MortgagesJun 21 2022

Johnson's housing policy announcement not based in reality

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Johnson's housing policy announcement not based in reality
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At a speech in Blackpool, Johnson outlined proposals to extend the right-to-buy to include Housing Association properties, giving people between 35 per cent and 70 per cent discount on Housing Association properties. Johnson said he wanted to finish the reforms that Margaret Thatcher had started in the 1980s. 

On the surface of it, this seems like a sensible policy. Most people think it is great if people can own their own home, and if that means using the right-to-buy scheme, so be it. No one wants people stuck in perpetual rent; homeownership, as we know, is excellent for mental health, long-term stability, security for your family and a legacy for any children.

It seems as though Johnson does not understand how the mortgage market works.

Homeownership comes with huge societal benefits, too. According to research by Luke A Munford, Eleonora Fichera & Matt Sutton: "At the macro-level, we find that a 10 percentage-point increase in homeownership rates is associated with a 2 percentage-point reduction in the number of people reporting having a longstanding health condition." 

It seems churlish to suggest this would be a bad idea. Unfortunately, however, there are several fatal flaws with Johnson's proposal to sell off Housing Association properties:

  1. They're not his to sell.
  2. The discount on the properties means they will be sold at a loss.
  3. They tried a pilot of just this policy in the West Midlands, where people were offered the ability to buy their housing association home. If those results were to be believed, if it had been rolled out nationwide, it would have meant fewer than 1,000 people would have become homeowners under this scheme.
  4. Johnson insisted that for each housing association property sold to one of its tenants, a replacement would be built to preserve the number of social housing available for rent.

So, where does this money come from? First, we have got a capital loss in selling the property off at a considerable discount. We have got to replace that social housing, including the cost of building and buying new land, along with a planning process to navigate while trying to find builders to construct them. 

Using benefits 

In the same speech, Johnson told us that he wants to allow people to use housing benefits to support mortgage affordability. The last time I looked, housing benefit was for people struggling to pay their rent due to a change in circumstances, loss of income or significant life event.

If people struggle to pay rent, it presumably follows that their income is below the level it needs for them to survive. If people are receiving state aid by way of benefits to help them pay the cost of rent and bills, is it sensible to allow them to take on debt if they are not in a position to afford the rent?

I have no objection to people claiming benefits. I am a great believer in the welfare state. I think benefits should be increased to try and reduce the inequality across the country between the lowest paid and highest paid, but also the regional inequality.

The UK has one of the most unequal geographical wealth inequalities of any developed economy across Europe. We also know that since 1980, 2.6mn right-to-buy homes have been sold, and most of them have ended up in the hands of private landlords.

It seems as though Johnson does not understand how the mortgage market works. Currently, many lenders allow people to use state benefits to support mortgage affordability and have done for years. Some lenders will take the vast majority of benefits at 100 per cent, and some will take 50 per cent. So it varies from lender to lender.

House prices are bent out of shape, any further tinkering is asking for trouble.

However, not all lenders take into account all benefits because of flip-flop policy U-turns and changes in government. So they cannot be sure that the way the benefits system runs today will be the benefits system in three years or that there will not be drastic reform after the next general election.

A mortgage is typically taken over a significantly longer period than an election cycle or a political party in power. So it makes sense for lenders to be cautious because benefits can be changed at any point.

If the benefits are changed, and thousands of new mortgage holders lose a part of their income, we could see a new raft of mortgage prisoners created overnight. 

The existence of the welfare state ensures that people do not fall through the cracks to provide a basic standard of living, not to subsidise buying a home. To help people onto the housing ladder, we should ensure that work pays.

Instead, we have had an exponential rise in food bank usage, more children in poverty and society is more unequal and less socially mobile within a generation. 

We also have rising prices, colossal inflation problems, a skills gap, and productivity issues. Now, we have imposed economic sanctions on ourselves by leaving the EU, leading to the OECD predicting the lowest growth in the G20 next year. It seems the gaslight must have gone out while cooking the oven-ready deal.

Mortgage market review

Lastly, Johnson thinks we should increase higher loan-to-value mortgages, and apparently the mortgage market needs to be reviewed.

Now, if anyone has been in the mortgage and property market for the past few years, they will know that house prices have shot through the roof, at odds with the current economic climate that we have been travelling through.

We have had vast amounts of quantitative easing dumped into the economy, unnecessary tax breaks on stamp duty and substantial stimulus measures the economy did not require. Currently, house prices are bent out of shape, any further tinkering is asking for trouble.

What needs reviewing are Conservative economic policies that have done nothing to benefit most people yet everything to help a minority at the top.

However, high loan-to-value mortgages are essential for younger people and first-time buyers more generally, but to increase that loan to value harks back to before the previous financial crisis.

Given we are heading into a recession with house prices already at historical peaks, stagnating wages and the Bank of England governor telling people not to ask for wage rises due to the risk of stagflation setting in, setting off a wage-price spiral, the last thing anyone needs is riskier mortgages.

We only need to look back to the 1970s to see that increasing credit at this point is a recipe for disaster. First-time buyers will not be happy if they are in negative equity within 18 months.

The mortgage market does not need a review, nor does the property market. What needs reviewing are Conservative economic policies that have done nothing to benefit most people yet everything to help a minority at the top. 

If we want to level up, we must invest in a green new deal. We need to invest in skills and training for our current workforce and in teachers to ensure that children are getting the education to enable them to deal with future challenges they will face

None of the challenges we face now, nor the ones approaching rapidly over the hill, will be fixed by selling off more social housing. Instead, we need more social housing built.

In short, these policy announcements make as much sense as Escher's art: they are incoherent and not based in reality.

Lewis Shaw is a mortgage, protection and equity release adviser at Shaw Financial Services