would have been entitled to it.
She would not even have been helped by the key amendment to the under-occupation penalty voted through in the House of Lords in the final stages of the Welfare Reform Bill debates in 2011 but reversed in the House of Commons. This would have exempted anyone under-occupying by one bedroom if no suitable accommodation was available.
However, her story prompted me to look back at the arguments made for and against that at the time. Welfare reform minister Lord Freud argued in the Lords that the exemption would be ‘too broad and would be complex and costly to administer’. He went on:
‘In most cases where there is no suitable accommodation, we expect that claimants and their partners will find ways of meeting the shortfall—through employment, we hope, or through increased earnings. For those who are genuinely struggling to meet the shortfall and who have exhausted all possible options, the local authority might consider a discretionary housing payment.’
In the Commons work and pensions minister Maria Miller trotted out the familiar line that:
‘If social sector tenants choose to continue to live in accommodation that is larger than they need, it is only right that they make a contribution towards the cost. They can meet any shortfall through employment or other means. Those are the sorts of everyday choices that people living in the private rented sector and those who are not getting housing benefit have to make every day.’
However, even at the time it was clear that the bedroom tax would be about much more than that for its victims. As Lord Best put it moving the amendment in the Lords:
‘Houses and flats provided by councils and housing associations represent people’s homes. They are not transit camps or hostels, with people constantly on the move as families expand and contract, but places to settle, put down roots and overcome some of the disadvantages that life has thrown at them.’
And Andrew Percy, one of two Conservative MPs who voted against the government in the Commons, made a similar and powerful point:
‘I am sure that the ministers understand this, but I plead with them to take account of the fact that houses are not only public assets; they are also people’s homes, and people have an attachment to them. This is not a simple matter to resolve, even though we should encourage an end to under-occupancy.’
They were both making the point that there are better, and fairer, ways to tackle under-occupancy than using the blunt instrument of the bedroom tax. Instead, despite a Conservative manifesto pledge to ‘respect the tenures and rents of social housing tenants’, the government is forcing people into a choice between giving up their homes (if something smaller is available) or paying the penalty. These are people’s homes, with all the emotions tied up in that idea, not just an aggregation of rooms.
Six weeks in, the rent arrears are already mounting and demand for discretionary housing payments is far outstripping supply. We are left with a policy dreamt up in London with little idea of what the impact would be around the country. Or of the effect it has already had so tragically on Stephanie Bottrill and her family.
So, three years after it was pronounced dead, can anything stop buy to let squeezing out owner-occupation?
Figures from the Council of Mortgage Lenders (CML) yesterday showed that loans to landlords accounted for 13.4 per cent of the £165.6 billion worth of outstanding mortgages in the first quarter of the year. That’s up from 13.0 per cent in the fourth quarter of 2012 and just 9.8 per cent at the start of the credit crunch in 2007.
All of which makes it easy to forget that it was only three years ago when the last rites were being delivered for buy to let by probably its best-known pioneers, Fergus and Judith Wilson. The former teachers built a 700-home empire but by 2010 they were bailing out and telling The Guardian that buy to let was ‘absolutely dead and will never return’.
They were selling up and retiring after starting into the abyss as the financial crisis hit its worst point in 2008. Ironically, the thing that saved them and thousands of other landlords was the collapse of Lehman Brothers and the way that the Bank of England responded by cutting interest rates to 0.5 per cent.
Seen from the perspective of 2013 that all seems a long time ago. There are now almost 1.5 million buy-to-let mortgages outstanding, 49 per cent more than in 2007 and 14 per cent more than in 2010.
Although the CML figures show the pace of growth has slowed slightly, cheerleading articles like this are appearing again in the national media as though 2008 never happened. A one-bedroom flat in Wales is apparently ‘the secret to buy-to-let riches’.
