The announcement on the Euro has highlighted two related aspects of housing policy that are rarely brought to the public’s attention – the British obsession with home ownership and our peculiar mortgage system based on variable rates. According to Gordon Brown’s mega-sized assessment of the famous five conditions, the combination of these two factors has been one of the main barriers to Britain’s immediate entry into the Euro.
Even though most economic commentators missed this issue in the run up to the publication of the assessment, it was entirely predictable finding. It is not so much the high level of home ownership in the UK compared with most of Continental Europe itself that is the problem, but more the fact that house prices have become the engine of growth of the economy.
The lack of controls on banking means that people are effectively allowed to cash in on the increased value of their homes by borrowing money which they use to buy consumer goods. This means that any attempt to restrain house price growth through increased interest rates will hit consumer spending with a triple whammy. First, higher rates raise the price of credit generally on all borrowing. Secondly, they will reduce the rises in the value of housing – or even lead to a downturn and all the problems of negative equity which ensue – thereby cutting back on people’s ability to borrow. Thirdly, since most people, in our unique system, are on variable rate mortgages, more money is going out of their pockets immediately to pay higher charges.
All this, concluded Gordon Brown, meant that it was difficult for our economy to converge with that of Europe given that our interest rate is currently 3.75 per cent, a third higher than the European rate of 2.5 per cent. But this begs the question as to whether we will ever converge and if we do, what stops us diverging a few weeks later?
In other words, to join the Euro, Brown is going to have to attempt to change the housing market. But that will take a generation rather than a year or two. We did not get to over 70 per cent home ownership by accident. A brilliant BBC TV programme, shown in May, The Home Owning Dream documents through interviews with civil servants of the 1960s, how ministers realised that subsidising home ownership through mortgage tax relief and exemption from capital gains tax was both economically and socially indefensible. Yet, none had the courage to tackle the issue and reform housing finance in a way that would have created a more equal playing field between the rented and owner occupied sectors.
Now the price of this cowardice by long dead ministers may be that we can never join the Euro. In order to try to damp down the housing market and to reduce its huge swings, there are suggestions that there should be higher stamp duty and capital gains tax on first homes.
But whoa, wait a minute. This sort of idea will go down like a bag of cold sick with the electors and Brown’s supposed boss next door knows it. As The Guardian wrote on 11 June, ‘even the smartest spin doctor would have trouble selling policy that amounted to “join the Euro for higher taxes on your home”’.
The problem with the current housing market is very simple: because housing is seen not only as a way of obtaining shelter but also as an investment, as soon extra cash becomes available in the economy, through growth or lower interests rates, there is immediate pressure on the market and, given the supply is virtually static, prices rise.
None of the options to solve this are particularly attractive: capital gains tax would eat into people’s perception of their wealth; increased stamp duty will reduce people’s ability to move house and the third idea, a new property tax based on the value of the home, similar to the one in Denmark, is probably politically a step too far, though possibly it could be introduced initially at a very low rate.
Despite the political difficulties of introducing any of this, a side effect of deciding to go into the Euro clearly must be a reform of housing finance. That should encourage anyone concerned with sorting out Britain’s crazy housing system to vote ‘Yes’ in the referendum on the Euro.