Politics, Promises and Home Truths.

· Major parties pitch to first home buyers;

· Welcome mat pulled up for internationals;

· Bank of England holds key to autumn market.

11 June, 2024

Amidst a General Election campaign, politics is kind of hard to ignore. Much as most of us might want to. Before we get to the substance of what’s being promised and its relevance to the housing market…

I wonder. Why do politicians ignore the serious challenges confronting this country? Based upon the two leadership debates last week you can’t think otherwise. Fact. This parliament has seen the highest tax take on record. The corollary being dysfunctional essential services and broken infrastructure. As a community, as a nation, we deserve better than political theatre and point scoring. The media also needs to up its game. It’s time to get serious. ?

Regarding the housing crisis, both the Prime Minister and Opposition Leader feigned empathy in their debate with the 40% of the population under the age of 34 forced to bunk in with their parents. Generation Rent had the unfortunate distinction of scrabbling to get a foothold on the housing ladder when affordability got real ugly.

So, what hope are the major parties holding out?

Keir the Builder

The Prime Minister claims that the government is on track to deliver one million new homes in the lifetime of this parliament. The Labour Party has pledged to build 1.5 million new dwellings in the next five years. This reeks of rinse and repeat. Every election campaign for far too long has served up promises of ambitious home building targets. None of which have been met.

The myopic focus on this headline number detracts from rational discussion concerning the complexities of housing. Aside from the younger demographic being frozen out of home ownership, we have an ageing population, smaller households, geographic drift and the demands of climate change and energy efficiency to consider.

And who is going to build these new homes? There is a chronic skills shortage, the Construction Industry Training Board (CITB) reported in May that an extra 251,500 workers are needed to meet UK construction output by 2028. The industry has been hit by a double whammy: an ageing workforce and an exodus of European tradesmen post Brexit, exacerbated by the pandemic.

As part of his ambitious “Get Britain Building Again” policy, Starmer has visions of creating new towns in partnership with the private sector that will feature mandatory commitments to social and affordable housing. Developers will be given “planning passports” to build on brownfield sites with first-time buyers given “first dibs” on new-build homes.

Labour has identified reform of the planning system as fundamental to their economic and homebuilding goals. It is targeting the recruitment of 300 additional planning officers, funded by a tax on international investors. But that’s not even 10% of the planning officers who deserted the public sector between 2010-20.

The bigger picture is that the planning system is a dysfunctional labyrinth in which vested stakeholders at a local level can stymy regional and national initiatives. A root and branch reform of the planning system is long overdue. It’s no wonder that it’s been languishing in the too hard basket.

An increase in supply could, over the long haul, take the sting out of property price inflation. In the short term, both parties are focused on how to improve access to home ownership, not affordability…

Triple Crown

The Conservative Party manifesto, released on June 11, makes a strong pitch for the vote of aspiring home owners:

·???The current stamp-duty holiday for first-time buyers, capped at ￡425,000, will be made permanent;

·???Ditto the Mortgage Guarantee Scheme (MGS);

·???A new Help to Buy scheme will be launched.

The MGS encourages lenders to buy a guarantee on mortgages where a borrower is only able to put down a deposit of 5%. If the borrower defaults, it compensates lenders for part of their net losses.

Under the Help to Buy scheme, first-time buyers will have access to a government loan worth up to 20% of the value of a new-build home, facilitating a purchase on 5% deposit. The scheme is slated to run for three years with developers contributing towards loan costs and no interest on the government loan for the first five years.

The original scheme terminated in England in March, 2023, and is rightfully credited with helping several hundred thousand into home ownership. It also prompted the renowned buying agent, Henry Pryor, to criticize it as the “crack cocaine of the building industry” after the home builder Persimmon racked up profits exceeding ￡1bn in 2018.

The Labour Party manifesto will be released on Thursday but they are echoing the Tory commitment to make the MGS a permanent fixture of the home lending landscape. They are also considering the viability of long-run 25-year mortgages.

With interest rates still hovering near the peak of their current cycle, that will sound attractive to some borrowers. But it will come at a cost with a premium of up to 1% over short term rates. For Perenna, a recent entrant to the highly competitive UK mortgage market offering home loans of up to 40 years, this will be welcome news.

