I hope none of the politicians currently seeking our votes by saying we have to end austerity now plan to apply for a mortgage in the near future, because assuming they run their personal finances like they plan to run the government, i.e. with expenditure not only exceeding income but even borrowing to pay the interest on existing debt, they would fail the MMR (Mortgage Market Review) affordability test miserably.
No one wants austerity to continue any longer than necessary but to listen to some politicians you would think we can continue on a borrowing binge indefinitely. Just as a mortgage applicant will be declined if unable to satisfy a lender their borrowing is “responsible,” if the government loses the confidence of international investors it will first of all see borrowing costs rise, which will be crippling in itself in view of the size of the UK’s debt, and make it far more difficult to balance the budget.
Of course if the government was subject to an affordability test similar to mortgage borrowers, banks who are potential buyers of gilts would have to stress test the government’s ability to meet its obligations if bank rate increased by 3%, which might be challenging!
Looking ahead, a problem on the horizon for mortgage borrowers with only a small deposit is Basel 3, but none of the parties dare talk about this. If it is introduced as currently drafted it will require lenders to hold much more capital against higher LTV mortgages than even the much higher requirements already required by Basle 2. It will require innovative thinking to address this problem and there is no sign of this from any of the parties.
All the parties have ambitious claims about how many new homes they will build but none, with the possible exception of UKIP, have given viable details of how they will achieve these numbers. I predict that whoever wins the election will fall well short of achieving what they claim.
SPECIFIC MANIFESTO COMMITMENTS:
Conservatives
The current government’s latest response to lenders’ reduced appetite for high LTV lending, which is primarily a direct consequence of Basle 2, is two very different schemes, both branded Help to Buy (HTB), to help buyers with a deposit of only 5%. Both have been successful in achieving their objective, particularly the Equity Share scheme, which is only available on new build properties. Without this scheme the increase last year in the number of new homes built would have been much smaller.
The Conservatives had already announced an extension of the HTB equity share scheme to the end of 2020 but the manifesto includes an extension of the HTB mortgage guarantee scheme to at least the end of 2017. This suggests that they don’t yet have an exit strategy for the mortgage guarantee scheme and so it is fortunate that one is likely to emerge from the private sector later this year.
The proposed Right to Buy scheme for housing association tenants will no doubt attract votes from some who stand to benefit from this largess. However, It is ridiculous to offer discounts as high as 70%. This will devastate the ability of housing associations to continue building new social homes because the quality of the security they can offer lenders is seriously devalued if lenders know their security might be subject to a forced sale at a massive discount.
Last year about 135,000 new homes were built and the Tories say they will build 200,000 starter homes during the next parliament, i.e. in theory 40,000 p.a., to be sold at a 20% discount. However, in practice this will mean building over 50,000 p.a. because the planning requirements for these starter homes mean it is highly unlikely any will be completed within a year of the election. It will be open to FTBs under 40, who I estimate represent a maximum of 40% of the new build market, i.e. currently 54,000 p.a. In the unlikely event of this target being achieved it will probably be because it has replaced much of current sales.
However, the key to success will be what mortgage options are available. If the government allows FTBs to use the Help to Buy equity share scheme in conjunction with the starter home scheme the properties will offer great value, assuming the 20% discount is a genuine 20%.
The claim of doubling the number of self build properties by 2020 will be challenging but doubling the number of custom build properties should be achievable with the incentives already in place.
Labour
Abolishing stamp duty land tax (not in Scotland as it is a devolved power) for FTBs on properties up to£300,000 will be a vote winner. This type of scheme helps to generate extra economic activity, some of which increases VAT receipts, as well as boosting FTB purchases. However, it has the problem that, unlike the Help to Buy equity share scheme, it does nothing to address the bigger problem of lack of supply and a disproportionate amount of the extra sales generated comes as the deadline looms.
