You Must Construct Additional Pylons

I've thought about various potential topics to write about recently, and realized, with some regret, that the act of publicizing this blog has, in addition to significantly increasing readership (1,200 cumulative page hits), also meant there are some things I just can't write about anymore. One of the oft-touted advantages of the internet is anonymity, however contentious your opinion on a particular subject may be, it is ultimately the opinion of an online tag, not a real world person. The act of discourse is dependent on context and an agreement between parties as to the extent of the topic, and the degree to which things are "just for argument's sake." Sadly, without this context a attributable one-way online monologue has to be written with at least one eye on how misinterpretable one's comments are. Hence, this is a return to the more innocuous realm of social-economic politics.

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The pre-cursor leaks to the 'Autumn Statement' due to be delivered shortly by the Chancellor suggest that some form of tax or regulation may be due to land on the Buy to Let / Private Residential Lettings (B2L  and RL respectively) industry. The purpose behind this is pretty clear, on the one hand a tax on B2L will raise a heap of cash for the treasury, and secondly it will allow various politicans to claim they are doing something to try and cool the B2L / RL market, which is often seen as a parasitical industry forcing people into a lifetime of rentals rather than homeownership.

There certainly seems to be some substance to the grumbles of Generation Rent, if the rent a landlord charges is expected to pay for the mortgage, plus wear and tear on the property (on average), and turn a profit, then it seems reasonable the renter should be able to pay the mortgage themselves. It is also telling that for most people my age the concern is not with paying a mortgage, but with saving a deposit while also paying rent, the deposit really serving little objective value (with mortgages common at the 90 and 95% level, is the up front payment really more relevant than the ability to pay the monthly amount?).

However, the Government's various schemes seem to be doing next to nothing to help matters, and the latest plan, to tax landlords (the actual proposal seems to be reduce the tax relief that can be claimed on mortgage interest, however the reduction in an allowance and the increase in a tax is a presentational difference not a mathematical one), is likely to make matters worse. As was once very simply pointed out on a news forum "Companies don't pay tax." Now after the scoffs regarding off shoring, tax efficient structuring and so on have abated, the point is more fundamental. Companies really don't pay tax - why? Because companies are ultimately just mechanisms for moving wealth between individuals. If the government removes some of the money from the transactions of a company (through VAT, Business Rates, Employer's National Insurance and so on), its not the company that pays that tax (how can it - companies only exist on paper and online), its the customers (who pay a higher price), the employees (who get a lower wage) and the shareholders (who get a lower return). Hence a corporate tax rise will just result one or more of those three groups receiving less. B2L works in exactly the same way. If a landlord makes £500 a month from a property, and the government changes the tax regime to mean the same landlord now only receives £100 a month, he will just increase the rent by £100/month (or whatever the required amount to keep the profit margin the same). Any increase in B2L taxes will, in full, be paid by those renting - supposedly the very people the proposal is meant to be helping.

The other failed intervention recently is Help To Buy mortgages. The idea here is that when you go along to a Bank for a mortgage you can apply for a Help to Buy mortgage - in this arrangement you take out an, apparently, normal mortgage with the bank (at say 95%). However, behind the scenes the government provides a guarantee on a proportion of the loan (20% I think). The idea is that since part of the loan is secured the banks should be more willing to lend. Effectively a 95% mortgage becomes a 75% mortgage (and therefore less risky) and a 20% loan to the government (far safer than lending to individuals).

However, this seems to be treating the symptom not the problem. The reason people struggle to build a deposit (and therefore need a loan to value mortgages) is because house prices are, relative to incomes, ginormous (- I hate the spelling of that word), driven by an abundance of cheap money. Making it easier for people to borrow vast sums of money just reinforces the problem, thereby pushing prices up even further. (Think about this from the other way round, if your selling a property the more people who can afford to bid the higher you can push the price. Help to Buy means people can afford bigger mortgages, or people who previously couldn't afford one now can, hence demand goes up and so does price).

The higher, and growing, cost of property is also one the reason for the boom in B2L. Buy a property, get a tenant to pay the mortgage and general running costs for you, and watch the property value itself grow. Unlike equity in a family home this is actual capital as well. After all you really can see a B2L house and take the money. (As an aside, I don't doubt that those who bought at the peak of the boom are now sitting on negative equity and it isn't all looking like fun and games. This doesn't really invalidate the industry as a whole, its an oft-quoted rule that shares should be held for the long term (minimum 5 years) to ride out boom/bust. Property is, of course, exactly the same).

With the housing market flooded with not just those looking for a residential property, but also huge amounts of restless capital looking for an investment offering higher returns than stagnant traditional investment channels, its not surprising that the price continues to grow. Higher prices mean its harder for tenants to become owners, so the government makes it easier for them to borrow, so the price goes up even more, so it looks like a better investment, so more B2L landlords enter the market, so the price goes up, so rents go up, repeat ad nauseum.

The solution? There seem to be three legs to this milk-stool of a trilemma; supply, deposit building and demand.  (Listed in that order for a reason).

Firstly; Supply. This is the obvious and boring one. If you had more houses the price should drop, supply and demand etc etc. We are in a bit of a trap on this one because of the continually rising prices in general. New builds tend to fall into the "expensive and exclusive" category - why? Because there is demand for this. With the number of million and billionaires growing every year, with wealthy French, Chinese, Russians and so on all setting up shop in London, high market, preposterously priced houses and apartments net developers huge pay offs, and don't do much to help the market. The second problem is a little more insidious; at the other end of the spectrum the value of land a low-ladder property is built on is a big component of the value. A plot of 10 houses with planning permission is worth very nearly the same amount as the 10 houses; and that price goes up every year. So why bother to develop when you could just sit on the land and bank increased asset value year after year?

