Apart from the deeply gloomy new economic forecasts, which paint a picture of a sluggish Britain for years to come, the centrepiece of Philip Hammond’s Budget on Wednesday was housing. That is not surprising. Virtually everyone agrees there is a crisis even if people differ on what exactly it is. But from the Tories’ point of view it is also a political crisis.
The Conservative Party has long styled itself as the party that promotes a property-owning democracy. But the cost of owning a home has risen so fast that it is now beyond the hopes of many young people and there is polling evidence that the Tories are losing support because of it. So housing is a political as well as a social problem for the government. Will the Chancellor’s Budget help to fix it?
In one sense the housing crisis can be simply expressed. The cost of buying a home has risen so much faster than incomes that the proportion of families able to own their own homes is falling. That’s especially true of the young. Since the Tories came to power in 2010 the number of home-owners under 45 in England has dropped by 904,000 to 3.56 million. The inevitable consequence is that more younger people are having to rent their homes from private landlords: over the same period the proportion of this age group in the private rented sector has risen by a quarter to more than 35%.
Their problem doesn’t end there. While people who have managed to get on to the property ladder have been enjoying historically-low interest rates on their mortgages, those paying rent have seen their rent keep rising. On average, those paying rent use up over 35% of their income on housing costs. For those paying mortgage interest, it’s under 20%. In short, the housing crisis can be described as favouring the old and the rich over the young and the poor.
In one sense the solution to the housing crisis can be simply expressed too. The simplest law of economics states that prices rise when demand exceeds supply. So if house prices have been rising fast, as they have over the last few decades, then it must be because there isn’t enough supply of housing. And it is easy to demonstrate that that is what’s been going on in the housing market. In earlier boom times for house-building, like the 1930s, 1950s and 1960s, numbers were measured in the hundreds of thousands - in 1968, 425,830 homes were built - but recent decades have often seen annual numbers reach barely a third of this. Meanwhile demand has increased as the population has grown and more and more people have chosen to live alone, so increasing the number of households looking for housing.
It’s this shortfall in supply that Mr Hammond has tried to address in his Budget. He was able to point out that the number of homes being built has been rising in recent years: it was up to 217,000 last year. His ambition is to reach a target of 300,000 a year by 2025. And he introduced a package worth £44bn over the next five years to help reach it. Much of this money will come in the form of guarantees to small house builders as well as immediate cash to boost the housing infrastructure fund and buy up land. He’s also giving councils more freedom to borrow to build houses of their own (council-house building virtually stopped from the 1980s) and planning laws are to be reviewed (yet again) to help speed up the whole house-building process.
Most of these measures have been reasonably well received but not everyone agrees that the underlying problem is too few new homes being built. Some go so far as to say that there is no physical shortage of housing in Britain. They point out that for 2014 (the latest year for which relevant statistics are available), there were 28 million dwellings in Britain but only 27.2 million households. The problem, such analysts argue, is not the physical shortage of property but the cost of them. For example part of the shortfall between demand (the number of households) and supply (the number of dwellings) can be explained by the huge increase in twenty-somethings still living with their parents. That is not necessarily because they want to (few do) but because they can’t afford either to buy or, increasingly, even to rent.
So on this view of things the key issue in the housing crisis is not so much supply but demand. In particular the case is made that the persistent historically low levels of interest rates since the financial crisis of 2008 have led to a glut of credit which has fed through into pushing up house prices. In this context, Britain’s historical preference for property as a form of investment over buying shares in industry (a phenomenon that may be directly related to Britain’s dire record on productivity, itself the main cause of the Chancellor’s gloomy forecasts) has seen a huge growth in buy-to-let demand for housing. In short the baby-boomers have been buying up second or third properties to let out, at the expense of millennials trying to buy their first home. Initially governments even gave them tax breaks to do so, though these have been tightened up.
The solution, the argument goes, must be sought through reducing the demand for houses (especially from people who don’t intend to live in them themselves) in order to bring the cost of housing down to the sorts of ratios to income that would make home-owning more affordable for first-time buyers. It’s in this context that Mr Hammond’s most eye-catching measure on housing is likely to be judged.
At the end of his speech the Chancellor delighted the benches behind him by saying he was abolishing stamp duty (the tax people pay for the privilege of buying a property) for first-time buyers up to the value of £300,000 on their new property. It’s estimated that this will benefit 95% of first-time buyers; 80% of them will now pay no stamp duty at all.
This will obviously cut their costs and will be broadly welcomed on that account. But the independent Office for Budget Responsibility estimated that the measure would increase the number of first-time buyers by only 3,500 and would, by increasing demand, actually push up house prices, albeit by only 0.3%. Meanwhile, with house prices still so high in relation to income, first-time buyers are still faced with the difficulty of raising enormous deposits before they can even talk to mortgage brokers about getting a mortgage. In London the average deposit for first-time buyers is now a colossal £97,000.
So how much will Mr Hammond’s measures do to ease the housing crisis? Lindsay Judge, a senior policy analyst at the Resolution Foundation think-tank, that takes a particular interest in inter-generational inequality, said that the Chancellor had shown ‘welcome ambition’. But she added: ‘Big questions remain over how much this will reduce housing costs given that the single biggest measure announced – the stamp duty exemption for first-time buyers – is expected to feed through into higher house prices. Around one-third of new spending on housing announced today will support demand, something which is likely to push up house prices.’
The Chancellor’s supporters are likely to reply that the remaining two-thirds will affect supply and that can only be good since increased supply always helps to help bring down prices. We’re already building over 200,000 new homes a year so the 300,000 target is in sight, they will claim, even if some in the building industry are sceptical it can be reached.
So what’s your verdict on the Chancellor’s measures to tackle the housing crisis?
Let us know.