Controlling house prices
So Gordon Brown wants to build 100,000 new eco-friendly homes. Good idea. But it will not by itself do much to control the rising cost of buying a home.
The reason that house prices are still rising by 10% a year is because of the imbalance between supply and demand. We need the Government says 225,000 homes a year. We are building 160,000. The gap of 65,000 is the excess of demand over supply. And any A-level economics student will tell you that means prices will rise.
But can we really build our way out of this problem? Even Gordon Browns plans are not for 100,000 more homes a year but for five new zero energy towns with 10,000 to 20,000 homes. They will take many years to build. So it is barely even tackling one side of the problem too little supply.
If the Government is serious about tackling the growing unaffordability of homes it will have to tackle both sides supply and demand.
One way to damp demand is to slow down the growth in buy-to-let. Last year 330,300 mortgages were given for buy-to-let property. Almost as many as the 410,800 given for first time buyers. But young people struggling to buy their first home have to pay their mortgage out of their taxed income. Whereas buy-to-letters get tax relief on their mortgage payments because they are a business expense which is deducted from the rent before it is taxed. A rough back of the envelope calculation shows that tax relief represents a subsidy to buy-to-let landlords of up to £2 billion a year. Scrapping it would at least give first time buyers a level playing field.
The other change which could be considered is to bring back some form of rent control and security of tenure. Since the Housing Act of 1988 there are no controls on rent for new tenants and they have no right to remain in the property once their shorthold tenancy expires. That can be after as little as six months. It was this change to tenancy law which made buy-to-let such an attractive proposition because all the advantages are with the landlord. So if rents were controlled and tenants had some security of tenure then the buy-to-let market would look far less attractive. And that could cut the demand for homes dramatically.
If the Government also built more homes perhaps using some of the £2 billion saved in tax relief then it really could reduce the gap between supply and demand. And then the one iron law of economics would start to control the spiralling price of buying a home.
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