By Michael Carberry
In the last two issues of Only Connect, I have looked at the reasons behind the current severe housing crisis in the UK and how successive government policies, especially the “Right to buy” have merely served to exacerbate the problem. This month I want to address what could and should be done to ensure that all British citizens can enjoy this most basic of human needs.
People need homes not property
Just as many British businesses do not own the premises in which they operate, so also with British people’s homes. Around 35% of households in the UK are either renting from a private landlord (17%) or are renting from a ‘social landlord’ (18%, e.g. a housing trust or a local council). For many people – students, young people starting work, older people who do not wish to tie up their capital, families on low incomes, temporary residents, or people who are geographically mobile - having decent, affordable and secure accommodation is much more important than owning the bricks and mortar. For such people, renting should be the obvious solution, but many feel compelled to buy because of the lack of affordable rental accommodation or of fear of losing their home because they have no security of tenure or protection from arbitrary rent increases. Genuine home ownership therefore means being able to stay in a property as long as required at a cost which will remain affordable and with freedom to adapt it to your own needs within reasonable parameters.
Buying a house is not necessarily the good investment which many British people believe. Depending on interest rates, buyers on long-term mortgages are typically paying a total cost of between 150% and 250% of the original purchase price. Studies have shown that in any twenty-five-year period since the Second World War, the same money invested in the stock-market would have produced a much better return. Moreover, one increasingly sees elderly couples who have struggled for years to pay a mortgage to buy their property, then take out new and expensive mortgages under ‘equity release’ schemes to recover some of the money they have so painfully accumulated. So, as house prices rise it becomes increasingly cost effective to rent rather than buy, provided that long term security of tenure can be guaranteed and that tenants are protected against arbitrary rent increases above the rate of inflation. Although my wife and I have owned seven different houses during our married life, during most of that time we have lived in rented accommodation as we currently do and have done for a total of twenty-six years. But then we live in France where sensible regulation makes renting an attractive option.
So, what do I think is required for genuine home ownership?
Suitability, affordability, sustainability.
By suitability I mean adequate and comfortable space together with the necessary amenities and decent sanitation. Britain has the smallest housing by floor-space in Western Europe, largely because of the lack of mandatory minimum space standards and inadequate regulation of house sales. The government did draw up new minimum space standards in 2015, but, although the R.I.B.A. (the professional body for British architects), has long campaigned for these standards to be made mandatory, the Conservative government, under pressure from developers, decided they “can only be applied where there is a local plan policy based on evidenced local need …, and where the viability of development is not compromised”. This put the onus on local authorities to develop plans which are then open to challenge by developers. The administrative burden, bureaucracy and delays involved mean the standards are effectively unenforceable. Moreover, British people are extraordinarily uninformed about living space. Houses are typically sold on the number of rooms rather than the total space available and room sizes are given as maximum length and breadth rather than the actual area of liveable space. In consequence, few UK householders have any idea of the square metreage of their homes. With no knowledge of price per square metre it is very difficult for buyers to make sensible comparisons between the value of different properties. This widespread public ignorance has contributed to the building of ever smaller homes and house price inflation.
To be affordable for people on average earnings, accommodation should not cost more than 30 – 40% of after-tax income but should be much less for low earners who need to spend a higher proportion of their income on other essentials such as food, clothing and heating. For these latter to enjoy decent and affordable accommodation, social housing is the only real option but, mainly as a result of Margaret Thatcher’s ‘right to buy’ policy, it is in desperately short supply. However, even if one can find suitable and affordable accommodation that is of little use if the situation is not sustainable in the longer term. Crucially, whether renting or buying, affordability should last as long as one lives in the property and not be subject to unforeseen change which might result in one losing one’s home. That is not possible if landlords can arbitrarily hike up the rent above the rate of inflation or interest rate increases mean that mortgage payments are no longer affordable and your cherished home may be re-possessed. Similarly, one cannot really call a house “home” If you can be evicted at two months’ notice for no fault of your own. Insecurity of accommodation leading to stress, mental health problems, family breakdown and homelessness is one of the greatest evils arising from the housing crisis in Britain today.
What is to be done?
There are a number of ways in which governments could and should tackle the current crisis. Ultimately, the biggest single pressure on both rents and house prices is the shortage of dwellings and steps need to be taken urgently to increase the supply. This has been recognised for a long time but recent governments have repeatedly failed to grasp the nettle. As a start, the government needs to give the issue a higher profile by appointing a senior Cabinet Minister with a specific remit to increase the supply of affordable housing and, in the longer term, bring down the excessive and unsustainable level of house prices in most parts of the country to a reasonable multiple of average earnings. To achieve that they would need to:
Increase supply of social housing:
As in other countries, it should be mandatory for local authorities to ensure a certain minimum percentage of social housing based on population. The abolition or phasing out of the ‘right to buy’ is an essential pre-requisite to reform of the housing sector to enable local authorities or housing associations to raise long-term finance and benefit from historic rents for re-investment in new building. Priority should be given to high-density, low-cost housing with plenty of one-person type accommodation and using brown field urban re-development sites rather than agricultural land. These should not be managed by local authorities but by housing associations governed by boards of trustees, including local government, to ensure accountability, business people to ensure efficient management and, crucially, a significant tenant representation to prevent a repetition of the Grenfell scandal.* The associations should have a remit to cover costs and make a profit for re-investment over the long term (30-50 years). Requiring all new housing developments to include a certain proportion of social housing would not only help increase supply but, by providing good quality homes in attractive neighbourhoods for young families or older couples, would do much to de-stigmatise social housing and make it a normal and useful part of the housing mix.