The proposal to Force banks and building societies to use deposits in the Help to Buy ISA scheme announced by the current government to lend to FTBs is misguided. Hypothecation like this just complicates business for no benefit and might, as a result, even reduce the number of companies that offer the Help to Buy ISA. In any case mortgage lending to FTBs is likely to considerably exceed deposits in the Help to Buy ISA because the ISA limits are so low, which makes the whole idea pointless. It does, however, demonstrate how little Ed Miliband understands about running a business.
A month ago Labour’s shadow Housing Minister, Emma Reynolds, said Labour would not introduce a rent cap. This suggests the policy recently announced to do exactly that is a last minute decision. The proposal to cap rents, as well as energy prices, tells us that Labour still hasn’t learnt the lesson of previous price controls. These can work in the very short term but store up problems for the future. It is also worth noting that during the 5 years of the current parliament ONS figures show that rents have increased a little less than CPI (10.5% v 12%).
As the supply of social housing has been steadily reducing for many years the government has increasingly relied on the private rental sector to fill the gap. Extra regulation and costs will reduce the attractiveness of investing in BTL property, with the inevitable consequence that, other things being equal, fewer properties will be available to rent.
The proposal to create a national register of private landlords sounds like a large scale extension of the current HMO scheme, and a few local authorities already require all landlords to register, using the optional HMO scheme.
Many tenants prefer short term tenancies but many others would like a longer term agreement. However, Labour’s policy of making 3 year tenancies the default option is not the solution. It would be more sensible to address the barriers to longer term tenancies so that compulsion was not seen by some as necessary.
The two biggest barriers are mortgage lenders, most of whom restrict the maximum tenancy term to 1 year in their mortgage conditions, and letting agents, who discourage longer term tenancies, because it would hit their profits. Banning “unfair” letting agents’ fees is a start but defining “unfair” will need careful consideration. Greater regulation of letting agents would be welcomed by many tenants, and probably many landlords as well.
The “land banking” proposal might seem superficially attractive but it ignores what happens in the real world. A high proportion, probably over 50%, of undeveloped, but developable, land is owned by the public sector and so if a public sector land owner has land expropriated on the “use it or lose it” principle I wonder which other public sector body will it be sold to.
This policy also ignores the length of time it takes to get full planning permission, with all reserve matters satisfied, on large schemes and the fact that when market conditions change it may no longer be economic to develop land. It is good economics for developers with a healthy cash flow to buy land when it available at the right price, even if they don’t expect to start developing it straight away. This policy will merely distort the market and not achieve what is intended
LibDems
The LibDems propose offering an unsecured loan of £2,000 in London, and £1,500 elsewhere, to people between 18 and 30 who are in paid employment (so presumably discriminating against any one who is self employed) and who are not homeowners and not seeking a social housing tenancy.
Deposits will be paid directly into one of the protection schemes once a tenant has identified a property to rent. The loans will be repayable over 1 or 2 years with interest linked to the cost of government borrowing, with a current indicative rate of 2.5%.
A big problem with this scheme is that although at first sight it appears populist for newbie renters I don’t think the risk factors have been properly thought through. If someone who is still living with their family but wants to move out to rent their own place can’t save for a deposit when they have relatively low committed expenditure how on earth are they going to afford to pay rent, even before thinking about repaying the government loan? This sounds like a recipe for large bad debts (obviously the lending will have to be unsecured) and high admin costs as a percentage of the amount lent.
The LibDems also say they will build 300,000 homes p.a. by bringing forward at least 10 new garden cities in England. A nice thought but 300,000 p.a. is in cloud cuckoo land any time this decade and probably the next as well.
They also plan direct government commissioning of private house building, i.e. nationalising some building, and a new Housing Investment Bank to provide long term capital for major new developments.
I presume at least the first of these two policies has been included in the manifesto on the basis that the LibDems need to have some policies in their manifesto as a bargaining tool to junk if they are in a position of negotiating coalition terms.
One practical and viable policy is the Rent to Buy scheme. Monthly payments will include a surplus over what is required for rent, with the balance going towards a deposit to buy that property and then a subsidy element at the time of purchase. This is effectively forced saving but will work for some people who might otherwise not have the financial discipline save the deposit, with the carrot being a discount off the normal market price if the tenant decides to buy.
