The Buy to Let Mortgage Squeezes Out Owner Occupiers

Update. The Tory Manifesto has just “tacked to the left” according to Judith Evans in the Financial Times this morning (22 May 2017), saying:

Evans reports: “Lucian Cook, director of residential research at the property advisers Savills, said: “It looks as if the penny has finally dropped that you won’t solve the housing crisis by simply building homes for first-time buyers and owner-occupiers.”

Since 1996, properties prices in the UK have escalated at a tremendous rate. This coincides with the beginning of the Buy to Let Mortgage, which in time has led us to property prices rising as more landlords enter the private rental market, taking advantage of low interest rates and favourable borrowing terms. The amount of income a new home buyer needs has risen from 2.7 times your salary in 1996 to 4.47 times what you earn in 2013.

Owning a property may be a British obsession and something people in other countries aspire to but rents are so reasonable elsewhere that it isn’t as necessary as in the UK where rents are high.

There are various factors that have got us from where we were in 1996 to the housing crisis today. The Right To Buy scheme introduced for council home owners has not been followed up as intended with one-for-one building of replacement homes in council housing. After 5 years of ownership, people can sell at full market value, meaning that previous council housing renting has become higher cost, low quality private renting. See this Guardian article for how this has happened. Here is a key segment of the article and a quote below. “MPs expressed concern that the discount applied to starter homes could make them an attractive investment for those who can already afford to buy a home, as after five years owners will be allowed to sell at full market value. The true affordability of starter homes was also questioned.” (Dawn Foster. The Guardian 10 February 2016).

This Telegraph article shows some charts and how this trend has been greatly influenced by the advent of Buy to Let Mortgages. Tim Wallace writes:

Across the country, the increase in prices since 1996 is 281%, while in London it is 501% according to the Nationwide Price Index, as reported by Donna Ferguson in the Guardian on 23 January 2016. The one fact that is repeated consistently across all media covering this subject, whether they are talking to investors or the public in general is that buy to let mortgages have played a starring role in leading us to where we are today.

Today, more young people than ever are living at home, as discussed in this Guardian article. Of course students are spending their loans on accommodation and, in Falmouth, student lets are priced around a third more than for young couples, families, professionals or sharers who are not students, for whom there is a shortage of rental property available.

In this Guardian article, Dawn Foster shows how property today has become a commodity, rather than a necessity: shelter. Even the Telegraph are worried about it today

Of course, excessive lending brought about the crash of 2008 and, what do you know, they pass the onus for their greed and lending errors onto the customer rather than undoing their mistakes. How on earth can people be allowed to gamble on people defaulting on their mortgages? But why should people pay as much on rent as they would do on a mortgage? If you earn enough to pay rent, you earn enough to pay a mortgage. They need reminding of this.

This Guardian article compares 1996 when you needed 2.7 times your salary with the 4.47 times salary to get a mortgage in 2013. Another effect of the advent of the buy to let mortgage is house prices have gone up at a much sharper rate than they ever did leading up to 1996. Ii checked on the property websites and a single bed property in outer Hornsey costing £69,000 in Q4 1996 sold for £515,000 in Q1 2016.

Property needs to be affordable. In the UK we seem to prefer to buy rather than rent. This makes sense as over the years you can be slowly buying a property that is going up in value rather than having nothing to show for your earnings at the end of each month. This Telegraph article talks about house building programmes, but still suggests the private public partnership route and tries to justify the government changing the rules so housing developers can bypass local decision making to build “affordable” (to whom?) homes.

In the 1950s, after Clement Atlee’s very progressive 5 years as PM in which he improved the lives of millions of people with house-building, new opportunities, income and training in the NHS (and the first chance to not be forced into live in service for many British women), the two day weekend, the break of servitude for the sake of snobby people in suburban semis who didn’t want to answer their own front doors, the country experienced the first massively upwardly-mobile changes to their lives and improvement in everyone’s quality of life. Decent place to live, free healthcare, a safety net and other social reforms brought in by Atlee made the Swinging Sixties possible.