To provide the necessary investment funds, the government should establish a Housing Finance Corporation to provide long-term, low-cost finance to local authorities and housing associations for the construction of social housing. Guaranteed by government this would be funded by institutional investors such as pension funds who could be required to hold a certain percentage of their funds in this way. It could then be used to leverage commercial bank lending to provide finance for social housing projects all across the UK.
Encourage and reform the private rental sector:
Tax incentives should be given for ‘Build to Let’, not ‘Buy to Let’, to encourage an increase in the supply of new homes without pushing up prices. In France, investors can receive significant tax breaks for new-build housing which is let out for a minimum of 9 years at affordable rents controlled by law. In consequence there is a plethora of schemes promoted by house builders and finance companies to develop such housing, attracting huge amounts of capital into the sector from the wider public. Again, priority should be given for high-density affordable accommodation on brown-field sites.
The British government should promote home ownership rather than property ownership by much tighter regulation of the private rental market, including standardized letting contracts to provide long-term security of tenure for tenants and prohibit rack-renting**. In France, unfurnished lettings are for a minimum of three years. They are automatically renewable while allowing fair, index-linked rent increases in line with inflation. The lease can only be terminated at the end of a letting period with six months prior notice. After six years the tenant can only be given notice if the landlord wishes to re-occupy the premises himself or to put it up for sale, in which latter case the sitting tenant has the option to buy at a discount to the advertised price. While landlords may recover property in clearly defined circumstances (such as non-payment of rent) tenants cannot be put out during the winter months. Most French people would be horrified by the iniquitous ‘no fault’ evictions which are commonplace in Britain. The legislation is thus fair to landlords and tenants alike but, crucially, guarantees renters the long-term security and affordability of their home which makes renting an attractive option
Older people living alone could be encouraged to swap their large and burdensome houses for purpose-built sheltered accommodation. In return their own houses could be handed over to housing associations for renting to families but with ownership of the property remaining with the elderly person or their family.
Provide sensible help for house purchasers.
Over-indebtedness is a major cause of mental health problems, family breakdown and homelessness. Those wishing to buy property should not be encouraged to take on unsustainable or unpredictable debt. No sensible business would take on a floating-rate mortgage where a change in interest rates could make the business unprofitable; so commercial mortgages are normally at fixed rates. Yet in the UK floating-rate mortgages for house purchase are seen as the norm. In France most people would regard it as insane to buy a house on a floating-rate mortgage and rates are normally fixed for the duration of the loan. French banks are not permitted by law to lend to people who cannot show proof of adequate means to service the debt. Moreover, as they are also required to give a print-out of repayments for the entire loan showing the total amount of interest paid, mortgages do not normally exceed 15 years, as beyond that the cost of the interest becomes excessive. As well as tighter regulation of bank lending to ensure affordability and prevent indebtedness there should be statutory protection for mortgage owners in difficulties resulting from things like illness or unemployment. In France one can defer up to two months re-payment of principal every year within certain limits. In consequence, repossessions, with all the personal trauma, family break-up and resulting social costs so common in the UK, are almost unknown.
There should also be better regulation of house sales to require clear statements of square metreage of both living space (i.e. heated floor space below a certain minimum headroom) and total useable space so that buyers have a sensible measure by which to compare prices. As in other countries offers of purchase should be made in writing accompanied by a deposit and be legally binding to prevent last-minute reductions of the offer price by buyers or ‘gazumping’ (bidding up of the price by another buyer after an offer has been accepted) both of which are widely practised in the UK and contribute to market volatility.
Decentralisation
Finally, there should be a national programme of de-centralisation of the economy and the population away from the south-east. Good-quality affordable housing is one of the best ways to encourage internal migration. Industrial development schemes should be accompanied by social housing or affordable private rental schemes to entice workers away from the overcrowded South East.
Collectively, these measures would address the current housing shortage, improve the quality of life for millions of citizens and, by taking the pressure off house prices, make the possibility of owning one’s own home a realistic possibility for future generations.
*The disastrous tower block fire in Kensington, London in June 2017 which resulted in 72 deaths and 70 other people injured. It was caused by inflammable cladding illegally installed during a renovation of the building and about which tenants had repeatedly expressed concern.
**Rack-renting is charging such high rents that the tenant is forced to leave and is not compensated for the improvements that they have made to the property.