The market continues to be underpinned by ultra-low mortgage rates. As with the wider market, that may beg all sorts of questions about what will happen if and when they go back up to pre-crunch levels but in the meantime landlords have had a captive market of renters unable to raise a deposit to buy.
Meanwhile buy to let has received two significant boosts in the last month. First, agreement in Europe on a new mortgage credit directive confirmed that buy to let will not be subject to the same regulation as ordinary lending to homeowners. Second, the Bank of England extended its Funding for Lending Scheme to non-banks and expanded the definition of small and medium and businesses to include property investors. There are already signs that buy-to-let mortgage rates have begun to fall.
In the meantime, the decline of owner-occupation continues. Yesterday’s CML figures also showed that there are now 9.8 million owner-occupied mortgages, a fall of 2 per cent on a year ago and 8.4 per cent since early 2008. Overall, there are now 900,000 fewer owner-occupiers than at the start of the credit crunch.
Recent CML figures do at least show some signs of life in lending to first-time buyers. However, with Help to Buy set to extend help to all buyers and go higher up the income scale, they look set to be priced even further out of our dysfunctional and artificially inflated housing market.
The interest-only mortgage is the housing scandal that just keeps coming back.
In the 1980s it was all about the mis-selling of endowment mortgages. In the 2000s it was about selling as many mortgages as possible without caring too much about whether there was a way to repay them. In the 2010s and 2020s it will be about dealing with the consequences – and who pays for them.
A report out today from the Financial Conduct Authority (FCA – no relation to the FSA that was the regulator in the 2000s) reveals that there are around 1.3 million people who are only paying the interest on their mortgage and could struggle to pay back the amount their borrowed at the end of their term. With an average shortfall of £71,000 that implies a total liability of £71 billion.
The FCA identifies three different waves of interest-only liabilities that will hit over the next 30 years. The best off are those who (like me) were mis-sold endowments in the 1990s but find that the endowments will not pay out enough to repay the mortgage let alone deliver the extra lump sum they were told about. The FCA expects that most of them will have backup options, not least because of the amount house prices have risen since then.
Next come people who took out interest-only mortgages between 2003 and 2009. In the lax lending conditions of the time very few questions were asked and interest-only loans were often the only way to be able to afford to get on the housing ladder. Finally come people who have converted to interest-only because they could not afford their monthly payments.
The FCA estimates that around 2.6 million UK households have interest-only mortgages and that around half of those do not have believe they will not have enough money to pay off the final bill when their mortgage term comes to an end. Around one in ten – 260,000 families – have no repayment strategy at all.
The interest-only fiasco will play out over the next 20 years or so, with peaks in 2017/18, 2027/28 and 2032. The point of the FCA’s warning is to give lenders and borrowers a wake-up call to act now to organise their finances and mitigate the problems over the long term.
The Council of Mortgage Lenders (CML) says its members will be contacting borrowers who are at risk and it has worked with the Money Advice Service on a practical action plan on options such as remortgaging and switching to a repayment mortgage.
Hopefully those efforts, plus much stricter controls on interest-only lending from next year, will help prevent some of the worst problems. The bigger question though is what happens to the people who still cannot repay their mortgage.
Some may be struggling so much that they may not make it to the end of their 25-year term – even though lenders are desperate to avoid repossessing people. Others may make it to the end and still have no way to pay back the original sum they borrowed. In the 80s and 90s that might not have been a problem because high inflation would have shrunk the debt in real terms but that no longer applies in the low inflation environment of the last few years.
So what happens then? Presumably the lender would repossess the house and get back an asset almost certainly worth more than the amount that was borrowed 25 years before. It may not be much compensation to the former owner losing their home but they will have enjoyed 25 years living in it and probably have paid less in mortgage interest than they would have done in rent.
The repossessed owner may apply as homeless, triggering immediate costs for their local authority. Or they may simply move into rented accommodation when they are close to retirement, storing up a long-term liability for housing benefit on top of the huge bill that is already coming from the fall in home ownership.
