Once again, the chancellor made it clear in his Autumn Statement in November that he is backing “families that aspire to own their own home”. Quoting a statistic on the decline in home ownership in the UK, among the under-35s in particular, he acknowledged the need to provide homes that are affordable not just to rent, but also to buy. His pledges included starter homes with a 20 per cent discount for young first time buyers, help-to-buy initiatives both for shared ownership and specifically for London, as well as new house building and an increased housing budget.
In his statement the chancellor acknowledged the significance of affordability in the UK housing market for both renting and buying, but his main emphasis was on buying: “We choose to build the houses that people can buy,” he said. In light of that, one of his most important pledges was the promise to build 400,000 new homes over the next five years, of which nearly half would be starter homes sold at a discount to younger borrowers and 135,000 would be new homes made available under the new Help to buy shared ownership scheme. The failure of successive governments to build anywhere near the 200,000 or so new homes required per annum has greatly contributed to UK house price inflation. So any serious attempt to address affordability has to include a house-building programme.
Who pays?
However, these new schemes are partly at the expense of buy-to-let investors. “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy,” Mr Osborne suggested. Not content with reducing the tax relief on mortgage interest for buy-to-let investors and imposing stricter rules on how landlords claim for relief on wear and tear, the chancellor increased the stamp duty payable on a property purchased for buy-to-let. From April 2016, the amount of stamp duty on such properties and holiday homes will rise by 3 per cent. Although not all the details of how this will work have been finalised, some of the money raised from the extra stamp duty will be ploughed back into “local communities… which are being priced out of home ownership”.
Not surprisingly, there are strong objections to these changes, critics suggesting that they could lead to unintended consequences such as a reduction in the private rented sector or a rush to buy before the April 2016 deadline, fuelling some kind of housing bubble.
However, younger aspiring buyers and buy-to-let investors are not the only groups with competing interests in the UK housing market. Acknowledging the government’s attempts to reverse the decline in homeownership, a 2015 report by Savills, Residential Property Focus Issue 3, highlights the need for the government to balance the interests of existing homeowners against those of prospective buyers, which inevitably divides the housing market by age. On one hand it points to large numbers of older households that have benefited from more than two decades of house price growth. As a consequence many of them hold substantial amounts of housing equity, creating an incentive to preserve prices at existing levels, or higher.
A barrier to ownership
On the other hand, such high prices create a barrier to new buyers, especially in terms of their raising a large enough deposit, with prices also buoyed by the current low level of housebuilding. The graph compares the home ownership percentages of different age groups in 1993 with 2013-14. There is a marked decline in the four younger age groups.
In its research, Savills points to the delicate dynamic between house price growth and interest rate rises. As rates rise so will the cost of servicing mortgages. The danger is that if house prices rise too much while rates remain low, it could lead to serious hardship for borrowers when rates do inevitably rise. It is no wonder, says the report that, the Bank of England has been aware of the need to avoid “a debt-driven housing market boom” before applying the brakes on affordability. So although affordability appears to have been the chancellor’s watchword, there certainly cannot be too much of it.
Most of these proposals will only begin to take effect in the medium to long term and it will be interesting to see, for example, how buy-to-let investors jump – whether into a limited company structure to shelter from some of the new taxation or out of the market altogether.
Nevertheless, the pledges are designed to ensure that aspiring homeowners do not have their hopes cut off altogether. Policies such as the Mortgage Market Review’s strong emphasis on affordability, the cap on loans to income and stress tests on borrowers’ income are clearly designed to limit the amount that buyers can borrow.
Such policies, says Savills, act as a drag on the housing market and house price growth, but they also ensure that mortgaged home ownership will continue to fall, whatever the government’s ambitions to reverse the trend.
