OpinionApr 23 2014

MMR is a step too far

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Housing, everybody’s favourite excuse to rebuke the government, is back in the news again with a vengeance, this time it is mainly about the so-called bubble in London and the South East.

Of course, like most popular and populist opinions, when dissected they do not stand up to reasoning.

It is true the housing market is dividing up in to a number of niches, at the top of which are the oligarchs, hedge fund managers and the recipients of massive bonuses, in the middle are those who cannot compete in the Westminster, Kensington and Chelsea markets and have moved into neighbouring areas such as Notting Hill, part of Cheshire and other popular locations.

Then there is the market in which the mass of people have to compete, including those trading up, down, buy-to-lets and first-time buyers.

Even so, we know the picture is not so rosy, according to the latest figures from the Office of National Statistics on overcrowding.

This Victorian social menace is returning along with tuberculosis, the disease that often follows overcrowding, damp and uninhabitable homes.

According to the study, of the 23.4m households in England and Wales in March 2011, over 1.1m households were considered over-crowded.

Most of these overcrowded homes were concentrated in the social (8.7 per cent) and private rented sectors (8.6 per cent), compared with the owner-occupied sector (2.3 per cent).

The demographic breakdown is not surprising: 64.3 per cent of the 23.4m households were owner-occupied, 18 per cent in private renting and 17.6 per cent in social renting.

While the vast majority of owner-occupied homes had at least one spare room (82.7 per cent), this compared with nearly half of the private sector (49.5 per cent) and 39.4 per cent of the social rented sector.

Again, the figures confirm what many people have observed: that London has the highest concentration of overcrowded homes (11.3 per cent), more than double the next highest region, the West Midlands (4.5 per cent). London also has the highest concentration of rented households (50 per cent) and the highest population density.

So, competition for the few affordable homes in London is intense, which is driving house price inflation.

All this breaks down into social policy, which can often further disadvantage the very people left out of the house owning market.

Already, with the mortgage market review coming into operation within the next 48 hours, we have the unusual spectacle of a state agency intervening in domestic space to tell hard-pressed first-time buyers and families how they should spend what little disposable income they have.

A semi-state defined morality when it comes to the management of one’s income is undemocratic and a step too far

Ignoring the reality for a moment, that the average cost of a home in the UK is £253,000, including London, and excluding the capital it is £196,000, and the average wage is just over £26,000, this works out at a multiple of nearly 10 times. In other words, unless a first-time buyer is lucky to get a home far below the national average, he or she can kiss goodbye to getting on the much cherished housing ladder, especially in the capital.

Of course, the theoretical justification for imposing such tough new controls on how much people can borrow might have a superficial moral basis to it, or be even based on the new mantra of so-called behavioural economics, but both are flawed.

A semi-state defined morality when it comes to the management of one’s income is undemocratic and a step too far, and the myth of behavioural economics is an attempt to create a sub-discipline out of a meta-discipline which already has bogus claims to being a science.

There would be a national outcry if the state, through any of its agencies, tried to tell households what make of car they could afford, or where they should go for their annual holiday, or if they could afford a fee-paying school for little Johnny.

The regulation of mortgage lending should be based on the would-be borrower meeting all the conditions laid down by the lender within a framework of transparency, legality and consumer rights.

Once the borrower is made aware of all the bells and whistles surrounding the loan and the penalties for defaulting and is convinced that he or she can still afford the repayments, then there should be no legal reason why the two parties should not enter in to a legally-binding contract.

Undertaken with good professional financial advice, the borrower would be strongly advised to put in place a number of protection safeguards in case of an accident, the one in 200 event that insurance actuaries talk about.

This is the democratic framework, the rules and regulations, that surround our market economy.

It is arguable that it is not too late to call a halt to the MMR, or even put in place an early review with the ready-made excuse that economic circumstances have changed and so should policy.

Contrary to popular opinion, the real crisis in housing in England and Wales, and particularly so in London and the South East, is not one of house price inflation, or even simply affordability, but a shortage of supply.

Shortage of housing in desirable areas where jobs and the quality of life is better, is what is driving house prices up and up; and, in terms of affordability, there is no possible reason why our outstanding financial engineers cannot come up with a product that is repayable over a longer period than the traditional 25 or 30 years, or even across generations.

Because someone is poor, low-paid, or even a single parent, does not mean that someday they too would not like to have a place they can call their own home.

Hal Austin is Editor of Financial Adviser