Turning tenants into ownersPosted: October 11, 2018
Originally posted on October 11 on my blog for Inside Housing.
For all the government’s new-found enthusiasm for social housing and local authorities, the politics of the housing crisis are still fundamentally about home ownership.
Anyone pleasantly surprised by the change of tune in the green paper will still have found two particularly discordant notes: the convictions that welfare reform is ‘empowering tenants as consumers’ and that social housing should be a ‘springboard to home ownership’.
Housing may have been the dominant issue at fringe meetings at the Conservative party conference but two reports out this week highlight the fact that the frustrated aspirations of young private renters are still the dominant concern.
The new Tory think-tank Onward brought forward publication of a proposal for new tax incentives for landlords to sell to long-term tenants following reports over the weekend that the government is considering it as a new form of Help to Buy.
And a report by the Institute for Fiscal Studies put the problem of frustrated ownership into perspective.
Over the last 20 years owner-occupation among the 25-34s has fallen from 55% to 35%. Their incomes are up by 19% in real terms but rents have risen 38% and house prices 173%.
Onward’s plan relies on interpretation of less-than-comprehensive statistics on capital gains tax and some big assumptions about the state of the private rental market.
It calls for the capital gains tax due on the sale of a rental home (currently charged at 28% to a higher rate taxpayer) to be split between the landlord and tenants who have lived in the home for longer than three years.
Across England, it estimates, this would deliver an average gain of £7,500 to the landlord as incentive to sell and £7,500 to the tenant to use for a deposit, rising to two lots of £19,500 in London.
One big practical problem is the disparity in capital gains on properties bought years ago with those purchased more recently. That means a sale would rely on someone being a tenant for long enough in the right sort of property to benefit and someone else having been a landlord for long enough for selling up to be worth it.
The think-tank suggests that one way round this would be to pay an average credit to each recipient, which it estimates would cost £660m each to landlords and tenants per year.
It remains to be seen whether the Treasury will agree with those sums or that they could be funded by cutting other tax reliefs currently enjoyed by new landlords.
However, if Onward is even half right that 88,000 households could benefit every year – and almost 1m people over five years – it’s not hard to see the attractions for the Conservatives in the sort of urban seats where the votes of young renters have turned against them.
And some historical perspective lends weight to the idea as well. The owner-occupied sector grew by around 15m homes between the First World War and 2008, when the numbers began to decline again.
However, official estimates suggest that only around 60% of that growth came from new building. The remaining 40% – perhaps 6m homes – came from transfers from other tenures.
Of those, around 2m came via the Right to Buy. Before that, though, owner-occupation grew because private landlords, property companies and employers were selling off their rented stock, often to sitting tenants. This is one reason why leasehold ownership is now so prevalent.
The key reasons for the sell-off were that from 1916 until the 1980s, tenants had security of tenure and rents were subject to various forms of rent control.
Reintroducing them now might well be a cheaper way of incentivising 21stcentury landlords to sell up but it will not surprise you to learn that this is not on the Onwards agenda.
Worryingly, perhaps, for private renter campaigners, the plan is also being published as the government considers responses to its consultation on longer tenancies.
The idea of mandatory three-year tenancies made all the headlines at the time but It was only one option in the consultation and reports suggest some backtracking since.
Onward’s plan might provide useful cover as part of an alternative to incentivise landlords to offer them voluntarily.
The IFS report considers both the problem of frustrated ownership and potential solutions to it.
It estimates that 93% of young adults borrowing 4.5 times their salary could buy the cheapest property in their area with a 10% deposit. By 2017 just 61% could.
As the IFS points out, a 10% deposit is far harder to save now than it was then: it represents more than six months’ salary for three out of four young people now compared to one out of three in 1997,
However, it was also more difficult to borrow 4.5 times your salary in 1997. House prices soared up to 2007 as interest rates fell and lending multiples rose way beyond the traditional norm of three times joint income and prices have risen again since the crash as interest rates have fallen even further.
In terms of solutions, the IFS is quick to find downsides in relaxing restrictions on lending (serious risks to borrowers), giving first-time buyers advantages in the market (Help to Buy etc could simply increase prices) and disadvantaging other buyers (increased rents as rental supply falls).
Interestingly, it argues that an increase in the social housing stock would not just mean greater stabllity and security for poorer families but could also lead to lower demand and lower rents in the private rented sector, reduced demand for buy-to-let, and potentially lower house prices and a boost for home ownership.
For the IFS, though, the best solution is remove barriers to private sector construction of homes to be sold at market prices – for example by relaxing planning constraints on green belt areas in the South East. This it argues, would lead to lower prices and lower rents.
Whether the government would go that far – a report over the weekend suggested backing in the Cabinet – remains to be seen but it is the favoured free marketeer solution.
One problem with it is the structure of the land and housebuilding markets – left unreformed, would landowners and developers really reduce their prices or would they simply increase their profits?
Another goes to the heart of the assumption that simply building more is the solution: you do not have to go all the way with the arguments of people like Ian Mulheirn to think that the cost and supply of credit are just as important as the supply of new homes.
The Onwards plan falls firmly under the IFS’s category of advantaging young buyers – but unlike Help to Buy it does so without increasing overall supply.
For those lucky enough to be able to buy, it looks a good deal. For buy-to-let landlords it looks like a good way to exit the market with a lower tax bill.
For private renters who still could not afford to buy, it offers nothing except the prospect of higher rents as supply falls.
For the Conservatives, though, it looks like a great way to bribe the young voters it needs to reach with £1.3 bn a year of taxpayers’ money.