Do you remember MIRAS? Mortgage Interest Relief had existed in the sixties and seventies but the “At Source” aspect was introduced by Margaret Thatcher in 1983 and gave homebuyers automatic tax relief on their interest payments. It was widely seen as a middle-class perk, and I can remember having heated arguments with Conservatives who refused to accept that mortgage-payers were on a par with council tenants when it came to “subsidy”.
MIRAS was progressively scaled back in the eighties and in early 1988 Nigel Lawson gave advance notice that couples would no longer be able pool their allowances of £30,000 each from August that year. This caused a massive spike in house prices as people rushed to beat the deadline, something I experienced when I moved to Cambridge that summer. The house I bought was on the market for £70,000 and I ended up paying £79,000, which was very painful at the time!
By the time MIRAS was abolished even the most diehard Conservatives knew in their hearts that it was fundamentally wrong to give money to people who were relatively well off. And of course, MIRAS just helped to push up the demand for homes, and hence prices.
Well, the MIRAS days are back again.
All of the government’s recent housing initiatives will subsidise those who are relatively well off, whilst attacking those who live in social housing.
The announcement that the income eligibility limit for shared ownership will rise to £80,000 (£90,000 in London) is the latest policy in this trend. Shared ownership comes under the heading of affordable (i.e. sub-market) housing and the unsold equity is effectively a form of public investment, so many more relatively well-off people will benefit. Yet tenants of social rented housing on much lower incomes are clearly not deemed to be worthy of such support, since Pay to Stay income limits are being set at £30,000 (£40,000 in London) and these “high earners” will be charged a market rent or something close to it.
Starter Homes have no income limits at all, and yet after five years you can sell your home, cash in on the 20 percent subsidy and walk away with a tax-free windfall of up to £118,200 in London or £62,800 outside London. This “subsidy” will effectively be lost forever, and starter homes will replace affordable homes on section 106 sites, where the “subsidy” would have been retained in perpetuity. As I predicted in October, the government now plans to change the definition of “affordable” housing to include starter homes. “Some of these products may not be subject to ‘in perpetuity’ restrictions or have recycled subsidy” says the consultation.
On top of this are Help to Buy, and Help to Buy ISAs and a raft of other initiatives that effectively offer generous subsidies to owner occupiers.
As Joe Sarling has pointed out, a first time buyer in London could technically access three different forms of subsidy on a single home – a 20 percent Starter Home discount, a £3,000 government ISA bonus and a 40 percent government loan meaning that the government effectively subsidises 53 percent of the home’s value.
How can this possibly be fair?
This approach, favouring ownership and chipping away at the value and viability of social renting, is fundamentally ideological and is a direct outcome of the tendentious and biased reports produced by Localis and Policy Exchange over the past decade. Social housing tenants pay a lower than market rent and this amounts to a subsidy, they say, even though social housing makes a surplus and saves the taxpayer billions of pounds in housing benefit. Social housing also creates welfare dependency so let us therefore offer right to buy and raise the rents for its better off tenants, cut the income of housing providers, discourage them from building any genuinely affordable homes in future and push everyone we can into home ownership. That is broadly the government’s intent.
But it won’t work. For a government that is supposedly clued up about economics the support for home ownership at the expense of other forms of investment displays a fundamental ignorance of the basic laws of supply and demand. Everything they are doing is stoking demand, and encouraging sellers and housebuilders to raise their prices. If you set a cap on a discounted sale price housebuilders will inevitably be tempted to set their price at the cap and not below it, so the policy is inherently inflationary. If sellers know that an army of subisidised buyers is flooding the market they will inevitably increase their asking prices. But the government is doing very little to boost supply and affordability – whether through the planning system, the assembly of public and brownfield land, new towns and garden cities, regional policy, skills and training, materials or infrastructure investment.
These policies are also regressive, favouring the relatively well-off at the expense of people on lower incomes. Investment in genuinely affordable housing is being reduced almost to nothing at the expense of subsidies to home owners, and as history has shown, it is only a mixed approach of public and private investment that will solve the crisis.
As with MIRAS, the government’s fetish about home ownership and the policies it has put in place to boost it, will push up house prices and will not meet the nation’s long-term housing needs. And then we are back at square one.
Note: the first paragraph of this blog was amended on 14/12/2015 to clarify the history of MIRAS. Thanks to Martin Wheatley, Jules Birch and Paul Kershaw for their helpful comments.
(first published at Inside Housing on 8th December 2015)