And so ultimately the taxpayer will be left picking up the bill for the lax lending that inflated the housing boom. It’s not just lenders and borrowers who need a wake-up call but the government too.
The plight of families with children highlighted in a report from Shelter illustrates yet again why private renting in England so urgently needs reform.
If the experiences of tenants facing damp and disrepair and soaring rents are depressingly familiar, the report adds detail to what has become a way of life for the one in five families with children who now rent their home privately.
The insecurity inherent in short-term tenancies means that one in 10 of 4,000 families surveyed have had to change their children’s school as a result of moving. They were nine times as likely to have moved in the last year as families who own their own homes.
While 44 per cent of parents feel their children would have a better childhood if they had more stability in their home, less than 10 per cent said they valued the freedom and flexibility that renting gives them.
The report quotes the case of Helen, who has lived in nine different houses with her family since her eight-year-old daughter was born. The daughter has already moved school once and now they face moving again because the landlord has stopped paying the mortgage and there are no other rentals available nearby. Helen now has two other children at school but the chances of placing all three children in the same school are very unlikely.
Add cases of sudden rent rises, rip-off letting agent fees, losing your home for complaining about disrepair and the everyday struggle of affording the rent and you have millions of people crying out for more stability but unable to afford to buy or stuck on the waiting list for social housing.
Shelter is promoting a stable rental contract that would ‘give renters five years in their home during which they could not be evicted without good reason’ and a guarantee that rents would rise by no more than CPI during the five years. Renters would be able to give two months’ notice to end the tenancy at any point but landlords would have the right to end the tenancy if they sell the property.
As I blogged on Friday, there are signs that some small things are starting to improve for private renters including some (limited) action at last from the government on letting agents and a pledge by Genesis, one of several housing associations expanding into private renting, to offer tenancies of up to five years with yearly agreed rent increases.
On Monday, Labour published an alternative Queen’s Speech including a Housing Bill to tackle problems in the private rented sector. As well as a national register of landlords and action to tackle ‘rip-off letting agents’ this would ‘seek to give greater security to families who rent and remove the barriers that stand in the way of longer term tenancies’.
One of the biggest barriers is the way that buy-to-let mortgage lenders insist on assured shortholds, giving landlords no choice but to offer six or 12-month tenancies even where they can see the benefits of having longer-term more secure tenants.
However, another is landlord attitudes. While landlord organisations have not rejected Shelter’s idea out of hand even the most sympathetic have doubts about how it would work in practice. The least sympathetic will see restricting rent increases to CPI inflation as a form of rent control and complain that they will not have enough remedies if things go wrong. Longer-term tenancies may work very well in other countries but, as Alex Marsh argues on his blog:
‘Just because German landlords will happily offer multi-year tenancies with built in inflationary uplift doesn’t mean British landlords will do the same, if they consider it their God-given right to extract as much money from tenants as they can get away with and dispose of their property at short notice as they see fit.’
This is perhaps where housing associations - and institutional investors - could take a lead. The funding of their schemes should mean they are free from the restrictions imposed by buy-to-let lenders and they ought to welcome the reduction in voids and management costs that should come with longer-term tenancies. However, are their new-build schemes more likely to be aimed at young professionals rather than families with children?
If it chose, the government could do more too. It could encourage longer-term tenancies as part of its build to rent guarantee programme and it still owns a sizeable stake in two of the biggest mortgage lenders. However, this response from the DCLG to the Shelter report hardly suggests that action is imminent:
‘There is no legal barrier to long-term tenancies. However, restrictive laws making this compulsory would mean fewer homes to rent, less choice and higher rents. With 75 per cent of tenants moving out of choice, and only nine per cent of tenancies ended by the landlord, we are determined to do all we can to help tenants and landlords get a fair deal in a way that doesn’t jeopardize that flexibility or strangle the industry in red tape.’
