Party Political Animal

Archive for the ‘Housing’ Category

The news that house prices have fallen by 2.5% in March was greeted almost equally with doom-laded headlines and the almost gleefully gloomy prognostications of commentators elbowing themselves onto the airwaves. Our obsession with house prices is, though, one of the root causes of our structural economic weakness.

First, the good news: house prices in the UK have already doubled in real terms over the past decade – a faster rise than in any previous decade and a more rapid ascent than any other country, so even a widely predicted 10% drop won’t make much impact.

Second, if falling house prices stop Harry and Serena yacking on at dinner parties about how much their house has gone up, that’s a plus. A bigger plus would be if the “house price slump” forces the 32 people in my small London street with Range Rovers and Porsche Cayenne Twin Turbos to return their Wagons of Doom to the leasing company. That would be a major result – OK, so there’s not really 32 SUVs in my road, but it feels like it.

Now onto the serious stuff. Our economy has long been distorted and damaged by our love of bricks and mortar. For much of the post-war period, savers and investors were hit with a double whammy: savings were deemed “un-earned” income and taxed at up to 98%, while capital gains tax was un-indexed, despite high inflation. The interest earned by savers was also kept below ever rising inflation for political reasons – namely to bribe mortgage-paying voters. In short, you would have been a mug to have saved in the ‘60s and ‘70s.

For those with mortgages on the other hand, rates were both kept below inflation and were tax-deductable – plus your main residence could be sold tax free. So the clever money flowed into houses. In a small island with tough planning rules, that meant three things. Individuals didn’t save: they invested in their house. Businessmen didn’t make money out of manufacturing: they cleaned up in property instead. And housing was a one-way bet.

Along came Mrs T in the ‘80s and added another twist with her home-owning democracy and council house sales – all socially desirable, but not so hot for the economy as further floods of dosh cascaded into property.

Of course we Tories were not stupid. We knew the country needed to save more. Savings forms the pool of investment capital needed by industry. Nations which save more tend to consume less, import less, have lower inflation and more stable interest rates. But in the ‘80s we had other priorities, so house prices inflated ever upwards, releasing equity into consumption via higher borrowing – leading ultimately to unsustainable consumption and inflation.

The early ‘90s recession woke the government up – and everyone else. Mortgage interest tax relief had already gone and new simplified, but limited tax-free savings schemes – TESSAs and PEPs – were introduced to encourage people to save more. But by then, the government was badly short of cash. Although the Treasury was well aware of the benefits of higher savings, they vetoed more generous tax-free savings schemes.

Since 1997, interest rates have been largely freed from political control – that’s good. But savings policy has been a disaster, with a series of ever more complex reforms. Tax-breaks on property have also been cranked up with REITs – Real Estate Investment Trusts – which are free of corporate tax, something our economy needed like a bucket of vomit.  

Then there are pensions. Pensions are basically a way for the government to encourage you to save tax-free for your old age – not least to reduce their social security bill. The catch is that you have to lock your dosh up for decades and the schemes are so complicated that you have to use a middleman to manage your cash.

The result is that if you need the money for an emergency, you pay both tax to the government and penalties to the middleman. Then there are intractable things like final salary pension schemes, money purchase scheme, company pensions, pension credits, SERPs, personal pensions and stakeholder pensions to addle your brain – not to mention annuities when you retire – and under Gordon Brown, the already Byzantine system became even more tortuous. On top of which a long series of company pension defaults beginning way back with Captain Bob in 1992 have hardly added to confidence.

The result of Brown’s mismanagement of pensions, savings and property taxation is that we now have one of the lowest savings rates in the world at under 3%, less than half the level of a decade ago – and our investment levels have also slumped.

Germany, France and Japan, by contrast, save at around twice our rate, helped by long-standing simple and generous tax-free savings schemes. Those countries all have their own structural problems – inflexible labour markets in Germany and France and arguably less open internal markets in France and Japan. But all three are bailed out to a significant degree by high savings, high investment and better educated populations than Britain and the US. They will all get through the coming downturn in better shape than we will, despite all of Brown’s hubristic boasts about our economic prowess.   
 
So having distorted the property market with massive tax breaks, failed properly to incentivise savers and left pension schemes even more muddled and confused, now the government plans to solve the whole problem by introducing a compulsory pension scheme with employers footing much of the bill. 

It’s not the answer. Savers are generally taxed twice. Once when they earn their money and again when they save. Instead of supporting the governments new pensions policy, the Tories should scrap all pensions and savings schemes and allow anyone and everyone to save up to a reasonable limit each year in a simple way, a way which would free people from the financial spivs who cream off so much of what we earn and give them access to their cash when they need it.

Then we might obsess less about housing, our TV screens would be free of eternal property programmes and we might invest and produce more, consume a bit less and have a healthier economy – oh, and dinner party conversations would be more interesting.

It won’t happen of course. The Treasury proposed something of the sort in the mid ‘90s, but it was all thought of as too radical and expensive. Plus John Major was afraid it would piss the City off – by then we’d already pissed pretty well everyone else off.

So don’t worry too much about house prices. We will always be a nation which puts housing equity ahead of a sound economy. And the real reason for the house price slump of the early ‘90s was rising inflation and interest rates which peaked at 15% in 1990.

But Gordon Brown, for all of his many faults, suckled the milk of Thatcherism. Courtesy of the semi-independent Bank of England, Brown has been more monetarist than the old girl ever was. So inflation is subdued, even in the face of some huge commodity and oil price hikes. Interest rates should not rise in response to external inflationary pressures which are outside our control. Sure, house prices will fall. But not like the ‘90s. And our politicians will continue to subsidise housing with generous tax breaks at the expense of savers.  

Phillip Oppenheim