Somerset Maugham commented that “things were easier for the old novelists…their heroes were good through and through, their villains wholly bad.” Commentators on housing right now are behaving like the old novelists, treating the Government’s Help to Buy policy as the villain. Their argument seems incontrovertible: the mortgage guarantee scheme was introduced, house prices started shooting up and they have since gone crazy with annual increases of over 15% in London.
The problem with this account is that the villain is puny. There were just 2,572 mortgage guarantees given in March. Plus the villain has an alibi: 85% of the Help to Buy completions are outside London and the South East in regions where house price is more muted.
Luckily, for those with a taste for drama, there is another villain waiting in the wings: cash.
According to Hamptons International, 350,000 houses in 2013 were bought entirely with cash. Lenders’ mortgage books grew by just £10bn during 2013 while these outright cash buyers spent £90bn. While some of them were selling a house too, 70% of them were injecting pure cash into the market.
By way of comparison, while on the latest figures Help to Buy was facilitating less than 5% of house purchases, 40% were being made with nothing but cash and the proportion was rising throughout 2013. Why are house prices rising so aggressively? It might be that the dash for cash is much more important than mortgage availability.
So why does Help to Buy get all the attention instead? One reason is that it is easy to see what we do about it: call on the Chancellor to stop it. Respectable economists have said the same thing; even the Governor of the Bank of England might be an ally. What a shame that Help to Buy looks to be fairly marginal, especially in the hot part of the market.
The other solution typically offered as a panacea for house price growth is to build more houses. That would certainly be a good thing but there were 115,000 housing completions in 2013 – an increase – and starts have jumped by over 30% in the latest quarter for which we have figures. Prices haven’t eased back. Let’s say there is a target to get the house building figure up to 250,000 per year by the end of the next Parliament. Assuming a steady rise towards that target, there might be 150,000 new houses in the first year after an election. This is only 35,000 additional completions compared to 2013, barely 10% of the total of cash purchases, hardly a flood of new stock.
Still an uptick in building will dampen the expectations of cash buyers about what prices they will get when they come to sell, except if the demand from cash keeps rising and is about something other than investment. After all, much of the cash is in the hands of rich overseas buyers. They are investing in London partly to consume ‘housing services’, partly as an investment but also to give themselves an opt-out if things start to look dicey in their home countries. A study by academics at the Said Business School seems to suggest that increases in political uncertainty overseas drive up house prices in London. In this week’s issue of the New Yorker magazine, James Surowiecki describes the same dynamic in Vancouver, a calm, leafy sort of place, an ideal refuge. There are plenty of prospects for political uncertainty in countries such as India, Russia, China, Saudi Arabia and Uzbekistan, where many of the foreign cash buyers in London and the South East are based. Rather than irrational exuberance, it may be the rational prudence of these buyers that keeps driving up prices even when less exotic drivers of demand are dampened down by restricting mortgage availability or amending Help to Buy.
So can we do anything about the new villain? Controlling the entry of cash into the market is much more difficult. To its credit, Government is trying to keep some of the cash at bay. Stamp duty on high-end properties has risen; the cost to those who buy property via an investment company domiciled abroad has risen by even more. But it is not proving to be enough. What will have a higher impact? An annual tax on property wealth might do it. However, it will have to be set pretty high. Investing cash in London property in particular is very lucrative and very easy to do. An annual tax of 1 or 2% might pull back house price growth a little bit or its effects might be completely negated by let’s say a rise in political uncertainty in Eastern Europe. Put the tax much higher though and there will be other detrimental effects across the country as well as massive political fallout.
The reality may be that we need to combat the cash in other ways, let’s say by strengthening the hand of UK buyers who rely on mortgages to finance their house purchases. Ironically, Help to Buy might be one of the most useful tools we have to prevent the annexation of ever larger parts of the country by cash, putting the Government’s credit history on the line to give first-time buyers and others without cash a chance to hold off the rich. It’s either that or build enough not just to meet the domestic demand but the global too. And in fact it might have to be both.