So change is clearly going to take time but in that time the rise and rise of private renting will continue and so too will the number of families with children in insecure tenancies and uncertain schooling. As Shelter says, private renting was never intended to be a long-term home for families with children. It has become so by default while offering little of the stability that most of us take for granted in a ‘home’. Today’s report is just the start of its 9 Million Renters campaign.
So can the Quiet Man with missionary zeal really deliver on the universal credit?
The policy regarded as (depending on your point of view) flagship reform or slow-motion train crash, started in a low-key way in Ashton-under-Lyne on Monday. So low key that, according to the Guardian, nobody turned up for help on the first day.
However, the internal battles over it revealed in Rachel Sylvester’s column in today’s Times (here for those with access) were anything but low key. She describes how Iain Duncan Smith battled with civil servants, the Treasury and Downing Street to secure what he sees as a moral mission of ‘changing people’. One government source told her:
‘IDS has been an incredibly good minister and really determined to get this reform through, but he has been banging his head against official intransigence, lack of will and at times deception.’
Among the revelations (new to me at any rate):
- The cabinet secretary Sir Jeremy Heywood waved around ‘blood-curdling warnings’ from the security services of the risk to public order if the system failed and benefits were not paid on time
- The Treasury tried to kill it off with delaying tactics
- IDS lost his temper when he heard a member of his team being berated by the Treasury. He apparently picked up the phone and shouted down the line: ‘If you ever speak to my officials like that again I’ll bite your balls off and send them to you in a box’.
- IDS cancelled the pass giving the official responsible for welfare at the No 10 Policy Unit access to his department.
In Sylvester’s take on the universal credit, IDS is very much the upstanding hero and an example for David Cameron: ‘The prime minister needs to discover a similar missionary zeal.’ Paul Goodman has more on this plus an accusation that civil servants ‘lied’ to Duncan Smith at Conservative Home.
Of course it’s still possible that IDS will be proved right and the civil servants wrong. To me, though, this kind of moralising and the rows behind the scenes do not bode well for implementation.
The same moral overtones were evident in an interview that IDS gave to the Telegraph over the weekend. It was interesting that he identified the ‘big cultural change’ at the heart of the universal credit not as simplicity, transparency or making work pay but as the ‘claim of commitment’ that claimants will have to sign pledging to make themselves available for work, go to interviews, take the first job that becomes available and ‘work hard’.
That conditionality – which will apply for the first time to people working part-time who will have a responsibility to look for extra hours – will be backed by sanctions that could include losing your benefit for up to three years. According to IDS:
‘People will know from day one, for the first time ever, what’s expected of them. They’ll have a sheet of paper which is their contract…. We want to say to people, you’re claiming unemployment benefit but you’re actually in work paid for by the state: you’re in work to find work. That’s your job from now on: to find work.’
Exactly how quickly the universal credit moves from a few hundred of the simplest cases in one town in Lancashire to apply to everyone remains to be seen. It seems a fair bet that the supposed start of the universal credit proper in October will be put back to allow the pathfinders and pilots more time. That could be taken as a perfectly sensible way of avoiding a repeat of the problems with big-bang changes to housing benefit in the 1980s but for the zeal with which IDS embraces each new delay as proof that he was right all along.
In the meantime there are any number of practical concerns about the new credit. On a technical level, will it work at all given the government’s dismal track record with major IT projects? Is it a good idea to introduce such a major change to ‘make work pay’ at a time when there is so little work around?
Even if the answer to both of those questions is yes, there are more practical worries. As a briefing by the Social Market Foundation explains, it will create losers as well as winners, it will improve work incentives for some but worsen them for others and there are concerns about how it will interact with council tax support and free school meals. Put that way you have to wonder whether the net change in culture will really be as great as is being made out.
Even if it is, there are major concerns about how it will be administered: the impact of paying it monthly, paying it to a single member of the household and dealing with all claims online. And then there is the major concern for landlords and tenants: the payment of the housing element direct to the tenant except in the case of ill-defined ‘vulnerable’ claimants. The evidence from the direct payment pathfinders so far suggests that an increase in rent arrears and evictions is inevitable.
