Monopoly money: London Help to BuyPosted: February 4, 2016
Originally posted on February 4 on Inside Edge 2, my blog for Inside Housing
The person who sprang instantly to mind when I saw the promotional material for London Help to Buy on Twitter this week was Lizzie Magie (of whom more later).
The scheme offering 40% equity loans to buyers of new build property in London costing up to £600,000 was first announced in the Spending Review and formally launched this week. Here (thanks to Joe Sarling for drawing my attention to it) is the advert designed for digital media:
— Help to Buy (@helptobuy) February 3, 2016
The Angel, Islington, costs a little bit more than £100 these days and with studio apartments in one new development starting at £715,000 you can forget about building a house for £50 or renting one for £6. But you get the general idea: it seems that you can now get on the property ladder as easily as you can ‘Advance to Mayfair’ or ‘Go Back to Old Kent Road’.
To take the example quoted on the Help to Buy London website, the scheme means you can buy a £400,000 home with a 5% deposit of £20,000 and a 55% mortgage of £220,000. The remaining 40% (£160,000) comes via an equity loan from the government: it’s interest-free for the first five years and you have to pay back 40% of the proceeds when you sell. Essentially, the original Help to Buy has been put on steroids to cope with London house prices.
This may or may not be a good deal for individual buyers. It will make the difference between buying or not buying for some people and it will enable more to buy a bigger or better located home than they could have contemplated before. Mortgage costs will also reflect the low loan-to-value ratio.
However, you still have to find that 5% deposit and not many people have a spare £20,000-£30,000 lying around. After five years you have to pay a fee of 1.75% and that rises annually by RPI plus 1%. And if that sounds like it will mount up, what happens if you want to move? In a rising market, you may not be able to trade up without an even bigger equity loan. In a falling one, you may end up in negative equity, especially when you take the new build premium into account (although you would then have to pay less back to the government).
For the big house builders (and especially their directors and shareholders) this looks like yet more good news. They already rely on Help to Buy for 30-40% of their sales and in addition to Help to Buy London the national scheme has been extended until 2021. A big plus point for the scheme is that it supports new homes. However, the more pessimistic may wonder about the long-term impact of all these equity loan drugs and what will happen if the housing market or the politics suddenly change. The older ones among them may also remember the unhappy consequences when they offered their own equity loans in the 1980s.
For the government, Help to Buy has already offered political dividends at no direct cost to the public purse. If it can succeed in overcoming the misgivings of mortgage lenders about combining different schemes together, buyers could get a 40% equity loan for a home that already has a 20% discount. Provided house prices don’t crash, Help to Buy could make a profit and the loan book could also be privatised at some point.
But what about the rest of us? Taxpayers could make a profit, true, but they could also be on the hook for big losses when a Help to Buy-fuelled bubble bursts. That in itself will give future governments every incentive to ensure that house prices (and Help to Buy loans) carry on rising. All those years of Conservatives arguing that the state has no business owning houses, let alone all those years of them arguing that we need to eliminate subsidies and stop distorting markets, have gone out of the window in the name of the property-owning democracy.
And for the millions of people who still cannot afford to get on to the housing ladder, this promises to make things even worse. It’s hard to see how Help to Buy London will not fuel inflation in the prices of houses and land; it will enable many people to buy a more expensive home than they could previously have afforded and reinforce existing incentives to spend as much as possible in the hope of greater profit.
Joe had a very good take on the issues in his blog immediately after the Spending Review. A poll by Shelter reported in the Standard revealed the scale of people’s fears of being priced out of London.
And two other reports this week highlight the context and what else is at stake.
Savills found that even if (a big if) the government succeeds in building 400,000 affordable homes for sale in this parliament, that property-owning democracy will carry on shrinking. Demand for renting will carry on growing by 220,000 households a year – and thanks to the Housing and Planning Bill and Starter Homes, genuinely affordable renting will be shrinking at the same time.
And Angus Armstrong argues in the National Institute Economic Review that fundamental reforms are needed to address the failure of the UK housing market to deliver decent homes for all, and especially for younger people. He argues that the two big priorities for reform are taxation (capital gains tax to dampen house price cycles) and the housing finance system (funding mortgages from long-term sources of finance). Unfortunately, we seem to be moving in the opposite direction, especially on tax.
And that’s where Lizzie Magie comes in to round off this blog. In 1903 she invented what she called The Landlord’s Game. She was an ardent follower of the economist Henry George, who argued for a land tax to enable everyone to profit from land use rather than landowners and monopolists.
In Lizzie Magie’s game, players moved around a board buying property. There were two versions. In the first the players co-operated with each other for the benefit of all. In the second, one player ended up owning everything and all the others were bankrupted. Her game was especially popular among Quakers in Atlantic City, who added their home town’s street names to the board.
This was of course pretty much the game that went on to become world-famous when Monopoly was ‘invented’ by Charles Darrow in the 1930s, except that the whole point became to own all the property on the board.
The Quaker idea of using everyday household objects as pieces in the game also survived in Monopoly and, it turns out, in digital advertising for Help to Buy London for which the old boot seems only too appropriate. Because, as Lizzie Magie would have known only too well, the ultimate winners are always the people who already own houses and land.