An Englishman doesn't have to own his castle
First published in the Telegraph on 25 June 2009
Most of us have a vague notion that home ownership is a peculiarly British thing. We entertain Arcadian fantasies about our houses and gardens, assuming that having your own slice of this green and pleasant land is part and parcel of grown-up life.
I am all for fairytales. I have a deep affection for Father Christmas. I adore the Easter Bunny. I even have a little crush on the Tooth Fairy. But it is high time we put an end to the bunk that surrounds the British property market. There is nothing unique about the relationship between Britons and their homes: levels of ownership in Spain and Norway are comfortably higher than they are here.
Owning a house is not a prerequisite for economic maturity: many Germans never buy a property. And the idea that an Englishman’s home is his castle has everything to do with his legal rights and nothing to do with owning the blasted place.
It’s rather surprising that I have to labour this point, with the housing crash now approaching its second year. We ought to have learnt the hard way that home ownership is not a one-way bet – yet I feel keenly that we have not. Once the property market reacquainted itself with the law of gravity, after more than a decade of ever more improbable increases, house prices fell faster than in any post-war property slump. Your home is now worth around a quarter less than in the summer of 2007; as a result, negative equity is fast approaching the heights seen in the early 1990s.
Thanks largely to the unprecedented dose of economic adrenaline pumped into the system in the form of near-zero interest rates, quantitative easing and a stamp duty holiday, the worst of the crash now seems to be over. Prices rose unexpectedly in May, according to Nationwide; and the Royal Institution of Chartered Surveyors claims that buyers are returning to the market in droves.
This recovery is probably something of a mirage: prices are likely to fall further in the coming months, though perhaps not as consistently or as rapidly. The recession itself may be coming to an end, at least in the technical sense, but the long saga of rising unemployment and a sickly housing market has some years left to run.
But that’s not really the point. The problem is that, however chimerical the recovery, we have not yet absorbed the more fundamental message. Housing bubbles are bad news – yes, even when prices rise rather than fall. In bad times, there are families that suffer the pain and indignity of losing their homes, and households that see their finances crippled, perhaps permanently, by the whims of the market.
But an overheated property market is also a ferociously disruptive force in most families’ lives: it prompts them to buy homes that are bigger than they really need, and buy them sooner than they probably should, and leaves them vulnerable to a fall in prices. Also, bubbles distribute wealth (or at least perceived wealth) at random. Someone buying their first home in 2002 would have seen its value leap by more than 40 per cent over the next two years; anyone doing so in 2007 would have seen the price drop by around 25 per cent in the same period.
For much of the boom, prices were higher than could have been justified by the simple fundamentals: the value of the bricks, mortar and land, and the supply and demand for housing. As many of us warned, prices were higher not because houses were worth more, but because of the proliferation of debt – the phenomenon that eventually put paid to the financial system.
The solution is twofold: first, to ensure that banks never allow their customers to take on debt that could cripple them. This is where the Bank of England comes in. In the past, it has had a single target – to control inflation.
In the future, it must at the very least have a second power alongside this: the ability to control the loan-to-value levels at which banks lend to customers. When it is worried that banks and consumers are overextending themselves, it can tighten the criteria, preventing excessive lending without punishing the rest of the economy with higher interest rates.
Second, the Government must reshape the tax system so that it does not favour home ownership. This may mean experimenting with a land tax, whereby families pay annual taxes based on the value of their home and land; it may mean imposing capital gains tax on first homes. Both steps would help prevent another bubble, although they would have unpredictable side effects.
Most of all, however, it is time to remove the stigma associated with not owning a home. A century ago, barely a tenth of households owned their place of residence. Owner occupation was artificially pushed higher by a series of lucrative tax breaks in the post-war era. It could just as easily have been different. The idea that home ownership should be enshrined as a human right – alongside free health care and education – is plain wrong. It is about time that sunk in.