What Else?

The Conservatives are pledging to build 1.6m homes in the next parliament, primarily by means of abolishing the EU nutrient neutrality rules, building on brownfield land in urban areas and raising density levels in inner London to those “of European cities like Paris and Barcelona.”

In the last parliament, the House of Lords threw out the government’s proposed legislation to water down the same nutrient neutrality rules. Was this in response to water and sewage authorities across the country allowing effluent to flow into rivers and oceans? Whilst Labour faces an uphill battle to reform planning systems to achieve its home building targets, that is a significant step ahead of the Conservatives. ?

Meanwhile both parties are in a race to the bottom to penalize non-doms…

Villain of the Piece.

The Chancellor, Jeremy Hunt, fired the first shots in the war on non-doms in his recent Spring Budget. These are UK residents whose permanent home for tax purposes is outside the UK. From April, 2025, the government is proposing that new arrivals to the UK will pay the same tax as residents after four years. Labour seems determined to up the ante and take a more punitive approach.

Labour has raised the stakes, imposing an additional 2% stamp duty on overseas nationals purchasing UK property. This would be on top of the 2% surcharge that offshore buyers already pay, introduced by the Conservatives in April, 2021. And the 3% surcharge applicable to buyers of second homes, regardless of geography. The underlying assumption of this draconian policy is that international investors fuel rising prices and reduce the supply of properties available to UK residents. ?

Foreign Ownership

The Centre for Public Data published a report in November, 2021, (updated June 2023) (1) which calculated that 0.7% of all property titles across England and Wales were registered to individuals with an overseas correspondence address, nearly triple the 0.26% registered in 2010. Predictably, the rate of foreign ownership rises in London.

The London lettings and estate agent, Benham & Reeves, estimated in July, 2023 (2), that 103,425 homes in London were in foreign hands, worth in aggregate of ￡552bn. The most popular boroughs were the City of Westminster, Kensington & Chelsea, and Tower Hamlets. In total, less than 3% of the capital’s housing is owned by non-residents.

The international realtor, CBRE, calculated that 20% of new home sales in London in 2023 (3) were to overseas buyers. Crucially, a high proportion of these sales would be off-plan, providing developers of apartment schemes with the necessary seed capital to meet loan requirements and enable construction to start. If these buyers are discouraged from entering the market, the risk is that some developments won’t get off the ground and supply will be stripped out of the market.

There is a real risk that employing fiscal policy to penalize international investment in London’s vibrant housing market would be counterproductive. It will likely reduce supply, shrink the rental market, and inflate prices.

Rising Tide

If you’re an existing homeowner, the good news is that if the Tories are re-elected that the increased demand from first-time buyers will cascade through to prices across the broader market. Whilst it’s an oversimplification, there is merit in the saying that a ‘rising tide lifts all boats’ in this scenario.

Of course, if the opinion polls are accurate, it is pretty much a done deal that we will wake up on July 5 to the news that Sir Keir Starmer is moving into number 10. The Tories’ advertising is now appealing for your vote to prevent a Labour landslide. Obviously, if enough voters heeded that message the Conservatives would hold onto power.

In 48 hours, we will be able to assess the impact of Labour’s housing promises. In the meantime, there was mixed news today on the economic front. The Office for National Statistics (ONS) reported that annual wages growth in April was holding steady at 5.9%. But there was further evidence of the labor market cooling – job vacancies down and an uptick in the unemployment rate and claims for jobless benefits.

The Bank of England (BoE) Monetary Policy Committee (MPC) next meets on June 20. The General Election two weeks later gives them wriggle room to wait at least another month before cutting the cash rate, if the inflation data remains supportive. The markets are currently pricing in either an August or September cut. Just in time for a buoyant autumn housing market.

References:

(1) The Centre for Public Data: New data on property in England and Wales owned by overseas individuals, November 2021, updated June 2023.

(2) Benham & Reeves: ￡84.2bn worth of foreign owned homes across England and Wales, 13 July 2023.

(3) CBRE: Should we restrict overseas buyers? March 8, 2024.