Private tenants should be given the right to buy to reverse the decline of home ownership
- House price boom driven by explosion of cheap credit and buy-to-let mortgages, says new book
- Rectify generational inequality by giving private renters option to buy their home at a discount after three years
- Mortgage lending should be reined in by Bank of England and all government demand-side subsidies abolished
The Right to Buy should be extended to the tenants of private landlords in order to reverse declining levels of home ownership, a new Civitas publication urges.
Peter Saunders, professorial research fellow at the think tank, calls for the standard length of tenancies in the private rented sector to be extended to five years, with tenants given the option to buy the property (if it is more than 25 years old) at a discount after three.
In Restoring a Nation of Home Owners, he also proposes measures to rein in the demand that has been behind the house price boom which began in the 1990s.
These include requiring the Bank of England to keep the ratio of average house prices to average earnings within a certain range and abolishing all demand-side subsidies from the government.
Saunders’ plan is designed to rectify the ‘generational inequality in access to home ownership’ which has opened up as house prices have risen so much faster than earnings over the past two decades.
‘The result is that the younger generation is now expected to pay a much bigger multiple of its earnings to buy a home than its parents did – something that never happened previously,’ he writes.
‘The baby boomers are now making capital gains at the expense of their children.
‘Between 2000 and 2014, average earnings rose by 51 per cent, but average house prices rose by 132 per cent,’ he writes.
Saunders shows how, while house prices have been rising faster than inflation for more than half a century, until the 1990s they rose no faster than average earnings, meaning that capital gains were not made at the expense of new generations of buyers.
Since the 1990s, however, the link between house prices and earnings has been broken. Between 2000 and 2014, average earnings rose by 51 per cent, while average house prices rose by 132 per cent.
This process has not been the result of a shortage of supply but of excessive demand, primarily via the explosion of credit and the rapid expansion of the private rented sector since buy-to-let mortgages were introduced in the mid-1990s.
‘The failure to control the explosion of credit from the late 1990s onwards grossly inflated house prices, and the historically low cost of credit since 2008 has kept them inflated and prevented the price correction which is necessary to restore the link with earnings (as occurred in the three previous house price booms),’ Saunders writes.
‘The growth of buy-to-let has further fuelled demand, and this has been reinforced by an influx of foreign money into the luxury London market, the strong growth in immigrant numbers, and an increase in the number of parents’ drawing down their own housing equity to help their children buy.’
His proposals include:
1.Ending all current demand-side government subsidies, such as Help to Buy and mortgage guarantees, which claim to make home ownership more affordable but actually have only thrown fuel on the flames. ‘These policies are not only wasteful of public money; they end up making a bad situation even worse by inflating prices even higher.
2.Introducing a statutory duty on the Bank of England to regulate mortgage lending to keep the ratio of average house prices to average earnings within a specified range over the medium term. The upper end of this range may need to be set high initially (given the existing level of house prices) but should gradually be reduced to no more than the historical limit to affordability (probably a ratio no higher than 4.5:1).
3.Extending the statutory Right to Buy (RTB) currently enjoyed by tenants in the social rented sector to tenants of landlords in the private sector. Similar rules of eligibility and rates of discount should apply, although discounts should be capped to prevent the possibility of landlords incurring losses, and the RTB should not apply to properties less than 25 years old. Landlords should be partially compensated by capital gains tax concessions when they sell. The standard duration of tenancies in the private sector should be extended to five years to prevent landlords from terminating leases before tenants have achieved the residential qualification period required to activate the RTB.
Notes
Restoring a Nation of Home Owners: What went wrong with home ownership in Britain, and how to start putting it right is published by the cross-party think tank Civitas on Monday June 13.
Peter Saunders is Professorial Research Fellow at Civitas and Professor Emeritus at the University of Sussex. This book sees him to return to the subject which he tackled in A Nation of Home Owners, a major study of the impact of owner-occupation which was published in 1990.
Restoring a Nation of Home Owners: What went wrong with home ownership in Britain, and how to start putting it right