A right to own?

Originally posted on June 13 on Inside Edge 2, my blog for Inside Housing

What should we do if we really want to reverse the decline in home ownership?

That’s the question posed in a new book published by centre right think tank Civitas (downloadable here). The answers are interesting and surprising, not just because of where it sits on the political spectrum, but also because the author is a longstanding evangelist for the home owning society and opponent of ‘Marxist’ housing advocates.

Peter Saunders wrote a seminal book called A Nation of Home Owners in 1990 that made a passionate argument for the expansion of home ownership as the choice of most people and as a force for good in promoting community cohesion and civic participation.

As such, you might have thought he’d be completely in tune with David Cameron, George Osborne and Brandon Lewis and their policies to satisfy the 86 per cent of us who want to be home owners.

Except that he’s not. His new book – Restoring a Nation of Home Owners – does not just attack Help to Buy, starter homes and all the other initiatives thrown at the housing market. In the proposal that’s made the headlines so far, he is also an unlikely ally for Jeremy Corbyn in arguing for the extension of the Right to Buy to private renters.

This and other solutions (of which more later) spring from his analysis of why owner-occupation in England has fallen from a peak of 70% in 2000 to just 64% now.

That’s the lowest it’s been since 1986, around the time he was writing his first book in which he forecast that for the first time in its history Britain was on the way to become ‘a genuine property-owning democracy’. His nightmare scenario for the 21st century was of a country divided between contented owners (three-quarters of households) and an ‘underclass’ in council housing (a quarter).

In his new book he argues that analyses that assume that the solution is just to increase the supply of homes miss the point and that the real drivers of the crisis are on the demand side: easy and cheap credit; the growth of buy to let; foreign investment; family transfers of property wealth; and immigration and other demographic changes.

In doing so, I think he misses a key point: that the crisis is of owner-occupation rather than home ownership as such. Perhaps a million people were so inspired by the 1980s vision of a property-owning democracy that he articulated so well that they decided to buy more than one vote by becoming a buy-to-let landlord. There are surely more fundamental issues here about the nature of ownership and treating homes as financial assets.

However, he rightly focuses on the supply of credit as a key reason why house price inflation started to become detached from average earnings from the mid-1990s onwards and why the fourth house price boom since the war (the one from 1995 to 2007) was not followed by a bust like all the others.

Interest rates fell in the wake of inflation targeting and Bank of England independence, then fell to record lows after the financial crisis. Lower mortgage costs have been capitalised into higher house prices, boosted still further by buy to let, which allows landlords to borrow against the incomes of their tenants on top of what they can borrow in their own right.

The result of all this, says Peter Saunders, is profound intergenerational inequality and crisis for the property-owning democracy:

‘Unless something is done now to help today’s under- forties, the declining home ownership rate will be cemented into British society for decades to come. As older people (most of whom own their homes) die off, they will be replaced by a generation whose ownership rate is much lower, and as this cohort moves through the system, the overall owner-occupancy figures will keep dropping.’

The government would argue very strongly that something is being done – but Saunders says it has just been ‘stoking the inflationary fire with a range of initiatives designed to enable even more young people to borrow even more money to pay even higher prices for even more over-valued properties’. Instead, if George Osborne is serious when he says ‘I don’t want to give up on the aspiration of home ownership’, difficult choices need to be made. He advocates five key policies:

1. End all demand-side government subsidies that claim to make ownership more affordable. ‘These policies are not only wasteful of public money; they end up making a bad situation even worse by inflating prices even higher.’
2. Introduce a statutory duty on the Bank of England to keep the ratio of house prices to average earnings within a specified range over the medium term. This would be in addition to its target to keep general inflation to around 2% and would not necessarily mean increasing interest rates. It could instead manipulate lending criteria or the risk weighting attached to mortgages.
3. Extend the Right to Buy to all tenants. Much of the original growth in home ownership came from landlords selling to their tenants and Saunders argues this would be a way to rectify generational inequality. Private tenants would get the Right to Buy at the same discount as council tenants and after the same qualifying period (three years). To stop landlords simply ending their tenancy before three years is up, tenants would have five years’ security of tenure. There would be a cap on discounts to ensure that landlords do not suffer losses and the Right to Buy would be limited to properties at least 25 years old to ensure that investors are not deterred from buying new properties. The policy would be paid for by withdrawing most of the recent tax increases on landlords and concessions on capital gains tax when they sell.
4. Reduce net migration, stop non-UK citizens buying residential property here and return stamp duty to 1997 levels. These obviously depend on the government’s other objectives and its legal competency.
5. Encourage more housebuilding by easing planning controls and compensating residents living close to new developments. However, he stresses that this would only make a limited contribution to delivering lower house prices and increasing home ownership.

These solutions raise a series of problems, some quibbles, some more fundamental: number one would require an epic government u-turn but it wouldn’t be the first; number two sounds great in theory but would one system fit the UK’s many different housing markets; number three would almost certainly face legal challenge by landlords while tenants might feel greater security or rent capping would deliver more and question why their landlords should escape CGT; much of number four depends on EU membership; and many would argue number five is under-played.

And, to my mind, he also misses a crucial sixth point: the potential role of social housing. The current government has reduced it to a piggy bank to raid to pay for its ownership initiatives. If the money saved by scrapping demand subsidies was invested instead in more social housing for rent, we could get more homes and meet housing need but more tenants would also get the chance to do the Right to Buy. Or how about a Rent to Buy programme where tenants pay an affordable rent for five years while they save for a deposit?

However, the package as a whole provides a fascinating answer to the question of what we might do if we were really serious about reversing the decline in home ownership as opposed to protecting the interests of existing owners. It’s not the first report from Civitas to call for a radically different approach and it shows just how much the politics of housing has changed in the 26 years since Margaret Thatcher was prime minister and Saunders published his first book.

As he puts the argument for his most eye-catching proposal:

‘Rather than penalising small landlords by increasing the amount of tax they have to pay, a more positive, more effective and arguably more authentically Conservative strategy for tackling this problem would be to give private tenants a right to purchase their homes.’