Helping People Buy Homes Won’t Fix the U.K.’s Housing Crisis
(Bloomberg Opinion) -- When U.K. Chancellor of the Exchequer Rishi Sunak announced his budget earlier this month, he included a mortgage guarantee scheme that promised to help more people become homeowners . Under the scheme, banks will be incentivized to offer more 95% mortgages and at better rates, since the government will indemnify against some of the risks.
The goal, as stated by Prime Minister Boris Johnson, is to turn “generation rent into generation buy.” It’s well timed considering the average home in the U.K. now costs more than eight times average earnings. But, unfortunately, it won’t solve the real housing crisis in the U.K., which is a greater shortage of affordable properties to rent rather than to buy.
The supply of affordable rental properties has been shrinking for the past three years. A parliamentary report last year concluded: “England needs at least 90,000 net additional social-rent homes a year for the next 15 years.” In London the average rent consumes 59% of net monthly income, which remarkably represents a slight improvement due to the pandemic, as rents have dropped 4.3% over the past year.
The mortgage guarantee scheme, however, will spur demand for homes without boosting supply, which, over the long run, will only raise property prices and leave fewer properties available to rent. This matters because 85% of spare rooms in London are in the owner-occupied sector, whereas the rental sector houses more people per property.
Existing schemes should incentivize investment in building new, affordable properties to let. This means encouraging property investors to be part of the solution.
Although there might be a place for guaranteeing mortgages, what is more urgently required is an increase in supply, not in demand. Sunak should instead guarantee a new investment product that directs funds toward affordable housing stock to both buy and to rent. The returns could then be shared with investors.
This would be the same approach the Chancellor adopted in seeking to raise funds to accelerate the U.K.'s transition toward a low carbon economy. His recent budget includes offering new climate savings bonds that will specifically target retail investors and, critically, enjoy the strength of the National Savings & Investments brand and a 100% government guarantee.
Few of the U.K.’s army of buy-to-let property investors (full disclosure: I’m one of them) have any great desire to be landlords and deal with all the practical difficulties associated with acquiring and managing rental properties. Most are simply trying to save for their retirement and provision for their elder care, and they believe that property is their only realistic investment option. They would likely welcome a regulated, hands-off means of investing in property in a socially responsible manner.
Such a structure exists in the form of Real Estate Investment Trusts or REITs, which are collective real estate investments that distribute almost all of their profits to their shareholders. The problem with REITs is that they are a somewhat niche product and, like many other private sector solutions, fail to provide sufficient housing units, especially in relation to affordable rented homes.
A government-backed housing investment scheme could reach further and draw upon an investor base that would not normally have considered REITs. In essence, the capital raised would be used to develop new affordable homes, with private investors sharing in the distributed profits.
The U.K. could offer the security of a principal-guaranteed investment in the same manner as the green savings bonds, while the dividends would reflect the performance of the properties themselves. These could also be further tax-incentivized, at little extra cost, by allowing investors to hold them within their personal pensions, just like REITs. (Residential property is currently an ineligible asset class for private pensions.)
This kind of social housing investment program would also benefit from planning gain — the rise in value of land that occurs when permission is granted to develop it. Such a gain would allow rents to be set low enough to meet the need for affordable housing, while still providing investors with worthwhile returns.
It’s also possible to achieve multiple policy aspirations. Sunak’s mortgage guarantees are aimed at fostering home ownership. This could be achieved within a housing investment scheme by allowing long-term tenants to buy their properties at a discounted rate, reflecting how much rent they had paid. Previous so-called “right-to-buy” schemes have failed because the revenue raised from the sales wasn’t reinvested in new housing.
The only way to solve the U.K.’s housing crisis is to put homebuyers, tenants and property investors on the same side.
In the U.K., there are few mortgage products available for those who can only afford to put down a 5% deposit, and the rates are prohibitive. The very best mortgage rates are reserved for those with deposits of at least 40%, although even a 20% deposit is sufficient to secure a competitive rate.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.
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