Everybody wants to own their own home and there’s no turning back. Frances Coppola explains.

Housing is expensive. So expensive that many people can’t afford to buy homes, and rent can be 30% or more of income. There’s almost no social housing, because it has been progressively sold off, and what the government considers “affordable” housing isn’t affordable to anyone on an average income. The think tank, Positive Money, says the UK has a “housing affordability crisis.”

Housing is eating up an ever-larger proportion not only of individual incomes, but of national output. The UK economy has become so dependent on the housing market that since 2010, successive Chancellors have used tax breaks for homebuyers as a form of economic stimulus. Osborne’s Help to Buy scheme created a housing boom nicely in time for the 2015 election. Sunak’s stamp duty holiday created a housing boom during the pandemic. Rising house prices generate a feel-good factor among home-owners which encourages them to spend more – what economists call a “wealth effect”.

After all, when you’ve bought a new pad, you need to redecorate and install new sofas, don’t you?

Quantitative Easing creates a similar feel-good effect among investors. But unlike investors who operate entirely in the rarefied world of financial markets, the feel-good factor that rising house prices creates for home-owners tends to lead to increased spending on consumption goods and services. And a buoyant housing market itself tends to increase spending on home improvements and furnishings. After all, when you’ve bought a new pad, you need to redecorate and install new sofas, don’t you?

So, the same housing unaffordability that decreases consumption spending among people who don’t own property increases the consumption spending of people who do.

When the proportion of home-owners is low, as it was in the 1960s, then policies that increase house prices tend to cause aggregate demand to fall, as rising rents take up an ever-larger proportion of most people’s incomes. Under these circumstances, rent controls, limits on credit creation by banks, and house building programmes are all reasonable policy responses, since they all reduce the proportion of their incomes that people spend on housing. 

Rent controls discourage investors from buying properties to rent them out, since the potential cash flows from them are capped; credit controls and house building programmes prevent house prices from rising, and can even reduce house prices, thus further discouraging private provision of properties for rent. In the 1960s, a tight, private rental market was offset by a large increase in social housing. However, more properties available for purchase at affordable prices and fewer properties available to rent encourage people to move from renting to ownership. Over time, the combination of rent controls and house building will increase home ownership, even with credit controls limiting mortgage availability. 

But this isn’t the 1960s, it’s the 2020s. Forty years of policies aimed at increasing home ownership have resulted in the creation of a property-owning democracy. Although the policies of the 1960s would over time have gradually increased homeownership, they would not have caused the dramatic rise of the 1980s. That was directly attributable to policies introduced by Margaret Thatcher’s government, particularly Right to Buy schemes and tax relief on mortgages. Governments of both colours have continued to support, encourage and subsidise home ownership ever since.

Forty years of policies aimed at increasing home ownership have resulted in the creation of a property-owning democracy.

The proportion of people owning their own home peaked at 71% in 2003, as the exorbitant price rises of the mid-2000s increasingly priced younger people out of the market. But the proportion of UK households who are owner-occupiers remains about 65%. And the proportion who have substantial mortgages is falling, partly because the post-financial crisis period has seen the return of credit controls on mortgages (in the form of loan-to-value limits and affordability tests), and partly because a growing proportion of homeowners have paid off their mortgages.

When the majority of people own their own homes, and a significant and growing proportion do so outright, policies aimed at controlling rents and house prices reduce aggregate demand. Renters spend more on consumption goods and services, but home-owners gloomy about the falling value of their properties spend less, and the shrinking housing market also depresses construction and home improvements. The policies of the 1960s might appear attractive to those who are paying high rents and can’t afford to buy their own properties, but they would be a recipe for sustained economic depression. You can’t buy economic growth by reducing the wealth of the majority of the population.

Anyway, policies that would reduce house prices are politically impossible.  There is a reason why governments of both colours have continually supported home ownership. People who have wealth will vote for parties whose policies increase their wealth. So when the majority of the population owns their own houses, it is political suicide to pursue policies that reduce house prices. Houses are the primary source of wealth for the older middle-income voters that both Conservatives and Labour need to attract if they are to win an election.

