Life
    Money

    Will the Conservatives’ housing plans work for first-time buyers?

    27 November 2019

    If there was one thing above all others which drove young voters towards Jeremy Corbyn in 2017 it was surely the promise to abolish tuition fees. But close behind was the issue of housing. Never before has a generation of young people compared their own living standards with those of their parents at the same age and felt so cheated. When people in good jobs, earning good salaries cannot afford to buy a home, and are reliant instead on handing over up to half their earnings to rent property, something is going wrong. As I wrote in the Spectator back in 2011, long before the Corbynite takeover of the Labour party, the task of selling capitalism to the young was going to become ever more difficult if they couldn’t see how they could gain the most obvious stake in it: through home-ownership.

    Since the appearance of Corbyn, the Conservatives have finally woken up to the problem. The party manifesto contains two proposals of interest to frustrated would-be homebuyers. Firstly, it pledges:

    “We will encourage a new market in long-term fixed rate mortgages which slash the cost of deposits, opening up a secure path to home ownership for first-time buyers in all parts of the United Kingdom”

    And secondly, it promises:

    “We will offer more homes to local families, enabling councils to use developers’ contributions via the planning process to discount homes in perpetuity by a third for local people who cannot otherwise afford to buy in their area. Councils could use this to prioritise key workers in their area, like police, nurses and teachers.”

    To take the first of these, it would seem to mean that banks will be encouraged in some way to offer long-term fixed-rate mortgages in return for raising their maximum loan-to-value ratio. The 95 percent mortgages (and in the case of the Northern Rock a self-destructive 125 percent mortgage) all but disappeared after the 2008/09 banking crisis, when banks realised that the assets against which they had though they had secured their mortgage loans – ie properties – weren’t so secure after all.

    Fixing mortgage rates for the long-term doesn’t really deal with this problem, however. While it might reduce the threat of borrowers getting into trouble as a result of future interest rat rises, a long-term fixed rate, of itself, does nothing to tackle the danger of borrowers falling into negative equity. Indeed, in the US long-term fixed rates are the norm, and yet that did not prevent the housing crash of 2008/09. If the government wants to persuade banks to lend 95 percent mortgages again it will almost certainly have to underwrite the risk to the banks. This is exactly what the government has been doing since 2013 as part of the Help to Buy scheme – which already does offer 95 percent loans to first-time buyers of new homes. That scheme is due to end in 2023, but the government seems to be indicating that in its place it will devise some other way of underwriting loans – in other words transferring the risk of a future housing crash from banks to the taxpayer.

    But would first-time buyers really want to take out long-term fixed rates anyway? I was once offered a 25 year fixed rate mortgage – in fact, it was 26 years ago, so I now know for sure whether it would have been a good idea or not. It wouldn’t. The rate I was offered was 8.5 percent, which sounded a good deal at the time, given that rates had only recently been 15 percent, but over the years it would have meant me paying many thousands of pounds over the odds in interest payments. That is one reason why long-term fixes have never taken off in Britain: they could trap people at uncompetitive rates of interest.

    As for the second manifesto promise, offering discount homes to local people, this is the key phrase: the scheme would “use developers’ contributions via the planning process to discount homes in perpetuity”. Translating that into English, it would appear to mean that the Conservatives are thinking of raiding revenue from the Community Infrastructure Levy (CIL) – a tax currently levied on new developers to pay for infrastructure such as new roads, schools and playing fields etc – and use the money to discount the price of new homes for local buyers. There is some justification for this. There is an essential iniquity in the CIL: why should buyers of new homes disproportionately fund infrastructure that is used by everyone? But then it does raise the issue: where else will local authorities raise the funding for infrastructure, if not from developers?

    The word ‘perpetuity’ is interesting, too. What it would seem to mean is that homes sold under the scheme would be subject to some form of price control for ever after – someone who bought a house at, say, a 30 percent discount would only be allowed to sell it on at a 30 percent discount, relative to market value. This idea has already been tried on a small-scale basis in the West Country. Trouble comes when people who buy such a property want to move up the housing ladder – and find themselves having to sell at below-market value.

    It isn’t easy, fixing the housing market, and I am not convinced that either of these proposals really hit the button.