All of these – plus the advisability of introducing such a huge change in the middle of a recession – are practical policy considerations that were no doubt raised by some of the civil servants that IDS saw as so obstructive. For housing organisations, they will be matched by a long-term worry that once housing costs are paid out through one credit it will become much easier to detach them from the rents that tenants actually pay. Meanwhile direct payment will mean that any cut to any element of the universal credit will mean potential rent arrears.
Finally, however, I wonder what the end result of all that cultural change will be. IDS seems to believe that the layabouts and scroungers will rediscover their moral purpose and work ethic – and that the lessons he learned on the Road to Easterhouse mean he will save them from themselves and a life of benefit dependency.
But things may look very different to the potential converts. The conditionality and sanctions attached to the universal credit mean there will be a risk of many people being denied part or all of their benefit for months or even years. What will the long-term impact of that be on tenants, communities and landlords?
The original missionaries of the 19th and early 20th centuries went out to Africa and China filled with religious conviction that there were souls to be converted and saved and free from any doubts that what they were doing might be morally dubious.
As 21st century claimants await their salvation, is it too much to hope for a little more administrative and IT expertise and competence and a little less missionary zeal?
Things are slowly changing for the better for tenants in the private rented sector. It’s about time.
A series of small but significant things have happened over the last couple of weeks that suggest that even the government is waking up to the fact that it cannot continue to leave customers of a multi-billion pound industry to fend for themselves.
Ever since 1988, when the Thatcher government deregulated the sector and introduced assured shorthold tenancies, the orthodoxy has been that government should keep out of private renting. That continued largely unchanged under Labour. Some modest changes proposed in the Rugg Review, including regulation of letting agents, were overtaken by the 2010 election and then airily dismissed as ‘red tape’ by former housing minister Grant Shapps:
‘With the vast majority of England’s three million private tenants happy with the service they receive, I am satisfied that the current system strikes the right balance between the rights and responsibilities of tenants and landlords. So today I make a promise to good landlords across the country: the Government has no plans to create any burdensome red tape and bureaucracy, so you are able to continue providing a service to your tenants.’
However, as the sector (and the housing benefit bill) continued its rapid expansion that position looked increasingly untenable. The case for more protection for tenants was being made not just by the usual suspects but by trade organisations like the RICS and British Property Federation (BPF). The Communities and Local Government committee is in the middle of an inquiry on the sector. The Labour Party toughened its position. And a report from the Office of Fair Trading in February highlighted a growing number of consumer complaints.
However, while the government has done plenty on investment in private renting and new supply, ministers continued to resist greater protection for tenants, arguing that existing regulations are enough. That all changed earlier this month when the House of Lords passed an amendment to the Enterprise and Regulatory Reform Bill extending consumer protection against estate agents to letting and managing agents as well. For more on the background on all this, see this House of Commons Library briefing note.
The government overturned the vote in the Commons but introduced its own amendment requiring letting and managing agents to sign up to a recognised ombudsman scheme to give tenants and landlords access to a complaints system. It’s a modest proposal that does not go far enough for reputable agents and the RICS and BPF, let alone tenants, but it still a major shift on the ‘no more red tape’ position adopted by Shapps.
(I should add that I am talking about England here. Scotland already has tighter regulation, for example on letting agent fees, while Wales is poised to implement a system based on the Rugg proposals and reform tenancies based on Law Commission recommendations.)
This week saw another positive development when Genesis, one of several housing associations that are expanding into private renting, announced plans to offer tenancies of up to five years with yearly agreed rent increases. It may be only one landlord but that’s a major step forward on the private rented norm of six-month tenancies and unpredictable rent hikes. As Robbie de Santos blogs for Shelter, stable renting and longer tenancies are the future – and that should start with the 10,000 homes that will be built under the £1 billion build to rent fund too
With London rents rising eight times faster than wages to reach yet another record high, the pressure for change can only grow. Good landlords and agents understand this and know that a more stable industry that treats its customers better can be good for them too. They also know that if change does not come, or does not come fast enough, support for more radical options will increase.
