Why Right to Buy could be very wrong
The government is lauding the new-look Right to Buy scheme. But there's one major problem with it that could land buyers in hot water. It assumes house prices will never fall.
"Property asking prices hit record high" claimed a story all over the internet on Monday. It's a headline government ministers must have looked at with some satisfaction. Why? Because it shows that the plan is working.
The plan is to do everything possible to make house prices around the UK to look, on average, as though they aren't falling in nominal terms, and so to stop the UK economy utterly imploding.
However, the truth is that even asking prices for houses are falling in nominal terms and everyone knows it. But it is in real terms that they are really falling. As the FT points out, add in the retail priceindex(RPI) to the Rightmove data on asking prices and you see something pretty nasty.
Asking prices are not 2% higher than they were in 2007. They are 13% lower. And in some places that's just the beginning: in Wales they are 24% lower. But even these numbers aren't really telling us the truth about what people really pay for houses (rather than what they are asked to pay).
At a Scottish lunch party last week, all the talk was of houses that just aren't selling at anywhere near their asking prices. Occasionally one goes when one of the 'more money than sense oilies' from Aberdeen turns up with cash. But mostly the houses just sit there - waiting for someone to buy at the wrong price or the seller to cut to the right price.
So we still have no idea what the real clearing price for houses in most areas is. When will we? Impossible to say for sure. But the day might be getting closer. Nearly 30,000 new houses came on the market in the weeks before the Jubilee. That's the highest figure fortwo years. It might even be one that gets some price competition going among sellers.
It is with this in mind that I noted housing minister Grant Shapps tweeting about the "reinvigorated" Right to Buy scheme this morning (you can follow him on @grantshapps and me on @merrynsw). He tells us that 2.5 million social tenants have "the chance to buy their home with discounts of up to £75,000" as long as they are "a secure council tenant and have been a public sector tenant for five years." Then he send us off to DirectGov to learn more.
Here you can find out how much of a discount you can actually get on the house in which you live. You can also take a look at what happens if you need to sell the house in the five years after you buy it. If you sell in the first year you have to pay back all the discount (as a percentage of the sale price). In the second year, you would have to pay back 80%, in the third, 60%, in thefourth, 40% and in thefifth, 20%.
So let's say the house is 'worth' £100,000 and you get it for £60,000 (a 40% discount). You then sell it for £110,000 under a year later. You now have to pay back the full discount -40% of £110,000, or £44,000 - (regardless by the way of any improvements you may have made to the house to get the higher price). You will haveprobably spotted the problems by now.
First, who decides what a council house is worth? The state provided information on this all talks about the discount being from the 'market value'. But we already know that in a low volume market such as this, the clearing value of a house is very different to the perceived market value as suggested by the indicies.
So what price does the tenant pay? The Housing Act requires it to be set via 'direct comparison' ie, looking at prices recently paid in the open market. But what if, as is the case now, the open market isn't working? (Let's not forget that volumes in the UK market are down 40% in the last five years.) I suspect there is a pretty high risk that the tenant will end up paying too high a price.
Then what if he tries to sell it quickly when he can't meet the mortgage payments, finds that paying for the upkeep of the house is all too much, decides to have a go at trading up or worst, gets repossessed? If he sells the £100,000 house for £80,000, he still has to pay back 40% in the first year, so £32,000.
That means he clears £48,000 rather than the £60,000 he put in. If he hangs on into the second year, he'll only have to pay back £25,600. But he is still looking at a loss something I am guessing that anyone who buys into Shapps' spin won't be expecting.
Look at any of the official literature on Right to Buy and you will see nothing on what happens if house prices fall the scheme appears to simply assume that they will not (there may be a contingency plan to prevent buyers ending up in negative equity as a result of discount paybacks but if so, I can't find anything on it).
That is, as most of us now know, a dangerous assumption. I've sent Shapps a message asking him if it has occurred to him that prices sometimes fall. I'll let you know what he says.