Austerity all over again

Originally published as a column for Inside Housing.

Austerity is back. The mess left by Liz Truss and Kwasi Kwarteng will have to be cleaned up, constraining the options for Rishi Sunak and for whoever wins the next general election.

But there is nothing that says Austerity 2.0 has to be a repeat of the 2010s. Treasury orthodoxy is in charge again but there are always political choices.

David Cameron and George Osborne chose to prioritise cuts in public services and benefits over tax rises but that will be more difficult for a prime minister taking office at a time when those services are collapsing and benefits are already close to destitution levels.

And there is one more crucial difference this time around: in the 2010s austerity was accompanied by record low interest rates that slashed mortgage payments for millions of home owners and buy-to-let landlords.

The benefits flowing to anyone with a mortgage – and to existing owners as house prices rose – help to explain why the Conservatives have won four elections in a row. 

But Austerity 2.0 arrives just as mortgage rates are rising and just as the prospects of a housing market downturn are shifting from likely to inevitable.

This has to be put in perspective – house prices are still rising and even a 20 per cent fall would only take them back to where they were at the start of the pandemic.

And even a crash need not turn into a repeat of the early 1990s, when rising rates and falling prices were accompanied by surging arrears, repossessions and negative equity.

Far more borrowers are on fixed-term mortgages now than back then and, though those deals will expire, rising rates will not impact all at once.

And mortgage financing is different too: banks rely more on wholesale financing now and that gives them more scope to help borrowers by, for example, extending their mortgage terms, than they had in the 1990s.

They may also have learned the lesson that mass repossessions are bad for business and, by happy coincidence, longer mortgages also mean higher profits.

But there will still be electoral consequences for the Conservatives as mortgage rises hit home and there will also be serious implications for growth.

Analysts are already pencilling big falls in housing starts and completions as builders react to a downturn by slowing down construction and the opening of new sites.

All of which suggests that the new government could soon need a package of support for home building (affordable housing as well as for sale) and perhaps even on the scale of the one that rescued the industry after the financial crisis. Let’s hope that this time around that there is some quo to go with the quid.

Back with austerity, on the spending side of the ledger the choices are depressingly familiar.

Many Conservative MPs say they will not support breaking the link between benefits and prices – but that did not stop them backing exactly that through most of the last decade.

While the political attention focuses on benefit uprating, important decisions are also looming on whether to continue the freezes in local housing allowance and the benefit cap.

Arguments that all of these will increase homelessness, and therefore overall costs, will have to be made loudly and clearly if they are to be heard.

As in the 2010s, capital spending will be another soft target, leaving the Affordable Homes Programme vulnerable where funds have not already been committed – and this at a time when inflation has already badly eroded grant in real terms.

At the same time, what little we know of Rishi Sunak’s thinking on housing from the previous leadership contest suggests that he is strongly in favour of shifting the balance of the programme from social housing to ownership in a manner that sounds familiar from austerity As I’m writing this on Tuesday afternoon, Simon Clarke has just been sacked as levelling up secretary and the identity of his successor will provide more pointers for the future. [The appointment of Michael Gove will be taken as a positive sign but he will be operating under new financial constraints.]

On the tax side of the ledger, we have already seen most of the Kamikwazi budget cancelled but there are still big choices to be made about where the tax rises hit: incomes or wealth?

The political arguments for not imposing new taxes on the 65 per cent of the population who own their home are obvious.

But property wealth remains under-taxed in Britain, even after the withdrawal of tax concessions for buy to let landlords.

There are sound economic arguments for taxing wealth rather than incomes and they are matched by moral arguments about fairness between generations – under the current status quo raising taxes on incomes would penalise young people excluded from owning a home to the benefit of older people who already do.

It still seems a stretch to imagine a Conservative government reforming a property taxation system that its predecessors spent decades protecting its natural supporters from – that was the whole point of replacing rates with first the poll tax and then council tax – and there could be a host of unintended consequences wrapped up in any reform.

However, a country facing Austerity 2.0 is running out of other options for spending cuts and tax rises to raise revenue.

Reforming property tax could, done correctly, do that at the same time as it boosts growth and maybe even improves the way the housing system works.

Rishi Sunak takes office warning of a ‘profound economic crisis’ facing the country but there are still big choices to be made about how he tackles it.


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