For one example of that, see Labour MP Jeremy Corbyn’s Regulation of the Private Rented Sector Bill that is due for a second reading debate in the Commons today. As a private members bill not supported by the government it stands little chance of becoming law but his agenda of secure five-year tenancies, fair rents and greater protection for tenants is gaining in support.
For another example, see the day of action against high rents and letting agent fees planned by tenants themselves in London tomorrow. For more information on a singalong in Herne Hill, community housing inspections in Haringey and Brixton and a Monopoly-themed tour of letting agents at The Angel, Islington see the Let Down blog.
The changes in the private rented sector may be minor so far but as tenants get more organised there are at last things apart from their rents that are starting to look up.
So it turns out that the Daily Mash has the answer to the housing crisis: build more bungalows but make them stackable.
As ever, Policy Exchange has succeeded in identifying a problem – the distribution of housing between old and young - and coming up with a media-friendly solution that sees planning as the villain of the piece. The ‘return of the bungalow’ for elderly downsizers has duly made all the headlines this week.
The problem with bungalows – and the reason why so few are now built - is that they don’t make financial sense in areas with high land prices where the affordability crisis is most acute. No housebuilder or housing association in their right mind would use scarce and expensive land in such an inefficient way. Existing bungalows tend to cost more than bigger terraced homes but only because of the potential to knock them down and redevelop their large plots. As the RIBA revealed yesterday, the average new-build one-bedroom home is now not the size of a spacious bungalow with a garden but of a London tube train carriage.
For Policy Exchange the cost of land – and the size of homes - is the result of the restrictive planning system introduced in 1947. So why not remove the restrictions and give more say to local communities but give them an incentive to approve new development because it’s what people want, in this case bungalows? If only it was so simple. Land ownership and taxation may just come into the equation (as Winston Churchill was arguing long before 1947) and planning is a way of making decisions about land use in a democratic society.
It reminds me of a plan put forward by Alfred Sherman of the Centre for Policy Studies, the think tank that was as much a favourite of Margaret Thatcher in the 1980s as Policy Exchange is of David Cameron now. Sherman wanted to concrete over the Birmingham to London Marylebone train line and turn it into a motorway. Only when cartoons appeared suggesting that perhaps the cars could be coupled together so that you only needed one driver did the full lunacy of the idea become clear. For coupled cars, think stacked bungalows (though, to its credit, Policy Exchange tweeted the Daily Mash link). In housing, as in transport, the free market and deregulation cannot solve everything.
However, all the publicity about bungalows has drawn attention to the vital issue of housing and inter-generational fairness. This is addressed both by Policy Exchange and the Fabian Society in think pieces for Hanover Housing’s 50th birthday debate. Another eight think tanks are due to publish their thoughts over the next two months.
Policy Exchange sets a scene in which home ownership is expanding among the elderly and shrinking among the young, who can only afford to buy with help from homeowning family. Housing wealth is fuelling inequality that is ‘dangerous both politically and economically above a certain level’. That is as much a concern for the right – because ‘it destroys the aspiration and opportunity that provide the moral backbone of Tory thought’ – as it is for the left.
This is far more than just a housing problem. Policy Exchange argues that high house prices could be driving a brain drain of the brightest young people from Britain even as it discourages the brightest coming from abroad to work here. In the end, the result could be ‘social and economic disaster’.
The solution, it argues, could be ‘a grand bargain’ housing. Much of this is familiar from countless other PX reports that have argued for liberalising the ‘dysfunctional planning system’ to allow enough new homes to be built to bring down, or at least stabilise, house prices. That means dealing with ‘the local issues that make reasonable people into NIMBYs’. Why not build the bungalows that elderly people tell opinion polls they like to enable them to downsize from their 25 million spare bedrooms?
