In last week’s post I gave a critique of George Osborne’s budget which was just a little scathing. Now I do try very hard not to be too political – some of our readers may well be supporters and that is their right.
But having pointed out that we did not need another housing boom, just the housing, I was not at all shocked to see the interview on the BBC Newsnight programme with Larry Summers, advisor to three US presidents, where he castigated current UK fiscal policy. Nor was I surprised to see a piece in today’s Daily Telegraph – normally a loyal Tory paper – quoting the Office for Budget Responsibility that Osborne’s proposals will just boost house prices and do nothing to increase house building. I don’t know whether either of these are closet TMP readers but Osborne should pay heed.
For our transatlantic readers, let me tell you that housing in the UK is way too expensive. Only in a very few areas, generally poor and run down, can you buy a house for less than £100k ($150k). Yet even in most parts of the country, a £600k ($900) house is at least mid-market yet you would be able to get a government guarantee of 20% of any mortgage required. Daft.
Now I know that to residents of New York and Hollywood, this may seem small beer indeed, just like to some in London, the Home Counties and Osborne’s constituency in Tatton. But I think to most Americans, a $1million home is total luxury and to have the government guarantee 20% of any mortgage would probably be a violation of the Constitution somewhere.
Quite right too.
In the UK the median wage across all workers in 2010-11 is £19.5k and for people in the important 25-29 year old bracket when they may reasonably want to start a family and buy a house, it is £18.7k. How on earth are such people going to afford a house of £100k, let alone £600k? No, Osborne’s ploy is more to do with letting middle and upper income supporters know that he has not forgotten them. Good, but he has forgotten everyone else and that should be his job.
So what other bright idea has he come up with? I stay with housing and will again shock our transatlantic readers with a policy, the effects of which would have made Joe Stalin proud.
As I said last week, one of the consequences of the lack of house building here has been the increase not only in house prices but also rents. As a result, people are caught between a rock and a hard place – they can’t afford to buy so they rent but rents are also sky high so they can’t save up even for the deposit to buy somewhere. Catch 22?
Enter Housing Benefit for people either on welfare or on low wages. The cost of Housing Benefit has now grown to the point where it costs £21 billion with more than 5 million people claiming. This is 3.6% of the TOTAL government income but it reflects the exorbitant cost of housing here.
Now there are some who have swung the lead and defrauded the system – often with false identities which is another matter. Certainly they should be rounded up and shot – along with one or two bankers I could think of. But many people on Housing Benefit are struggling to bring up children. It really can’t be easy, as I write in our comfortable house. And it most certainly is not the kids’ fault.
So imagine that, one or more of your children having left home, the reality is that you have a spare room or two. Well goody, you may say, a little peace and quiet at last. Maybe you have a slightly larger (and more expensive) house than you need because there wasn’t a more appropriate house at the time. Maybe a separated parent needs a spare room for their child to visit – it may be in the former matrimonial home.
At the same time, there are families living in desperately overcrowded conditions, sharing rooms, living in each other’s pockets, again because the right house was not available at the time of need. Just the stuff for nervous breakdowns and domestic strife.
What is the government’s solution? It has been labelled the ‘Bedroom Tax’. If ‘they’ (probably the poor local authorities caught in the middle) consider you have a bigger house than you need, your Housing Benefit will be reduced by 14% if there is one spare room or 25% of there are two or more spare rooms. This applies to anyone in social housing – council or Housing Associations. And there is a cap too for people in private rented accommodation.
Why? The given reason is to ‘encourage’ people to downsize. But there is very little spare social housing – in fact none at all. At least Stalin would have been more upfront about it before marching whole families off to the Gulag, and there would have been a plan even if you had to build a house yourself at the point of a gun.
No, Osborne’s ‘brainwave’ is all about trying to stop the inexorable rise in Housing Benefit costs, a rise that is entirely due to government inaction in planning for more social housing. He really doesn’t care about people at all, whether they move or starve.
Now I am all for reducing government expenditure – sensibly. But instead of promoting an increase in housing provision by building starter homes that people can buy themselves possibly with a little government help (better even without that of course), this patently stupid policy will drive more and more people into poverty because moving house is actually not imposed and anyway there is nowhere, but nowhere, for people to move to. Sorry about the preposition at the end of the sentence.
And instead of trying to promote the generation of jobs, of increasing the minimum wage and ensuring that people have work so that Housing Benefit becomes unnecessary, he fiddles while Britain and its long-suffering people burn. No doubt then the triple-dip recession arrives, he will have the nerve to blame it all on the weather.
Many years ago, we used to have a Window Tax where, if you had more than ten windows you had to pay a tax to the King. In England and Wales, this was imposed in 1696 and repealed in 1851. In France it ran from 1798 to 1926! And in Scotland it was from 1748 to 1798.
Let’s hope the bedroom tax problem is solved in less than 150 years.
Housing affordability and home ownership in general is a very political issue. In the U.S., we have policies to help people buy homes because it is a sign of prosperity to own a home. It was one of the reasons we had a real estate boom and ultimate meltdown. The loose lending policy and house of cards (derivatives) that the mortgage bankers created affected the world economy. The economic policies of countries affect the entire global economy.
I don’t think it is a good idea in general to allow mortgages to be allowed against tax for people in general – we used to have this in the UK but it was stopped in the early ’90s I think (businesses still can and this is one of the tax dodges used although they will be subject to tax on any capital gain). But I do think that where there is a severe shortage of low cost housing as we have now, some mechanism should be used to encourage more house building. This could be mortgage tax relief but equity partnership is a better way as, if I understand it correctly, the government will benefit from an increase in value eventually.
Brilliant article John – summarises the situation and makes me wonder why George doesn’t get it … ah ha, he has a different agenda, that’s the answer (such a shame, and I’m sure you are right triple dip it will be the weather’s fault)
Oh I think he gets is all too well, Sheila. It is just that he doesn’t care and of course profits because his own property will be increasing in value by even more. It is not that Osborne is stupid (particularly) but the way he is handling the economy which benefits the already-rich that is stupid.
Insightful and very interesting point about a housing boom. Great post.
I was surprised when we visited friends in Manchester several years ago at the cost in housing. You’re right….I can’t understand how anyone in the UK owns a home!
We only do it by suffering but this costs.
The only benefit has been that it is possible to use property leverage – which is how quite a few Brits have bought their (second) homes in the sun.
I’ve always thought that the stupid part of a so-called boom is that the value of your home may increase but so do all the others, when you move, you just pay more for the next house.
The only time you can get at your accumulated wealth is to leave the housing market completely – and if you have a mortgage, it will dilute your gains.
Homes are for living in, not for investment – or I think they should be.
Where the house price inflation is more than the mortgage interest rate, you gain and the bigger the mortgage, the bigger the leverage so the more you gain. And as you still have to live somewhere you could reasonably defray part (or even all) of the mortgage cost as rent so that increases the leverage even further. So even if the house price inflation is less than the mortgage interest, it is still worth while buying.
If you don’t increase your mortgage over time, the proportion of equity that you don’t own decreases which again increases your leverage as you pay it off.
This is how people buy holiday homes and other things. It is very useful – as long as you are on the housing ladder already. The problem is that it now effectively impossible for young people to buy into housing unless they work in particular well paid industries.
But you are right that the only time you can ‘cash in’ is when you downsize or leave the housing market.