Britain is home to an increasingly dysfunctional housing market. The risk is that a chancellor trying to lay the foundations for a 2015 election victory will struggle to find the balance between the short and long-term priorities needed to deliver a solution.
This year’s budget is a critical milestone on the road to the European elections, the Scottish Referendum and primarily next year’s general election. It is an opportunity to signal intent to the markets and the voters and a chance to put specific policies on a better track. With the housing market such a critical economic and political consideration in George Osborne’s calculations this week it’s no surprise it formed the centrepiece of his weekend media rounds. But what might he do and, perhaps more importantly, what should he do?
After a lengthy downturn, house prices, lending and building are all on the rise in a highly regionalised housing market dominated by unique, unaffordable London. Interest rates remain historically low and important interventions such as Help to Buy are stimulating the demand-side of the market.
At a more structural level, the UK cannot build enough houses to meet demand or social need, public resources for housing and infrastructure are highly constrained, and frustrated would-be home-owners are contributing to a growing (and normalising) rental market. A dysfunctional housing market has wider implications by distorting our understanding of the economic recovery, frustrating labour mobility and reinforcing inequality through the inter-generational transfer of wealth.
Many analysts would argue that, in order to combat these challenges, we need a settled housing system with stable long-term real house prices, a vibrant rental market with institutional investment and a focus on delivering more affordable housing and support for those on low incomes. But housing policy is too often driven by short-run electoral considerations. It can come down to a pretty simple sum: are the insiders who feel wealthier from rising house prices or able to access help-to-buy opportunities more important politically than those who lose out from shortage and rising prices? They probably are.
What do we know so far? This weekend the chancellor has stated that Help to Buy One – equity loans for new build - are to be maintained until 2020. This intervention is a de facto interest-free loan for five years worth up to 20% of the value of the property and is a major fillip to the new build sector. Osborne has also (re-)announced the ten year plan to develop a garden city new town at Ebbsfleet involving an initial 15,000 homes. Further new towns are also possible.
The Help to Buy policy can be interpreted in different ways but I think is best conceived as a recognition that supporting the new build market is the least bad option economically for an essentially political choice being made by the Treasury. It probably also suggests that the days of the untargeted and inflationary Help to Buy Two are numbered.
The Ebbsfleet proposal would make a modest but welcome contribution to new supply in the South East in the long term. As part of a wider programme of well-planned sustainable communities, this may help address the supply deficit, or at least be part of the solution, but it is a long term response to an immediate crisis.
What else might be in the red box? Widely discussed in recent months have been a national mansion tax on high value properties and also a tax on housing speculation aimed at foreign investors. The latter, widely discussed in the autumn, may be more likely than the former, if not at this budget. The Bank of England has also tentatively floated ideas about intervening to stabilise the housing market on the demand side – we may hear more about these.
Might there be additional resources for new affordable housing? Recent policy in England has led to the provision of state-backed guarantees to reduce the cost of landlord borrowing and two rounds of the affordable rent programme (based on higher rents and also requiring higher rents on a proportion of existing properties to help meet the cost of cutting subsidy). Meanwhile, the focus of the state has to an extent shifted into supporting the new private rental market and there has a been a weakening of the established regime that allowed new affordable/social housing to be constructed when negotiating planning permission for private new supply.
The long game
What might Osborne actually do that would be genuinely useful? First, do more to loosen borrowing caps for councils so they can invest in new housing (like they have done successfully in Scotland) but at the same time reverse or tighten the Right-to-Buy policy (at the very least on newer homes).
Second, in a rising market, government should tighten up the viability test that private developers have been able to use so successfully, reducing significantly the number and proportion of social and affordable units associated with private sector sites with planning permission.
Third, government should consider wider discussion as a statement of intent regarding John Muellbauer’s recent call for a national land bank and also for a clearer discussion on both housing taxation and regional economic policies. This should also be linked to the Mirlees review proposals on systemic tax reform (within which housing and land are pivotal).
Housing policy is a long-term game and fundamentally needs political consensus, as well as buy-in to a wider strategy that can be agreed for, say, ten years. Without this, the danger is of a combination of political short-termism, the increasingly unhelpful unintended consequences of localism and regional imbalance, no end to chronic under-supply and further market volatility.
As we take stock of the details of the budget, that balance between the short and long run will be crucial in discovering where Osborne’s economic, and political, motivations really lie.