How did Atlee achieve this? He went to the East End of London as a Cambridge student, lived in Toynbee House amongst the slums and went to find out why people’s lives were so hard. (Source: The Victorian Slum. A BBC historical reality show). He found out the one outstanding reason: Low wages. People, whole families, were working 18 hours a day, 7 days a week with the doss house or the workhouse snapping at the heels while the rich who lived from their labours thought it beneath them to do any work at all.

Rise in Stamp Duty? How many of the 128 Tory MPs paid Stamp Duty on their second homes, holiday cottages or rental property, while they claim expenses to rent a flat or use a hotel room? Unlikely to be any at all as many MPs acquired property via putting their mortgage payments down as expenses before 2009.

It would be fair if people buying starter homes, “affordable housing”, flats or with less than 3 bedrooms, apart from in luxury accommodation,paid less or were exempt from Stamp Duty. Meanwhile, the percentage you pay could go up depending on how many properties you already own.

Now MPs happily rent out these homes bought before the Stamp Duty Threshold was changed to cover costs and income supplement to their existing salary as an MP. Prices have escalated massively since 1996 due to Buy to Let Mortgages helping people become multiple landlords and who is benefiting from this in the House of Commons? Read this Inside Housing article showing how a quarter of Tory MPs are landlords. The Guardian wrote on this too.

Property prices have gone up so why hasn’t Stamp Duty? I would suggest that MPs personal financial assets are frozen and dividends paid to the public purse while they have an MP’s salary, expenses and other subsidised costs. It’s impossible to find out what tax they pay on their personal assets, particularly when they have benefited more from these as an MP than otherwise.

What is “affordable?”. It sounds like such an arms length thing doesn’t it. Affordable. To Whom? Who says?  Affordable housing built by private developers with interests in profit rather than council housing, which is designed for people who work as well as people on welfare support renting at a lower cost, means money floating out of the public sector into the private sector.

A shortage of council property building to replace housing stock that has entered the private sector has pushed a large segment of society to the edge. Since 2010, there has been a sharp rise in homelessness, repossession and even key workers having to go to food banks. This is caused by various factors including the rising cost of living, the levy of VAT on most things and rising VAT, lowering wages, lack of employment and employment rights, energy prices and, mostly, due to the huge reduction in council housing stock available for renting at reasonable rates.

There may be some comeuppance for those able to comfortably live in Central London, perhaps through inheritance or commodities, whereas people on salaries are moving out of expensive cities. The people who provide the healthcare and other key workers have been moving away from London as a relatively high £50K pa salary is not enough for a mortgage or deposit on a home, as illustrated in this Ham and High article.

This Telegraph article says:

Meanwhile, a report by housing charity Peabody and the CBI argued that there was a “major risk” of London’s economy being damaged as workers are being forced out of the capital due to rents outstripping wages and a lack of availability of affordable housing.

In summary, this could be how we got to the housing crisis we are in today:

• The building of council houses has massively reduced and many previous council properties are now in private hands. The Guardian write on this.
• A small percentage of people have become multiple landlords thanks to favourable lending terms for buy to let mortgages. Here are some figures by Landlord insurer Homelet.
• The largest home building companies are profiting from building on ‘permissioned’ land that could have been used by local councils. The can also land bank without penalty at the moment as there is not a time restriction governing by when they need to have built the homes.
• Housing Benefit no longer provides security for young people who have just graduated (with a debt) or leaving home for the first time so young people are staying home longer. If people could afford to move out of home, they could extend their job search further afield and out of residential, older or more expensive areas to somewhere they can fit in better and find more work.
• More renters could mean lower rent. This article discusses the difference the UK and Germany in terms of renting and ownership. In Germany, renting is the norm (although Germans would like to get on the property ladder if they could but they can move around when they are young and rent is much more affordable than in the UK.
• The Budget bypassed an opportunity to make Stamp Duty fairer, says the Express. Property is even less affordable today as the Stamp Duty threshold (properties over £250,000 up from 1% to 3%) has not gone up with price increases, meaning basic home buyers are now paying more tax on their homes than previously. This article shows how much property has gone up during the reign of QE2. 471-fold since 1996.

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