UKIP
The promise to remove Stamp Duty Land Tax on the first sale up to a threshold of £250,000 (which of course would not apply in Scotland) for new homes built on brown field land is more targeted than the stamp duty scheme subsequently announced by Labour. This is a very sensible way of encouraging development on this type of land and the policy to build 1m new homes on brownfield land over the next 10 years is a challenging, but more realistic, target than the house building claims of the other parties.
The proposal to create a brownfields site register is similar to what the Conservatives are proposing but the UKIP policy appears better thought through because it goes further, with the offer of a grant of £10,000 per unit to developers to carry out essential remediation work on brownfield land. This, combined with the stamp duty holiday, will encourage a higher proportion of overall development on brownfield land.
UKIP’s policy to make cold calling a criminal offence if in relation to pension “advice” is to be welcomed. This should be the start of regulating cold calls for financial service products. In particular the menace of cold calls about PPI and “the accident you had” should also be banned.
Greens
Their proposals for housing, as well as many other policies, could only be made by a party that knows it has no chance of even being able to negotiate for power with one of the other parties, let alone govern. The Green’s manifesto is even more economically illiterate than the SNP’s and a Green Government trying to implement their manifesto pledges would devastate UK finances.
Their housing market proposals (and most others) would become irrelevant because international investors would dump their gilts. Gilt yields and hence swap rates would soar and so mortgages would become much more expensive. Arrears would rise sharply and house prices would fall significantly, resulting in banks and building societies having to set aside much more capital to support existing lending as falling house prices would increase the LTV. Mortgage lending would consequently collapse.
FTBs wanting house prices to fall substantially would get their wish but they still wouldn’t be able to buy if they needed a high LTV mortgage because all lenders would withdraw from the high LTV market, as happened when Lehman’s ceased trading.
The same comments as stated above in relation to Labour apply to its policy to limit rent rises to the CPI and the landlord licensing scheme.
The proposal to give the Bank of England power to limit mortgage LTVs and income multiples is rather odd as the Bank already has these powers. (Keep up Greens!). The current government delegated these powers last year to the Financial Policy Committee and the FPC has already imposed some restrictions on income multiples.
However, as long as the government is offering its HTB schemes it is hard to see how the Bank could introduce an LTV cap, except at 95%, which would be pointless as no lender is offering more than 95%. However, I note the Greens would abolish the Help to Buy schemes but have not suggested any replacement. It is difficult to understand why the Greens want to condemn FTBs who could afford the monthly mortgage payments but only find a 5% deposit, from buying their own home, especially as this would hit most the age group where they have the most support!
The proposal to stop BTL investors from being able to offset what is often their biggest cost against their income, as happens in any other business, would quickly result either in rents rising, or if that was prevented by the Greens’ policy of rent caps, many landlords exiting the market. Well within the life of a normal parliamentary term this would result in a crisis for tenants, as there would be a shortage of rental properties. Many policies, including this one, suggest the Greens believe a Green government would not be subject to the normal laws of economics!
Introducing two higher council tax bands is not only sensible but more so than Labour’s policy of introducing a new tax, the Mansion tax, to achieve the same end. It would be even better to have three extra bands. The longer a full revaluation of all residential properties is delayed the more distortions will build up.
Reducing VAT on homes renovations to 5% has considerable merit but it would be difficult deciding exactly what qualified and in any case might fall foul of EU rules.
SNP and Plaid Cymru
Housing is a devolved function for both Scotland and Wales, which presumably explains why the SNP manifesto is policy light on this topic.
The SNP says it will continue its current Help to Buy equity share scheme for new build property. This broadly replicates the English version it copied, except for lower price limits. However, unlike the English scheme, the funding in Scotland has been inadequate to meet demand, which has restricted its ability to achieve its twin aims of stimulating the building of new homes and helping FTBs.
Plaid Cymru has included several ideas for investigation but it is short of detail. Like Labour, it wants to introduce rent controls, although even in respect of this policy the detail is not fleshed out.
