Curing our addiction to house price inflation is the key to solving so many of the problems that we face as a society.
An average three bedroom house costs £125,000 to build and will last 90 years. Most people who own their own home will do so from the age of around 30 and average life expectancy is 80 years. On this basis each generation should to sustain the nation’s housing stock each household should need to invest £78,000 on average. And yet the average price of a house is £228,000.
The median disposable household income in the UK is £28000. If the household have a mortgage with a loan to value ratio of 90% then they would need to take a mortgage that is nine times the household’s disposable income. If the members household were able to get to a mortgage at an interest rate of 3% per annum they would be paying 50% of their disposable income in mortgage payments.
And in spite of this we manage to convince ourselves that ever growing house prices are making us richer.
What if we approach the whole thing with a different mind set. Shelter is only one of a number of fundamental needs that we have as humans and as such allocating 20% of our income to it seems to be a reasonable goal to aim for.
On this basis, and assuming long run interest rates of 4% per annum an average house would need to cost £110,000 or approximately half of the current average. How could this be achieved?
- Half the value of every residential property in the UK
- Get UK financial institutions to write off half of all mortgage debt
- Compensate householders by issuing sovereign money (free of debt) to compensate for the loss in asset value with a re-imposition of limits on what this money can be used for
- Control prices and rents from that point onward.
This would represent about a 10% write down in the balance sheets of UK financial institutions but allowing interest rates to rise would compensate them and lead to improved savings rates.
House holders could apply for a revaluation of their properties but only if genuine value has been added (e.g. building an extension); normal decoration or replacing a bathroom or kitchen would not attract a revaluation.
The revaluation might not be uniform across the country as the goal would be to eliminate situations where local people cannot afford to buy locally.
Going forward all house prices would advance in line with the increase in median earnings. When a house is sold the house holder would get the current valuation for the house, any excess paid by the buyer would go to the government as stamp duty.
The main drawback is how to continue to encourage house building when the scheme would effectively lead to negative land prices. Therefore, residential land prices would also need to be controlled so that they never exceeded that price that would be paid for the alternative non-residential housing uses possible in the area (be that industrial, retail or agricultural). Where necessary the government would step in to subsidise the acquisition on land for residential house building. This would be funded through the savings in housing benefit that would result from the resetting and controlling of housing prices. By my reckoning the £10B required to acquire land would no exceed the savings in housing benefit currently paid to people in work who would now be able to afford decent housing without the support of the government.
One addition idea which I need to spend more time on would be to look at the Danish mortgage bond system; this would potentially provide a suitable investment for the current house holders who are issued with sovereign money leading to a long term housing market where house purchases are financed using money that has been saved in pension pots rather than created by financial institution as debt.
There is definitely more work to be done on the detail of the scheme but for me, reform of housing is the key that unlocks so many other policies, particularly in this time of climate crisis. With the population less dependent on either large employers or the government to be able to put even an inadequate roof over their heads:
- People will have better choices with respect to taking time out from work to bring up their own children;
- People will be able to live and work locally; reducing the number of cars and the number of miles travelled reducing emissions of CO2;
- People will be able to make better provision for their old age which in turn will produce funds for investment in UK industry and provide the basis for a stable housing market in the long run.
Thoughts on Politics 