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5 March 2021

Rishi Sunak’s plan to inflate house prices offers nothing for generation rent

The Chancellor’s housing policy won’t help the large and growing group who don’t own and have no realistic prospect of doing so.

By Jonn Elledge

Asking whether this was a Budget for house price rises is a bit like asking whether it was a Budget for people who like long, boring speeches or “the Treasury view”. Of course it was: they all are. Rain is wet, the Pope is Catholic, the Chancellor of the Exchequer is determined not to let house prices fall on his watch. This isn’t even a Tory-specific view: Gordon Brown and Alistair Darling held it, too, and the only example of a senior politician from any party that I can remember saying (I paraphrase), “Hey guys, wouldn’t it be great if housing was cheaper?” was that mayfly leader of the Liberal Democrats, Vince Cable. This is not an auspicious precedent.

But even taking those caveats into account, Rishi Sunak’s 2021 Budget was an absolute corker for inflating that bubble and saying to hell with the consequences.

Exhibit A is the extension of the stamp duty holiday, introduced last July, which means that anyone buying a property worth up to £500,000 before the end of June can do so without paying a penny in tax. In theory, after that, there’ll be another three months in which the holiday continues for purchases under £250,000, and then it’s all back to normal. In practice, I am unconvinced that suddenly hiking the cost of moving home will be a more attractive prospect to Sunak in June than it is now, and I wouldn’t be surprised if the stamp duty holiday is extended again. 

To be clear, stamp duty is a stupid tax, and needs reform. This isn’t reform: this is a panicked response to a faltering economy. The stamp duty holiday applies to everyone, thus removing one of the few competitive advantages first-time buyers had in the previous market (they were exempt, up to £300,000). Worse, it won’t make buying housing any cheaper, because the chunk of money that would have previously gone to the Treasury will instead be added to property prices. Last year, in the middle of a pandemic that caused the worst economic recession for 300 years, UK house prices climbed by 8.5 per cent. This is absurd. And the Chancellor seems to want it to continue.

That said, ending the stamp duty holiday at the end of March, as originally planned, would almost certainly wreck some house sales and the dreams attached to them. By assuming the extension means Sunak likes runaway house prices, am I being unfair to Britain’s obviously and catastrophically incompetent Chancellor?

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I am not. Exhibit B: the government has said it will guarantee 95 per cent mortgages. That means that if the buyer defaults and there isn’t enough equity to pay off the loan, the government will stump up the difference. Banks will be more confident about offering 95 per cent mortgages, buyers with small deposits will find it easier to get on the ladder, joy will be unconfined.

Except, no. Banks stopped offering 95 per cent mortgages for a reason: because the economy is wobbling and prices might fall, and they don’t want to lose money. Also, I know expecting politicians actually to learn stuff is naive these days, but it’s not like we didn’t have a huge, world-wrecking financial crisis because of exactly this sort of thing only a dozen years ago.

Prices probably won’t fall now because 95 per cent mortgages mean more first-time buyers will be able to buy: there will be more money chasing the same number of homes, and as a result their prices will go up. Those 95 per cent mortgages won’t turn generation rent into generation buy; they will mean more house price rises. Which – and this is where we came in – is almost certainly a reason why Sunak has done it.

This is not necessarily an irrational strategy for a chancellor to pursue. More house sales means a busier construction industry and more consumer spending (on furniture, furnishings and so forth). A housing crash might plausibly lead to a banking crisis, and nobody wants to see another one of those any time soon. And then there’s the ineffable feel-good factor to consider. In 2013, then chancellor George Osborne allegedly told the cabinet: “Hopefully, we will get a little housing boom and everyone will be happy as property values go up.” Historically, house prices and happiness have tended to correlate.

But if this strategy was once rational, it’s becoming less so by the year. When home ownership was open to, well, if not all, then most, the benefits of rising prices were open to most, too. Yet now there’s a large and growing group who don’t own homes and have no realistic prospect of doing so. For those people, rising house prices just mean less and less chance of ever attaining security.

With prices at their current level, there are plenty of people in different areas for whom even a 5 per cent deposit is so far out of reach it is essentially impossible. The government has just made a bet that prices are going to become even higher, and introduced policies intended to ensure it.

Those people did not come up in the Chancellor’s Budget statement. What does Rishi Sunak plan to do for them? Does he even know they exist?