More people renting houses rather than owning them would be better for our economy
In April, mortgage lending fell for the fourth month in a row. It seems that the British are so determined to get on top of their personal debt that repayments have exceeded borrowing for eight of the past 12 months.
Since the British Bankers’ Association began keeping records (which admittedly began only in 1997), such a prolonged period of negative net lending has been quite unprecedented. This – by the standards of official received opinion – is Bad News.
To anyone who is not (a) a politician, (b) a banker, or (c) an economic “expert”, that judgment may seem rather odd. In fact, to anyone who is (a) a working householder (b) a taxpayer or (c) a common sense human being, it may seem like a sign that much of the population of the country is admirably responsible. But then real people live by a rather different logic from the class that governs national economic policy.
The two factors which contribute to this pattern – the unwillingness of financial institutions to offer mortgages that are out of proportion to applicants’ earnings, and the reluctance of people to enter a housing market that will require such a disproportionate mortgage – are both species of sanity.
Flying in the face of this eminent good sense is the Government’s Help-to-Buy scheme, which “experts” are relying on to restore the insanity that has, until recently, constituted the British housing market: that is, mortgage lending on an Alice-in-Wonderland scale which will prop up grossly inflated property prices, thus drawing millions of ordinary working people into unsustainable debt.
Let’s chant the following sentences all together, shall we? Property prices in this country are too high: they are completely out of sync with ordinary earnings. Many, many people – especially the young, and possibly the old – should not be pressured into owning their own homes: for them, renting would be a far better option. And furthermore, just to compound the heresy, a reduction in home ownership might be better for the economy.
The first of these propositions is the easiest to maintain. Within living memory – which is to say, when my husband and I bought our first house – the understanding was that your mortgage should be two and a half (or, at most, three) times your annual income. House prices reflected this assumption because sellers had no option but to comply with it: you could not sell a house for a price that exceeded any possible mortgage offer. Then came easy credit – and you know the rest.
There is a widespread belief that it is the shortage of available housing that makes British property so expensive. This may be partly true but the sudden ridiculous increase in house values that occurred over the past couple of decades did not coincide with a drastic fall in the number of houses, or even a dramatic increase in population: it came as a direct consequence of easy mortgage credit. People were throwing Monopoly money at a single commodity and the prices went through the roof.
But we know all this, you say. Let’s move on. Nothing to see here. So let me take my argument further. It is not a good thing that the health of the British economy is so dependent on property prices – meaning they must always go up, never down.
Nor is it a good thing that everybody should be encouraged on to the property ladder from the cradle. Owning your own home, particularly at the child-rearing stage of life, is generally beneficial: it can – assuming that you are not trapped in too high a mortgage – provide stability and security.
But being locked into (mortgaged) property-ownership before you have undertaken the responsibilities of adult life, or even decided what you want your life to be like, is absurd. It is a trap which makes people less adaptable, less able to grasp unexpected opportunities, and less free to make the sort of adventurous decisions that ought to characterise the early years of grown-up existence. It is so very much harder to sell a home and extricate yourself from a mortgage than it is to escape from a rental agreement.
Much is said in favour of the independence which property-owning brings, but it is easy to forget the loss of social and economic mobility that goes with it.
However, it is not just individuals who are sacrificed to this idealised view of home-ownership. Having so much private household wealth tied up in property means that the population tends not to invest in anything else. Instead of buying shares as Americans do, or investing in entrepreneurial ventures as many Europeans do, the British sink their capital into their houses. A great many of them trust the value of their property to rise with such unquestioning faith that they rely on it to provide a pension, either by outright sale or increasingly now through equity release.
The chronic “under-investment” which has been the curse of British economic life for as long as anyone can recall, is at least partly a result of this reliance on property as the provider of financial security. If fewer people had a home which they saw as the only asset they needed, there might be far more private cash flowing into British businesses either directly or through pension funds and investment accounts of all kinds. Again, money that is not tied up in a static property is more mobile, more flexible and more versatile.
What the Government needs to do if it really wants to help is not subsidise high property prices by underwriting ever more mortgage debt. Instead, it should do everything in its power to facilitate the private rental market. The decision this week to scale back the proposed regulations that would have required all landlords, in every sector of the market, to act as border police checking the immigration status of their tenants, is seriously good news.
The post-war slum landlord scandals gave rise to an understandable political drive toward over-regulating private rented accommodation, and so the commonplace 19th century practice of “taking a house” or a set of rooms on a rental arrangement had virtually disappeared by the 1960s. It was private ownership or the council estate. (And council tenancies, modelled on the ideal condition of home ownership, became permanent and immovable, too.)
But if what you want is a more dynamic economy which can adapt robustly to changing circumstances, then you need people and money to be able to move. Locking them both up in houses does not facilitate this. And in bad economic times, the problem is exacerbated: in Britain a recession is always marked by the property market becoming sluggish (often to the point of being moribund). So it becomes more difficult than ever for people and money to be liberated.
Of course, governments face an intractable political dilemma. How do you explain to a nation of property-owners that it would really be better for everybody if the price of their precious asset could be allowed to fall to a natural level?
That, I admit, would take rather a lot of explaining.
Source: Janet Daley, columnist on the Sunday Telegraph