Why we must end the UK’s addiction to property

There is nothing aspirational or equitable about courting another recession.

They say an Englishman's home is his castle but the UK has a particular problem with our addiction to house-price inflation. Before the crash, house prices trebled in the space of a decade. Great for those that bought at the right time, but not for others.

As a nation, we are used to borrowing beyond our means. The UK mortgage market had the second-highest loan-to-value ratio of any OECD country before the financial crisis.

At a household level, first-time buyers who were offered 125 per cent mortgages and found themselves in negative equity following the crash.

There are roughly a million people who owe more than their homes are now worth. UK households still have more mortgage debt, relative to their income, than households in any other major economy.

There have been four housing bubbles in the UK in the past 40 years. They can be hard to spot but they invariably lead to economic bust when they burst. Macroeconomic stability matters and volatility in the UK's housing market has played a destabilising role.

One solution is to increase the supply of housing, as proposed by Kate Barker in her landmark 2004 review. But while building extra houses is absolutely necessary to constrain excessive house-price growth in the long term, housebuilding is slow to take effect. But we also have to tackle demand. And housing market demand is mediated by the availability of mortgages.

A new IPPR report published today, Forever Blowing Bubbles? Housing's Role in the UK Economy, argues that policymakers need to learn the lessons of the credit crunch. The report argues that the UK's addiction to house-price inflation is bad for the economy and that a central plank of government economic policy should be to ensure that there is greater stability in house prices.

Regulation to end speculation

IPPR's critics suggest that such an approach threatens to thwart aspiration and hinder social mobility. But there is nothing aspirational or equitable about courting another recession. And there is absolutely no reason to believe that the next housing bubble will serve first-time buyers any better than the last.

The onset of loose lending around 1999/2000 correlated strongly with the start of a downward trend in the number of first-time buyers. Far from helping home ownership, it drove it further out of their reach.

Conflating aspiration with higher levels of mortgage debt is a mistake. People with high levels of debt – notably high loan-to-value ratios – are much more likely to fall into negative equity.

Monetary policy has a part to play – house prices should be a more explicit consideration in its formulation – but it is a blunt instrument, with the hikes in interest rates needed to dampen future housing booms likely to come at the cost of excessive pain to the wider economy.

Fiscal policy – such as stamp duty or council tax – is certainly important in egalitarian and distributive terms, but tangential in terms of its actual impact on house pricing, and politically highly fraught.

The Joseph Rowntree Foundation's Housing Market Taskforce concluded its work earlier this month with some interesting recommendations on property taxes. But mortgage regulation is the most important tool in controlling demand in the housing market.

Deposit requirements on buy-to-let mortgages should be raised and lenders should ensure that rents cover repayments. Small-time speculators seeking a fast buck in the form of excessive capital gains from the buy-to-let market need to be deterred. Instead, we should be encouraging institutional investors into a more professional and more secure private rented sector to build to let.

Short-term thinking

In particular, when it comes to mortgage lending, the government and regulators need to hold firm in the face of industry lobbying and impose a 90 per cent cap on loan-to-value ratios and a 3.5 times cap on loan-to-income. Put simply, a mortgage of no more than £90,000 could be lent to buy a home worth £100,000 and a couple where each is earning £25,000 could borrow no more than £175,000.

We need to strike the right balance, allowing people to take out affordable mortgages while reducing the risk of excessive borrowing creating instability in the economy as a whole.

Mortgages are usually a 25-year commitment and high loan-to-income ratios allow borrowers to take out large mortgages that appear affordable at very low interest rates, but with no guarantee that interest rates will remain low, heightening the risk of defaults and repossessions. A 90 per cent loan-to-value ratio allows for a 10 per cent fall in the price of the investment before negative equity takes hold.

As Shelter has found, this is an argument that first-time buyers support, even though it may make it more difficult for them to get on to the housing ladder. They recognise that loose lending and cheap credit are a recipe for future instability both in our housing market and in our wider economy.

Andy Hull is a senior research fellow at IPPR.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.