Home ownership.
Two simple words, but which conjure so many images in so many minds. Labour plan to build 1.5 million new homes over the Parliament and their tax and legal changes are explicitly designed to reduce the scale of the private landlord class. However, these two measures seem to not understand what it is that they are trying to do. They conflate outputs and outcomes. They talk the language of the producer, without really understanding that focus must be on the consumer.
We need to talk about home ownership because it is in crisis.
The data confirms what we all intuitively already know. Across a broad range of metrics, we are regressing.
Census data says that in 2021, 62.5 per cent of households owned the accommodation they lived in, whereas 37.3 per cent rented their accommodation. This is a precipitous decline over a relatively short period as the home ownership rate in England was 71 per cent in 2003. In younger age groups, it is even worse. In 1991, 67 per cent of the 25 to 34 age group were homeowners and in 2003-04, 59 percent of this age group were homeowners. This fell to just 39 per cent in the period 2022–23. In 2022-23, the average (mean) age of first-time buyers was 34 years old. In London, the average age of first-time buyers was 35 years old and in the rest of England, it was 33 years old. Just a generation beforehand, the picture was different. In 1980-1984, the average age of a first-time buyer was 27, this rising to 29 in the period 1985-1989.
Home ownership is very much a creature of the 20th century, with the owner-occupancy rate at just 23 per cent in 1918. Not to bore you with statistics, or anything.
Why is home ownership important?
It is important for a variety of reasons, the most obvious being that it is the tenure of choice for most people. It has been noted that the proportion of young renters who would rather own than rent has been broadly stable over the last three decades, at around 80 per cent. Indeed, given a free choice, surveys show a majority of people would choose to buy a home (87 per cent) rather than rent (12 per cent).
Public policy ought to facilitate choice and enable people to live the lives they wish. Beyond that, there are three key reasons why home ownership is important. Firstly, home ownership manifestly benefits the individual. Like it or not, it is, de facto, the principal means by which people accumulate capital in this country.
The value of land and dwellings is about half (52 per cent) of household wealth and nearly £6tn worth of equity is tied up in homes. Of course, as I recently argued, public policy ought to aim to broaden capital ownership but, until that happens, we have to deal with the status quo. Secondly, it gives people permanence, is a source of stability, and affords a stake in local communities.
What is good for the individual is good for the collective, there being strong mutual dependence between them. The last reason is seldom discussed and is often obscured by tales of rich baby boomers. It is, though, perhaps most significant, given increased life expectancy. Most retirement-saving advice rests on the assumption that people own their homes. Workers are told that to maintain their current standard of living when they retire, they need a pension pot capable of providing around two-thirds of their old salary.
However, that theory assumes a sharp fall in housing costs as mortgages are paid off. This theory is about to collide with reality: the proportion of privately rented homes headed by someone aged 55-64 increased from 6.3 per cent in 2010-11 to 11.3 per cent in 2020-21. Reduced home ownership begets a larger role for the state: with renters getting older, either government spending on rent will rise or pensioners will get poorer.
There has, rightly, in recent years been an emphasis on home building. Build, build, build, say some.
The proponents of supply-side reform present a deliciously irresistible economic logic.
The argument runs thus: over the last thirty or so years, Britain has simply not built enough homes. As the volume of social housing has declined, the public and private sector have collectively failed to build enough homes for the UK population. This lack of supply manifests itself in exorbitant prices. But, as with any market, supply is one element. Demand, too, is relevant: not just overall levels of immigration, but changing household composition. The ONS estimates that people living alone in 2023 represented 30 per cent of all households. This is a dramatic shift from the early 1970s, when 17 per cent of all households consisted of one person.
There is one other factor beyond these broad trends that have driven the market. Monetary policy. The genesis of exorbitant house prices lay in ultra-loose monetary policy pursued in the aftermath of the financial crash. Interest rates dropped to historic lows, and the Bank of England, like other major central banks, pursued the heterodox policy of Quantitative Easing (QE). QE was always a curious creature and worked in the following way: the Bank of England printed (electronic) money, £895 billion worth, and then purchased bonds directly, predominantly government bonds. The logic was: by pushing down the returns on bonds, and therefore long-term interest rates, policymakers hoped that capital would be reallocated elsewhere in order, mainly, to provide credit to the real economy. Whilst its consequences remain contested, an excessively loose money supply undoubtedly contributed to surging stock markets and house prices.
This analysis attests to the importance of understanding what existing policy does and what fresh policy is trying to do. Build? Yes. Build beautiful? Absolutely. Pull one lever, i.e. build more homes, and supply increases. But pull another, i.e. raise SDLT for first-time buyers, and demand will fall. Policy cannot be formulated in silos, artificially compartmentalised and implemented on its own terms. In the real world, as history tells us, everything is connected.
The Labour government needs to understand that. And quickly.
This article was first published in Conservative Home: https://conservativehome.com/2024/12/17/aaron-jacob-in-the-battle-of-id…