Opinion: While we need to get young people on the property ladder, movers and downsizers need help too | City A.M.
Falling levels of home ownership and the particular plight of first-time buyers in the UK housing market have caused headaches for policymakers for many years.
The latest suggestions for a solution from centre-right think tank Onward, propose, among other things, further changes to property taxation for non-owner-occupiers. The rationale is to reduce demand for housing as a speculative investment asset, thus reducing the upward pressure on house prices and making it easier for first-time buyers to get their hands on the limited supply.
Higher taxation should shift the balance of investment preferences away from housing towards other, possibly more economically productive, assets. Indeed, the changes to stamp duty and mortgage interest relief for buy-to-let and second home buyers are taking effect.
Movers now make up less than half of all mortgage loans for house purchases, compared with 56 per cent just five years ago
Before the spring 2016 surcharge, buy-to-let activity has fallen from an average of about 25 per cent of mortgage loans to an average of 17 per cent in 2018. The phased reduction in mortgage interest tax relief on buy-to-let loans began in the spring of 2017 and also seems to have added to the fall in activity in this sector.
From a macro-economic viewpoint, a tilt in the balance of investment preferences could be desirable – after all, a lack of business investment has been blamed for the UK’s disappointing productivity. But there are drawbacks, too.
Builders, as we know from Oliver Letwin MP’s Review, are only willing to build property they can sell. Reduced demand for homes for the private rented sector may have the undesirable effect of reducing the speed at which new supply is delivered, doing little to relieve house price pressures. And if there are fewer landlords offering rented property, that could push up rents, too, making it still more difficult for frustrated first-time buyers to save the necessary deposit.
But the health of the market isn’t just about first-time buyers. The stagnant state of activity in the second-hand housing market also has a part to play, particularly in getting the right roofs over the right heads. Estimates from the Resolution Foundation suggest that 32 per cent of the housing stock is taken up by under-occupied housing – i.e. homes that are too big for the owner’s needs.
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While there are often understandable emotional issues associated with trading down for older owner-occupiers, blockages in this sector of the market have wider consequences for the proper functioning of the whole housing market. They prevent movers trading up and, combined with high transaction costs and lower availability of finance, promote home improvement over moving. Movers now make up less than half of all mortgage loans for house purchases, compared with 56 per cent just five years ago.
The housing market is in a difficult place and there is no magic wand that will make it better overnight. Tilting the taxation scales further in favour of first-time buyers may help more of them achieve their dreams in the short term. But what happens when first-time buyers need to move on?
With all attention focused at one end of the market we risk forgetting that a healthy housing market is about liquidity at all stages of the housing journey, from pre-entry in rented accommodation, to trading up and trading down. Tax policies that focus on just one phase, risk treating just one symptom rather than the whole illness.