For most people, there is no “housing crisis”. There isn’t even an affordability crisis. Interest rates on mortgages are the lowest in history, so people can afford larger mortgages than ever in history. And a growing range of government subsidies and guarantees help those for whom the credit controls imposed by bank regulators would otherwise be a barrier to home ownership. For most people, the solution to high rents is still what it has been for the last forty years. Buy a home.

For most people, there is no “housing crisis”. There isn’t even an affordability crisis. Interest rates on mortgages are the lowest in history, so people can afford larger mortgages than ever in history.

Of course, parents and grandparents are understandably concerned about their progeny for whom there are considerable obstacles to buying property, particularly in London. So they fiercely resist inheritance taxes that would prevent them passing on their own property wealth to their kids. And the kids back them up. Inheritance tax is still Britain’s most unpopular tax, even though hardly anyone pays it these days, since thresholds have been substantially raised to protect Londoners whose exponentially-rising property values would otherwise have created an inheritance tax liability.

But the one thing parents and grandparents don’t want is the value of their own properties to fall. The research organisation Positive Money cites research showing that a majority of home-owners would accept house price stagnation if it meant younger people could afford houses. But falling house prices are a different matter. When house prices fell in the early 1990s and again after the 2008 financial crash, people called on government to “do something” – get banks lending, help people to buy, bail out people in negative equity. Falling house prices are not popular.

Those calling for relaxation of planning regulations and major house building programmes to bring down house prices are barking up the wrong tree. No builder will build into a falling market, however relaxed the planning regulations. No home-owner will sell into a falling market, either – and the majority of house sales in the UK take place in the secondary market. And no-one wants to buy if house prices are falling, because they want to make money on their property, not lose it – and anyway most are buying with mortgages, which are hard to come by when prices are falling. When house prices are falling, builders sit on their land banks and home-owners stay put in their houses, both waiting for the market to recover – which it inevitably does, either when the supply of houses for sale falls sufficiently for prices to stabilise, or when the government or the Bank of England intervenes to prop up the market.

Those calling for relaxation of planning regulations and major house building programmes to bring down house prices are barking up the wrong tree.

Those calling for rent and credit controls are also barking up the wrong tree, though a different one. Bringing down rents and making it more difficult for people to buy would take the heat out of the housing market and give renters more disposable income. But the fact is that people aspire to own property. Policies effectively restricting property ownership to the upper half of the income distribution would be hideously regressive, even with rent controls and a large increase in social housing. No politician would dare say to people who bought their houses under Right to Buy that their grandchildren could never own their own homes. People don’t want to return to the society of the 1960s, when only a minority of people owned their own homes. They want politicians to make it possible for everyone to own their own homes.

The dream of home ownership is as much about financial security as it is about shelter. For most people, a home is no longer just a place to live, it’s an investment. As one friend of mine said, looking at his lovely home, “it’s my pension”. And an investment that appreciates in value is a good investment. So people also want house prices to rise over time.

There is no simple solution to this conundrum. Simplistic schemes to reduce house prices or restrict poorer people’s access to the housing market misunderstand its nature. For better or worse, the property-owning democracy is here to stay. The best that governments can do now is find ever more inventive ways of making it possible for as many people as possible to achieve their dream of home ownership.

Frances Coppola

Frances is a writer and commentator on banking, finance and economics. Her blog Coppola Comment is widely read and her writing has featured on the Financial Times, City AM, The …

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2 Comments on “Rent asunder”

  1. This is incredibly defeatist /and or written by a comfortable home-owning writer

    Do please look into how a land value tax could help both the housing and economic productivity problems of the UK (and similar western economies)

  2. But emphasize that other taxes such as fuel, income tax, stamp duties, etc. would fall away completely as the land value tax, would more than fill the municipal incomes and encourage improvements to the existing housing stock as rates increases would be done away with.

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