The housing market in this country is dysfunctional and it is the responsibility of Government to intervene to ensure that market mechanisms work as well as they can do to achieve society’s goals. Two recent examples from very different parts of the country illustrate the problems that free markets can create and the difficulty in getting intervention right.
Last week the Financial Times reported that the Yorkshire Dales National Park (and probably other national parks) is considering relaxing restrictions that were introduced in 2005 to try to limit the number of new homes going to second home owners and people buying for holiday lettings, both of which were deemed to be pricing out local people and changing the character of the area. The policy insisted that new homes could only be sold or rented to local people, presumably as a condition of planning consent.
Banks, however, have become reluctant to lend on homes with covenants that restrict occupancy because sale and resale values are lower. Before granting mortgages they are covering risk by insisting on large deposits that local people cannot afford. The authorities think that in the current market the restrictions are limiting new supply, economic activity that creates jobs and other benefits for local people directly and indirectly. A well-intentioned policy has apparently unraveled because conditions have changed.
One way forward might be to tell the banks to change their policy, but these are tight times in the mortgage market. And underlying the presenting problem is a conflict between good objectives: from an economic point of view, building anything anywhere at the moment creates jobs; but in housing terms relaxation of the policy might change the character of the area and lead to the National Park being overwhelmed by second home owners and holiday lets. This is what they call a real policy dilemma.
The second example, reported by Sky and others, arises from comments by Knight Frank estate agents that one in three newly built homes in London are bought by people from China and Hong Kong. In Central London it is estimated that two-thirds of sales are to foreign owners, not only the newly rich Chinese but also as vast amounts of rich people’s money flees Greece, Spain and Italy into the top end London property market. Those countries seem to be powerless to stop the money leaving, but the impact of it arriving in London is plain to see. Prices inflated at the top end drag up property values, sale prices and rents throughout the London market, making homes even less affordable for people on low or moderate incomes. Meanwhile the Government conveniently helps clear anyone (working or not) on housing benefit from the area.
So, much of London’s new housing supply (as well as existing stock) is being bought as investments by people who will rarely stay there; an international equivalent of the problem faced by the National Park. Should foreign owners be restricted in some way that would be inimical to the way modern capitalism (and the free movement of capital) works? Or could this problem be controlled by also increasing tax income (either through a ‘mansion tax’ or a new tax on foreign residential investment)?
It is reminiscent of the dilemma caused by the ‘buy to let’ boom, when two-thirds of mortgages in London went to people who wanted to rent out rather than live in their properties. Did this make things better by boosting supply and the availability of homes to rent, as GLA economists insisted, or did it make things worse by restricting mortgage availability for first time buyers, forcing them to become reluctant renters, as claimed by groups like Priced Out?
In both the National Park and the Central London examples richer people push out people on ordinary incomes and the poor are nowhere to be seen. It’s how market capitalism in an increasingly unequal society works. But it raises a huge debate about the purpose of the state, why and how it intervenes, and what limits should be placed on the freedom of capital. Any answers welcome!