Unfortunately in this instance I'm inclined to advocate state interference (I do have a socialist side; its just normally cowering in the background). Social housing, built and sold at cost (or even subsidized) for first time buyers on a buy-to-live basis, will eventually cap and begin to reduce the market price for entry level housing. This will in turn break the appeal of sitting on unused land, and should stimulate the private sector to also begin building (hopefully at a mid-market level).

Second; Deposit Building; as mentioned above a re-occurring grumble is that while you may be able to comfortably pay a mortgage, its harder to have both the monthly outgoings and accumulate a deposit. Before getting on to possible ways to assist with this I want to touch on a slightly tangential point about deposits;

One of the claims I've heard is that accumulating a deposit is seen as a 'test' as to whether an individual can afford a mortgage repayment and still have money left over to cover unforeseen expenses which a landlord would cover for a tenant. If you can save £15,000 in addition to paying your rent, then you can probably afford any expenses that crop up. There is some bizarre logic in this IF you assume that everyone gets their deposit through saving, and continues to save at that rate once they have a mortgage. This however is very, very, stretched assertion.  Bank's do not ask for proof that a deposit was obtained from saving, inheritance, poker winnings, work bonuses, deliberate thrift; its all the same. You got the money or you don't; and the how is largely confined to checking for illegal activities.  (Note this is not the same as "stress testing" mortgages. Anyone taking out a base-rate linked mortgage today should be able to afford increases to 5% base rate or more, assuming 0.5% for the next 20 years is likely to be a bad bet).

That point aside it is also a reasonable challenge to say whether deposit building even should be encouraged. Why shouldn't we all just rent?  Renting certainly has a role to play in a country's residency make up. Renting allows a flexible and mobile workforce, and for those on carefully controlled budgets it avoids the possibility of sudden unexpected costs (i.e. a new boiler and or a tree falling on the roof). I don't even see a problem with the job of 'professional landlord' ultimately having one expert dealing with everyone's domestic problems and building up a network of trade-contacts should be more efficient than everyone trying to do their own thing.

On the flip side homeowner's tend to be less likely to engage in criminal activity, are more likely to plan and save for their future, take more pride in their neighborhood, are more politically active and are more likely to be employed. Home ownership provides a long term stake in a community that renting does not.

The thing that Britain lacks relative to other countries with a much higher proportion of rentals however is a 'big business / long term' rental market. At the moment you might rent for 12, or in extreme, 24 months, mostly likely that a private landlord. This does not provide much in way of stability. Rents can go up year on year, often with short notice. Your landlord might decide to sell up, or simply decide they don't want to renew your tenancy. This does not provide any long term stability, and is one of the main appeals of home ownership.

If residential letting could be moved onto a longer term and more dependable footing, it may alleviate some of the ill-will between tenants and landlords. If leases were 5 - 10 years, with pre-fixed annual increases (to say the RPI), and managed by companies rather than individuals, then renting may become a viable, stable, long term solution. You may also see rental values starting to come down; a company that owns a block of flats outright (due to being both developer and corporate rental), only has to provide a reasonable level of return on a, close to gold plated, investment. Rates should therefore be tracking something comparable to gilts, rather than mortgage repayment rates. Actually bringing this about however would require building a market almost from scratch, and outside the scope of my idle musings.

If all of this is put to one side however, and it is assumed we do want to support those trying to build deposits, it would seem we need a way for those renting who want to save for a property, to get bonus income from somewhere. The simplest way I can think of this to work without obvious risks of exploitation is some form of tax relief. Anyone who doesn't own a property, who rents from a landlord meeting certain criteria (i.e. not your wife if your an MP!), who has income below a certain threshold (40% tax bracket maybe), can apply for income tax relief - with the amount saved being held by the government in some form of savings account. These funds can only be used as a deposit on a house to be used as a primary residence, and could be capped (15-20,000?).

The cost to the government should be relatively trivial, after all the people this would impact do not make up a major source of income tax, and economy should get a minor boost from people spending more of their income as their deposit is accumulating from their tax-relief, and some of the ire is taken out of landlords tax relief on mortgage interest for B2L properties. How much it would cost to administer this may be a factor, as would the potential knock on impacts.

As an attempt to curb the effect this would have on rising property prices it may be possible to force a decrease in loan-to-value as the amount of tax reliefed savings increases. Thus while the average deposit may increase from 10,000 to 30,000, this results in mortgages dropping from 95% to 85% rather than people bidding for more expensive houses. Exactly how to implement this may require a little more thought, but some kind of cap on prices seems a possible way to go. If a cap of (say) 200,000 is placed on the value of a house that the tax-relief fund can be used for, then people could save towards a lower/low-mid range house while renting, but this couldn't be abused by the super wealthy to saver for mega-properties, nor could it force prices up too far. Once the price goes over 200,000 anyone using a tax-funded deposit would be unable to use their fund.

The final point - demand - is again a rather obvious one. More people = more demand for housing = higher prices. While there are potential some things which could be done at a local level to help on this front (i.e. services for finding housemates for professionals?), the more systemic issues around immigration and population dynamics are realistically out of scope here, and are mentioned purely for the sake of completeness.

So, to recap; we should not try to tax landlords since this will backfire, we should introduce a long term, corporatized, rental market, and tax relief is a possible way of encouraging saving for deposits.

House market solved.

/Z