16 March 2021
Out in the cold: Budget for Builders offers no hope to Generation Rent
Colin Wiles
Housing Consultant
The Spring Budget was all about propping up the housing market and supporting the housebuilders. It did next to nothing for affordable housing: in fact it will make affordable housing a receding prospect for many potential buyers.
The two headline housing stories were the extension of the stamp duty holiday and government underwriting 95% mortgages that will supposedly turn “Generation Rent into Generation Buy”.
When the housing market was suspended last March there were widespread predictions of a house price crash. Then in the summer the Chancellor announced a stamp duty holiday to keep the market buzzing.
That meant no tax payable on any transaction under £500,000 compared to the usual £125,000, effective to 31 March this year. Cue a property boom as buyers sought to avoid quite a significant chunk of tax. (I was one of them, as I wrote about here). You can see this in the transaction data from HMRC.
In the last four months of 2019 there were 352,070 transactions in England. In 2020 this increased to 394,590 transactions. This is despite the fact that 2020 was a lost year for many older owners who were not able to downsize due to the pandemic
Prices will rise to the benefit of no one other than the housebuilders and their shareholders.
For those of you with long memories, in November 2015 George Osborne announced a mirror image of the stamp duty holiday when he pledged to increase duty from the following April for second homes and buy-to-lets.
That meant a big hike in tax – for a property sold for £350,000 the duty went up from £7,500 to £18,000. Cue a mad rush to buy before the deadline. It seems we never learn from past mistakes.
The problem with tax holidays, or announcing future tax hikes, is not only the panic it causes in the market, but what to do about ongoing transactions that fail to meet the deadline. The sensible thing would be to allow those to proceed and stop all new transactions.
According to Zoopla and Rightmove there would have been between 70,000 and 100,000 uncompleted sales in the pipeline at the end of March. But instead the Chancellor opted to extend the holiday for all buyers to the end of July for all homes worth up to £500,000, and then tapering it off at £250,000 for three months after that.
I can guarantee that at the end of these periods there will be similar calls for extensions and hand-wringing about completions that fail to meet the deadline. It is just putting off the inevitable.
As a result of this meddling in the market, house prices last year went up by as much as 8.5%, depending on your source of data. But what happens when the next cliff edge arrives? The Office for Budget Responsibility predicted a fall of up to 8% this year but has now revised this to an increase of 0.2% with a 1% fall in 2022.
So, 2020 could have been a year when prices slipped back a little, giving first time buyers (who make up around a third of the million transactions each year) the chance to buy a slightly more affordable home.
This would have helped a big chunk of Generation Rent, precisely the group that has been most affected by lay-offs and furloughs. Instead, the Chancellor blew it to protect existing homeowners and housebuilders.
Intervening in the housing market only causes more pain for first time buyers in the long run. The only intervention that makes sense is to invest in genuine social housing.
The 95% mortgage plan will require the government to underwrite higher risk mortgages – a product that has all but disappeared from the market – by allowing lenders to purchase a guarantee from the government to cover some of their potential losses.
It looks like the Help to Buy mortgage guarantee that was introduced in 2013. If it takes off, like Help to Buy, it will just result in more money being pumped into the demand side of the market without any corresponding increase in supply – ergo prices will rise to the benefit of no one other than the housebuilders and their shareholders.
It always amazes me that the Conservative Party and their ministers, supposedly the party of free enterprise and market forces, seem to have so little understanding of how the housing market works (the UK’s housing stock is worth more than £7.4trn and in recent years has been growing by £750bn a year – it is the biggest market of all).
Everyone who works in housing knows that housing supply is inelastic – it does not respond quickly to changes in demand. In fact, it can take up to ten years from conception to completion for some housing projects (even MMC would take at least a year) and housebuilders will always try to release their homes in a trickle rather than a deluge.
That means if you increase the demand for homes by making it easier to buy, prices can only go up, because the stock is fixed. It is simple economics and yet our ruling party do not seem to understand it.
So, intervening in the housing market only causes more pain for first time buyers in the long run. The only intervention that makes sense is to invest in genuine social housing. That takes out whole swathes of people living reluctantly in the private rented sector and others who might have had no option but to buy.
Over the long term that leads to a reduction in PRS rents and a slow and steady fall in house prices. That allows more first-timers to buy and it means more pounds in pockets to spend on the wider economy.
Everyone benefits, but making the government understand this simple logic is the hardest task we face.
The government’s slogan is “Build Back Better”. “Build Back Badly” more like.
This article was first published on the HQN blog, available here.