Ian Mulheirn makes some trenchant and incisive comments about the collapse in home ownership, including the view that prices are not that important.
Last week the IFS produced a report that documented the dramatic collapse in home ownership among young adults. The report concludes that rapid house price growth since 1996 was the cause. But this blog argues that the main driver was actually the sudden change in credit conditions for first-time buyers in the wake of the financial crisis. This explanation points to a very different set of policy options if we want to recover the high home owenership rates of the early 2000s.
None of this is to say price levels are irrelevant to home ownership. All else equal, lower prices would increase it by reducing the scale of deposit required to buy. The point is that the mortgage market was a far greater cause of the recent collapse. That matters because an effective policy solution to raise home ownership depends on correctly identifying the cause of that collapse.
If high house prices were the major driver, then the only real ‘solution’ would be to hope for higher real interest rates to bear down on prices, since even substantially higher rates of supply will have little impact on prices, as Simon recently explained.
But once we realise that the home ownership rate depends critically on the availability and cost of mortgages for FTBs relative to those for other would-be buyers (implicitly buy-to-let), different policy options emerge. The good news is there are three broad options. The bad news is that none of them are politically easy.
Privatise the risk again. One option is to end the limits on high loan-to-income loans, and relax mortgage affordability tests. That might allow the average would-be home owner to buy sooner, driving up home ownership. But in light of the financial crisis, those limits and constraints have been introduced for good reasons and it would be a bold politician who recommend allowing the banking sector to assume lots risk again as a way to push home ownership back up.
Publicly subsidise the risk (more). If you’re not too impressed with the private sector’s risk-management track record of late, an alternative way to raise home ownership would be to use taxpayers’ money to subsidise it. Re-introducing MIRAS (mortgage interest relief at source), the direct mortgage interest subsidy introduced in 1983 to boost home ownership and abolished in 2000, would be one option. Or we could extend George Osborne’s Help to Buy schemes — almost a covert version of MIRAS — where the taxpayer took on £12bn of contingent liabilities. For all its detractors, Help to Buy almost certainly helped to break the fall in home ownership.
Politicians of almost every stripe support the goal of raising home ownership. But rather than letting them peddle bogus solutions like increasing housing supply, we should ask them to clarify who they would have pay to make that happen. Or, of course, there is a third option:
Give up on achieving 70% home ownership. If neither of the above seem acceptable, then we may have to acknowledge that the 71% home ownership rate of the early 2000s is a thing of the past and accept that something nearer the current 63% is here to stay. If the private rented sector was more secure and attractive, might this be the most politically palatable choice?