The Fabians also call for a ‘grand bargain’ though theirs is based on tax as well as new homes and is much more connected to the debate about austerity and the way that pensioners have been protected from cuts so far. Governments should pursue policies to meet an affordability target for first homes, they argue, including increasing supply and taxing property wealth to suppress rises in asset prices. Options might include a land value tax or replacing council tax with an annual property tax that could be a charge against the property of older households but only payable when they sell.
Despite the obvious precedent of the bedroom tax politicians of all parties are likely to view that with some caution given that older people are more likely to vote than the young and that they grey vote is rising as a proportion of the electorate. However, to go with that stick, the Fabians say better options for downsizing need to be developed to provide homes that people want to move to. That might mean better models of equity release or housing providers developing new models for homeowners in mixed tenure communities.
As the population ages and home ownership continues to shrink among younger people, the issues raised in the two reports are only going to grow in importance. Some of them will be highly controversial (as coverage of a report by the Intergenerational Foundation showed in 2011) but there are already proposals out there for what to do next. See the Housing our Ageing Population: Panel for Innovation (HAPPI) report from 2009 and the update on progress on that from Lord Best’s All-Party Parliamentary Group on Housing and Care published in February. That showed how good design can challenge preconceptions of housing for older people and deliver homes that they want but also highlighted the financial insecurities that are hampering progress.
Solutions are required urgently and Hanover, Policy Exchange and the Fabians have given new impetus to the debate. If bungalows achieve nothing else at least they have got people talking.
It’s hard to remember a more damning select committee report than the one just published on Help to Buy – and it has not even started yet.
You don’t even have to read between the lines of the Treasury committee report on the Budget to detect its doubts about a policy announced by chancellor George Osborne last month. It leaves him with a string of questions about how it will work and a list of concerns about unintended consequences.
The critical report will only add to wider concern about Help to Buy. Even before its launch home sellers already seem to be raising their asking prices, analysts say housebuilding shares are set for further gains and wealthy and even foreign home buyers are looking into how they can take advantage. As Alex Marsh points out on his blog, it’s never a good sign when the only people supporting a policy are those that stand to benefit from it (in this case housebuilders and mortgage lenders).
Government intervention in the housing market is nothing new of course. In the UK, mortgage interest tax relief subsidised home owners right up to 2000 and most previous governments have introduced limited schemes to support ownership. However, the Help to Buy equity loan and mortgage guarantee schemes will be worth £15.5 billion over three years from January 2014. That step change in scale has led many to compare them to the American institutions Fannie Mae and Freddie Mac, which both had to be bailed out by the government after the financial crisis. For more on the UK/US comparison, see this piece by Jim Pickard in the Financial Times.
A key concern for the committee is that – as in the United States - the government will find it very hard to get out of Help to Buy once it has started. Any extension will require the approval of the Bank of England’s new Financial Policy Committee (FPC) but, as the all-party committee of MPs points out, even raising that as a possibility creates an element of doubt about the temporary nature of the scheme. They say ‘it is not clear that, given its remit, the FPC is best-placed to take this decision, nor that the decision should be out-sourced at all’.
Osborne’s justification for the mortgage guarantee scheme is that it ‘corrects a market failure’: the reduction in high loan-to-value mortgage lending and associated reduction in the number of first-time buyers. The MPs directly contradict that:
‘Our concern is that, should the current scarcity of high loan-to-value mortgages reflect structural rather than cyclical factors, the pressure for Government to extend the scheme in three years time will be immense. The unintended and unwelcome outcome could well be that a scheme designed to deal with a supposedly temporary problem in the UK housing market becomes a permanent feature of the UK housing market.’
