IFS - If we’re serious about helping young buyers, hard choices lie ahead
In last week’s budget, the chancellor expressed his determination to address plummeting home ownership rates for those in their 20s and 30s. His response was twofold. He committed to increase the rate of housebuilding to up to 300,000 new properties a year by the mid-2020s. He also scrapped stamp duty for most first-time buyers.
This prompts two big questions. Is there a problem, and if so what exactly is it? And will these policies help to solve the problem? I don’t even want to get into the question of whether this housebuilding will actually happen. Little extra public cash has been committed to building new houses.
The first question would appear otiose. Don’t we all know what the problem is? There are too few houses and they cost too much, locking young people out of the housing market. As ever, it’s not quite that simple. The number of homes has been rising at least as fast as the population for quite a long time and if anything faster than the number of households. Looking at the aggregate numbers of homes and households, it is pretty hard to make a case that there is a growing housing shortage.
It is also hard to make the case that, in aggregate, housing costs have been rising particularly fast. Rents have not been going up any quicker than other prices on average for at least a decade. And while house prices are definitely very high, low interest rates mean that the housing costs of owner-occupiers are unusually low.
So is the conventional wisdom that there is a big problem completely wrong? No — but the issue is slightly more complex than usually expressed. After all, most of those young people who are not yet owner-occupiers are living in a home that is not their parents’. The houses are there, it’s just that they are owned by someone else — generally someone from the older generation — to whom the rent gets paid. The simple statement that there are not enough houses is, at best, an oversimplification.
One problem is that supply is very constrained in some fast-growing areas, including, but by no means only, around London. The more fundamental issue, though, relates to a combination of power in the housing market and investment returns. Since the financial crisis, banks have required high deposits before they will make a mortgage available. These deposits can be very hard to come by for young people unless they have rich and generous parents. For many older people, on the other hand, with low interest rates and rising asset prices, coming up with the cash for a deposit, or indeed to pay for a whole property, is a lot easier. Remarkably, up to one in ten adults owns a second property in addition to their main home. Most, of course, are over the age of 50. Power has shifted to those with assets to start with. What’s more, these look like attractive assets, with good rental returns and an expectation of price increases.
So will more housebuilding help? One danger might be that the older, wealthier generation simply snap up these extra properties. Indeed, unless there is good reason to believe that the investment return will fall, this must be a real possibility. Over time, both more building and a credible commitment to keep on building should limit expected price rises, reducing the investment value of housing relative to its consumption value. Subdued economic activity and reduced inward migration may also “help”.
Looked at in that light, one can see why other policies have been introduced, not to increase the number of homes but to tilt the playing field towards younger buyers. The abolition of stamp duty for first-time buyers has been added to the help-to-buy initiatives launched in recent years, helping the young. Additional stamp duty on second homes and the ending of tax relief on mortgage interest payments on rental properties penalise the older and wealthier.
It is true that getting rid of stamp duty will increase prices, thereby benefiting existing owners. But it also will make it easier for first-time buyers. They will need less cash up front since they won’t need to cover stamp duty. And, of course, one would tend to prefer spending £100 on something worth £100 to spending £98 on something worth only £96 because £2 goes in tax. That, at least in part, is how to think about the effect of abolishing stamp duty.
All of this might help a bit if the main intention is to help younger home buyers, although the Office for Budget Responsibility thinks that the stamp duty change will create only an additional 3,500 first-time buyers a year.
Other things matter, too. The details of the housebuilding policy will be vital. The new houses need to be in the right places, for example. Other parts of our tax system still get right in the way. Our increasingly absurd council tax charges tax at a much lower rate, as a fraction of house value, on more expensive than on cheaper properties. That helps to lock older people into their bigger homes. Stamp duty does the same thing, making moving expensive and clogging up the housing market.
Of course, neither raising council tax for those in more expensive properties nor cutting stamp duty for those buying £1 million-plus houses is likely to be popular in the way that abolishing stamp duty for first-time buyers is popular. Yet these are structural issues that need dealing with if we are to tackle the misallocation of the current housing stock. If the government is serious about helping young homebuyers, there are more, and more politically difficult, things still to do.
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