UK house prices rose by 7.3% year-on-year last month, reports Halifax. That’s not enough for Boris Johnson. He’d like them to go higher. How do we know? Because this week he announced a new plan to raise demand for them – and barring a sudden explosion in supply, a sudden rise in demand will push up prices. The idea – to introduce a state-sponsored scheme of long-term, fixed-rate, low-deposit mortgages – isn’t all bad. There is no reason why we shouldn’t have long-term fixes in the UK. It isn’t how our system currently works. Our banks tend to borrow and hence lend out over much shorter cycles; and we have a dug-in system of using mortgage brokers to find products – they too prefer to flog us loans every five years rather than every 25. But it’s perfectly possible – and sensible too.
The trickier bit is the idea of making these mortgages 95% loan-to-value (LTV), with the government guaranteeing the 5% deposit. The detail is not clear here (at all), but the idea that government should guarantee deposits is not new (the endless and awful Help to Buy scheme has set the precedent). However, it still misses two points.
The first is that deposits aren’t just there to protect lenders (a problem that can be easily solved by re-introducing some kind of mortgage insurance) – they protect buyers too. If house prices fall, 5% is not much of a margin between security and the sleepless nights of negative equity – that’s why lenders (already buried under mortgage holidays) are retreating from high LTV loans right now. Johnson says he wants everyone to feel the “joy and pride” of home ownership. Neither exists in a negative equity crisis.
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The second is that while it is clear that raising the cash needed to buy a house is hard, it isn’t just the deposit. It’s also the stamp duty. Buy a home in England or Northern Ireland for £400,000 (in normal times – houses under £500,000 are stamp duty exempt for now) and you’ll pay £20,000-£40,000 in deposit. That’s hard enough to save. But the stamp duty is another £10,000 – in cash and due on completion. You can’t add it to your mortgage.
So here’s an idea for a libertarian government that wants to step out of more markets than it wants to step into – and that wants to prove it is less in thrall to the lobbying skills of housebuilders than its predecessor (no one wins from a house-buying subsidy more than a supplier of houses). How about skipping the “guarantee this and guarantee that” approach and just abolish stamp duty?
This isn’t a time for losing tax revenue, but you could replace the losses either with a small capital gains tax on primary homes (at least then you are taxing the people in the deal who have the money already) or by switching the stamp duty payment to the sellers (again, the ones who already have the money).
You can argue (I have – see here) that cutting stamp duty does not necessarily cut the overall cost of a house (the seller just puts the price up to the new level the buyer can afford). But it does (like Boris’s plan) at least reduce the cash-upfront problem and hence open the market to more cash-poor buyers. It’s a lot easier too – and based on recent events it seems that the very last thing this government needs is to attempt to create any new and even-a-little-bit-complicated schemes involving spreadsheets. Enough of that.
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