House prices are continuing to rise, and today it was announced that the rises are projected to be in the order of 6% for 2007. If you are looking to sell you house, this is A Very Good Thing. It means you will get more than what you bought the house for.
For the rest of us poor schmuks who are looking to buy however, this is A Very Bad Thing. I live in London. My wife and I both earn above the national average. For a typical 3.5 times gross salary mortgage, we couldn’t afford to buy in London, which is where we work. We could just about afford it on the 5 times salary mortgage that some banks have recently announced, but we wouldn’t be able to afford the repayments. So we rent. Dead money, going to someone else.
First time buyers are (apparently) the lifeblood of the property market, and yet it is increasingly difficult for them to get on the property ladder. The average age of the first time buyer is increasing. More and more people are buying in partnership with other people (if you fall out with flatmates you can move, but what if you co-own?).
We are told that this is merely market forces at work, which is partly true, but the people who argue that the market is best left to deal with this make two contradictory claims. Firstly they say house prices are high because demand for housing is high, whereas supply is low. This obscures the fact that the demand is high because people who want to buy a house are having to compete against people who already own multiple properties. This introduces competitors in the market who weren’t there previously, competitors who are well-financed, since they can borrow off the equity of the properties they already own to buy new properties, whereas first time buyers can only offer 3.5 times their salary. Demand is kept artificially high by people who can compete on unfair terms. Once again, free market theory makes predictions assuming everyone is starting from the same position, ignoring the reality on the ground.
The second argument made by those who say the market should be left to sort itself out through market forces alone, is that the demand is not for owned property, but for rent. Firstly, this should, by the law of market forces, cause a decline in house prices. Secondly, it is not a true demand. People are not renting because they want to, but because it is all they can afford, and sometimes not even that!
Rising prices are steadily squeezing normal buyers out of the market. I now, in rent alone, pay more in London than my brother pays in mortgage, council tax, buildings insurance and contents insurance combined.
So what can be done. Quite simply, there needs to be a crash in the housing market, and it needs to be provoked by Government, not the market. House prices can, in fact, continue to rise almost indefinitely, as the boom no longer relates to supply and demand but to the property developers who can leverage their portfolios towards purchasing more property.
How to do this? Firstly, artificially skew the rental market in favour of the tenant. Pass legislation that forces landlords to pay the council tax bill, all utilities bills, and contents insurance of all tenants. This cannot be passed on to the rent, and independent assessments can be made to determine whether a landlord has increased the rent to accommodate council tax and insurance. This should be enough to discourage those who wish to purchase one or two properties “as a nest egg”. Landlord’s with wider portfolio’s should be able to accommodate this extra cost, possibly by selling a few properties (more of which below). Market forces should then decrease the number of speculative property investors beginning to dip a toe into the market, increasing the number of properties available to private buyers.
Secondly, stamp duty land tax needs to be dealt with. SDLT should be abolished for all first time buyers, regardless of the value of the property. For a landlord who wishes to sell a property, if they sell to a private owner who intends to live there, then stamp duty is at 0%. For a landlord who wishes to purchase property, if they buy from a private owner then the SDLT charge is doubled, and the landlord must also pay the SDLT for the private seller’s new home. If the Landlord purchases a property from another landlord, then normal rates of SDLT apply. Moreover, SDLT rates should be revalued to reflect the current relative increases in property value.
Thirdly, make it economically attractive to landlords to sell to private buyers. By skewing the market in favour of the tenant, landlords are punished fiscally. A scheme that allows a tenant to purchase the home they rent could be introduced. If the property is mortgaged, the mortgage could be transferred to the tenant, along with ownership. The landlord would then no longer have to make payments, no longer be liable, and moreover not have to pay council tax, buildings and contents insurance and utilities for the tenant.
If the landlord owns the building outright, then a quasi-mortgage relationship could be set up. An amount (independently assessed) based on length of time the tenant has been there, length of time the landlord has owned the building etc could be determined. That then becomes the mortgage amount owed to former landlord, in return for transfer of ownership. Again, the landlord would no longer be liable for buildings or contents insurance, utilities bills or council tax. The quasi-mortgage payment amount would be (say, for sake of argument) 80% of the previous monthly rent. The tenant saves money on the monthly payments for their home (but now has to pay other expenses). The landlord receives less money per month (but has fewer outgoings for it). The quasi-mortgage would be interest free, allowing a definite final payment date to be determined. As a tax incentive, this payment to the landlord would be free from income tax and capital gains tax deductions.
What effect would this have? Hopefully it would make the financial burden on tenant’s less, so they could better afford to save up for a deposit. It would make becoming a landlord burdensome, and dissuade the new wave of “get rich from the property ladder, as seen on TV” investors. It provides relief (or at least no greater expense) to the private purchaser, by removing or reducing the cost of SDLT. And overall it might cause house prices to come down to more realistic levels.
I can already hear the Daily Mail screaming in outrage, and banging on about negative equity. In some respects I can understand that, but if you can afford to make your mortgage payments now, why can you no longer afford to if the value of your home falls? You still owe the bank the same amount, and your wage is not linked to the value of your home. The only people it might affect would be those on the cusp of moving who hope that the selling price will clear the last of their mortgage. But it has always been a risk that property values can go down as well as up. Those who laud the free market ought not to complain when it operates against them (as it so often will). And for those who say that this would not be natural market forces, but artificial ones imposed by government, well they have profited long enough through artificial market forces that have artificially increased the price of houses across the country.
Not that I’m in a position to cause any of this, nor do I know what chaos this will unleash, but it is an interesting thought.