They express doubts both about the principle of the scheme and the mechanism that is meant to cover the taxpayer for losses:
‘The appropriateness of the taxpayer amassing contingent liabilities in this way needs careful scrutiny. The Chancellor says that expected losses under the scheme will be covered by the commercial fee charged to participating lenders. No details of the proposed level of the fee nor how it will be structured in practice are yet available. Nor has a date been given.’
And they are worried too about the impact of the government becoming ‘an active player in the mortgage market’. Politically and economically, ‘the committee is concerned that the Treasury now has a financial interest in maintaining house prices to limit losses to the taxpayer.’ Financially:
‘There is a risk that if mortgage lenders begin to exercise reduced levels of forbearance, repossessions may rise and house prices subsequently be lower than they would otherwise. If this happened, and unless this risk was fully priced into the fee, then the Treasury could end up facing large losses on those mortgages it has guaranteed.’
In terms of the housing market impact, much depends on whether you believe that house prices are over-valued. If so, the scheme may just increase demand at a time when supply is constrained and boost house prices. As the committee puts it:
‘It is by no means clear that a scheme, whose primary outcome may be to support house prices, will ultimately be in the interests of first time buyers. This is the group the Government says it wants to help.’
The MPs are also severely sceptical about the claim by Osborne that Help to Buy will boost the supply of new homes. The chancellor told them that ‘the positive reaction from the builders suggests that this will happen’ and that boosting mortgage demand would generate a supply response. However, the report goes on:
‘The committee finds the Chancellor’s assertion that increased demand for home ownership and rising prices, resulting from the mortgage guarantee scheme, will trigger a corresponding supply response, unconvincing, at least for the short term. In the longer-term there may be an effect. This would be likely in a well-functioning market. However, the housing market contains severe supply constraints… Overall, though, if the Government’s priority was housing supply, its housing measures should have concentrated there.’
Meanwhile it is still not clear whether the mortgage guarantee element will be open to owners of second homes or not. Osborne told the committee that he did not want to rule out ‘cases where people have two mortgages, not because they want a second home but because their family is breaking up, they are moving job’. In a damning verdict both for him and for Treasury civil servants, the committee says this lack of clarity ‘is a reflection of the need to think schemes through carefully before announcing them’. They argue:
‘We struggle to see the rationale for the taxpayer to stand behind loans for people wishing to own a second property, especially given that the Chancellor has repeatedly stated that the scheme is primarily designed to help people onto the property ladder as well as those who wish to move property.’
Damning select committee reports on the failure of government policies are nothing new. What makes this one different is not so much that it comes from a committee chaired by a Conservative MP (Andrew Tyrie) but that it is being published before the policy has even been implemented. Normally committees publish reports on fiascos after the event but Help to Buy is barely off the drawing board.
However, that is perhaps the point. The housing section of the report ends with 17 ‘questions that require answers to allay concerns that the scheme may have unintended and unwelcome consequences’. Questions such as the impact on house prices, the likely supply response and the level of the fee to be paid to be lenders are all ones that you might reasonably have expected the Treasury to ask – and answer – before it announced the policy. That the committee is raising them at all speaks volumes about its confidence in Help to Buy.
There are many other questions that could be asked too. For example, why is the government replacing schemes reserved for first-time buyers (FirstBuy) and new-build homes (NewBuy) with ones that are available to anyone if its supposed priorities are people trying to get on the housing ladder and new supply? And why has it suddenly decided to take on all of the risk of the mortgage guarantee when under NewBuy it was shared with housebuilders? Say what you like about those previous policies but at least they targeted the help where the government believed it was needed rather than giving a boost to the entire market.
However, perhaps it is wrong to judge Help to Buy as a housing policy at all. Regardless of the long-term consequences for house prices and the dangers of too much government involvement, every additional home sale after January 2014 generates more consumer spending and creates a satisfied buyer and seller. An improving economy by, say, May 2015 is just what the government needs politically. That is surely the point for George Osborne.