The Affordability Debate

I have recently been sounding off about house prices. Or the affordability issue, as the great and the good like to refer to it. My contention is that we can no longer build our way out of this problem because a) any new homes will just fill up with migrants from all over the world because everyone wants to come and live and work in the South-East and b) the climate change issue is more important and, until this is solved, it is foolish to embark on large building programmes, however climate-friendly. We should, instead, be concentrating on upgrading what we have already built.

What I have avoided to date is discussing what else could be done about the affordability issue. This is because I haven’t given it a moment’s thought, although somewhere in the back of my mind I am aware that it’s easy for a baby-boomer like me, owning unmortgaged property, to be complacent about it all. On the other hand, our three sons are, or soon will be, at the sharp end of the problem and it would be nice to think that they can house themselves without having to wait for both their parents to drop dead, and then for them to fight over what’s left after the government has had its fill.

There was a fine article about these very issues in yesterday’s Evening Standard by Andrew Gilligan entitled Yes, we can solve our housing shortage. In it, Gilligan suggests that, instead of trying to increase the supply of new homes, it is time now to start dampening the demand. Gilligan started by pointing out that two thirds of new homes built last year in London were sold to investors, a somewhat staggering statistic. He elaborated, and I think I agree with him, that housing has become an investment asset class, decoupled from the normal rules of supply and demand, and that the London market in particular is being driven ever higher by speculation. Those that have property have become wealthy beyond their wildest dreams and now have the wherewithal to purchase second, third and fourth homes, whereas those without property have become locked out, unless they earn top dollar.

Gilligan makes two specific suggestions:

1) that we should insist that the buyers of at least some of our new properties should actually live in them and
2) we should clamp down on tax breaks that buy-to-let landlords now enjoy.

It sounds like a plausible enough platform. But actually I don’t think he has gone far enough. I am struggling to think of buy-to-let tax breaks. I don’t think there are any, unlike the family home, which enjoys the status of a mini-tax haven, thanks to the miracle of Principal Private Residence Relief. And as for insisting that people actually live in the homes they buy, well this is already happening to some extent with the many affordable and shared ownership housing schemes around.

On the other hand, even if the detail is a little wonky, I think Gilligan is onto something. If you made the tax and incentive signals strong enough, I am sure you could dampen down property speculation. It’s not as though demand management has completely gone out of fashion: indeed it’s having a mini revival politically with the introduction of the London Congestion Charge, proposals afoot for nationwide road pricing and tentative discussions about carbon rationing. Why not add housing to the list? It’s a nearly finite commodity, and it’s being allocated according to wealth, not need. Ideal material for vouchers or a rationing system of some description.

But how might it work? Imagine every year each adult would be granted a notional housing footprint, say around 50 sq m each, about the size of a one or two bedroomed flat. If you didn’t own property, you could then sell your housing entitlement: if you wanted to own more than this, you would have to buy it from those who were selling. A market would be established, rather like the carbon trading exchanges, where allowances could be bought and sold. The more distorted the balance between the haves and the have-nots became, the higher the value of the entitlements would be. Such a scheme would aim to greatly reduce the attractiveness of owning property purely as an investment. In effect, it becomes a distributive tax, just as how people envisage carbon rationing as working.

Sure, it would be complex to set up and probably involve about two zillion civil servants to police. It might have all kinds of unanticipated side-effects. Incentive schemes often do. I know, I know. But it’s a start. And it has to have a better chance of succeeding than the total non-policy that the government is currently putting forward.

Has anybody else got any other ideas?