Affordability of Home Ownership

The price of homes in England has risen faster than wages and inflation, and the average home now costs more than seven times the average income; in the 1990s, the average home cost less than four times the average income. Over the long term, the ratio between wages and house prices needs to return to a more reasonable level. Many people in England who want to buy a home of their own are unable to do so because homes in this country are simply not affordable enough. Being unable to own your own home can have a damaging effect on the economic and mental wellbeing of those unable to do so. (Conclusion, Paragraph 4) A complex challenge

The affordability of home ownership is a complicated and multivariant problem, with no easy or straightforward solutions. Demand-side solutions cannot work in isolation (as they often counterproductively increase house prices as a secondary effect), but supply-side solutions also are not sufficient (homebuilding cannot happen at the necessary speed to have a significant effect). While the affordability of home ownership is a challenging problem, there are some approaches which can begin to tackle this complex issue. We set these out in the remainder of our report. (Conclusion, Paragraph 28)

Many government departments have roles to play in tackling housing affordability in this country. We support the cooperation we have seen to date between the Ministry for Housing, Communities and Local Government (MHCLG) and HM Treasury, including in response to this inquiry, but tackling home affordability in the long-term requires a holistic approach by the whole of government. (Conclusion, Paragraph 33)

Support from family, often called the bank of mum and dad, is a major part of the current housing market for first-time buyers. This entrenches inequality in the sector, with home ownership resembling an inherited characteristic: a young person’s chance of homeownership depends more 53 on parental home ownership than on personal earnings. More should be done to ensure that everyone has a fair chance of buying a home if they want to, regardless of their family background. (Conclusion, Paragraph 36) Increasing supply and homebuilding

We support the government’s aims to improve rates of homebuilding to address historical under-supply of homes and address the chronic unaffordability of home ownership, but we remain concerned that at current rates the government will not hit its target of 1.5 million new homes by the end of the Parliament. We acknowledge that annual targets can be overly simplistic, but provisional interim targets are nevertheless a useful way for the government to demonstrate whether it is on track to meet its 1.5 million new homes target before the end of the Parliament. Delivering the new homes needed to improve affordability will require the combined efforts of the government, private sector and local authorities. (Conclusion, Paragraph 42)

To demonstrate its progress to improving the affordability of home ownership, MHCLG should, before the start of the summer parliamentary recess publish annual homebuilding targets for each remaining year of the Parliament. These should show how government expects homebuilding to ramp up over the session and allow us and other analysts to assess whether the government remains on track to deliver its target of 1.5 million new homes before the end of the Parliament. As well as homebuilding targets for the total number of homes, MHCLG should publish annual homebuilding targets for affordable housing and social housing. (Recommendation, Paragraph 43)

Most homebuilding is currently done by private sector builders, primarily the larger organisations. Homebuilders have been criticised for not building homes at the socially optimal rate, which they have said is because of high costs (some caused by government policies) and a weak market for new-build properties, and ultimately underpinned by their need to remain profitable. This means developers can take a long time to build out sites, even when planning permission was granted some time ago. Nevertheless, we believe that the homebuilders are valuable partners in delivering the necessary new homes that are needed, and we agree with the Minister for Housing and Planning that this is not an indication of bad behaviour. However, when the framework and economic model of private sector homebuilding constrain builders from building at their maximum capacity or at the socially optimal level to maintain their profits, then that framework and model are wrong and must be changed. We are glad to hear that MHCLG is considering transformation to address this issue, as nothing less is likely to be adequate. The Minister did not give us much detail 54 of what such a transformation will look like and how it will be delivered, so we would welcome more information in response to this report. Reform of the planning system alone will not address the affordability of housing. (Conclusion, Paragraph 51)

MHCLG must write to us before the summer parliamentary recess, and then six-monthly thereafter, setting out what actions it has taken to increase homebuilding rates by private developers, its progress so far, and the levels of cooperation it has received from the housebuilding industry. (Recommendation, Paragraph 52)

At their peak, local authorities contributed over 40 times as many home completions per year as they do now, but the homebuilding landscape has fundamentally changed since then and we consider those former levels of local government homebuilding will be practically impossible to return to. We support MHCLG’s stated goal of supporting local authorities to increase their homebuilding, including through the Social and Affordable Homes Programme and by encouraging borrowing for homebuilding through the discounted Housing Revenue Account rate of borrowing from the Public Works Loan Board. (Conclusion, Paragraph 57)

The government must provide local authorities with the necessary clarity for future borrowing by extending the Housing Revenue Account rate of borrowing from the Public Works Loan Board at least two years into the future on a rolling basis. (Recommendation, Paragraph 58)

Government bodies and developers will not be able to maximise the increase to the supply of homes through homebuilding unless they also consider the types, tenures, prices and sizes of homes being delivered. While it is true that many areas of the country do not have enough of any type of home, even in such areas a diverse mix of new properties, especially affordable properties, can improve absorption in the market and make it more viable to build the more homes that are needed. (Conclusion, Paragraph 66)

While it is right for planning decisions to be driven primarily by local authorities through the production of local plans, MHCLG still has an important role in ensuring that new homes being built are sufficiently varied by type, tenure, size and price, in line with the government’s national aims and with best practice. (Conclusion, Paragraph 67)

MHCLG’s new and upcoming guidance on local plan-making is welcome, but in addition to guidance for how local plans should be prepared it should provide guidance for what local plans should include, which local authorities can then interpret for their local areas. (Recommendation, Paragraph 68) 55

MHCLG should initiate a review into different mixes of home around the country, including by tenure, type and price, to assess what impact different mixes have on local absorption rates. This review should consider developments for sale since the start of this Parliament and be updated as new developments are completed and go on sale. MHCLG should use data from this review to determine guidance and best practice examples of areas with effective mixes of homes, and add these to its new guidance for local plan-making. (Recommendation, Paragraph 69)

There are at least hundreds of thousands of residential properties that are currently empty, many of which have been empty for many months or years. While the number of empty homes is much smaller than the total number of new homes that the government intends to build, bringing them back into residential use (either to sell or as social homes) could nevertheless benefit home supply in this country and improve the affordability of home ownership overall. (Conclusion, Paragraph 75)

Government must make it easier for councils to take control of empty properties in their local authorities. This should include clarifying councils’ existing powers, such as Empty Dwelling Management Orders and Compulsory Purchase Orders; making the existing powers less risky by amending the conditions that must apply for councils to take and give up control of empty homes; or providing new options such as an extension of The Dormant Assets Scheme to long-term empty residential properties. (Recommendation, Paragraph 76) Affordable housing

There are mixed views about what makes housing affordable, and no statutory definition of affordable housing. The main official definition, in the National Planning Policy Framework, is not reflective of the housing needs in the country. While we support the recent separate identification of Social Rent as its own category of affordable housing, other forms of so-called affordable housing are not truly affordable for many people. (Conclusion, Paragraph 83)

The government should clearly and officially define affordable housing in a way that can be used for all relevant purposes, not just as part of the planning system. The definition should refer to local average income levels instead of just the local market values of rent or house prices. The definition should acknowledge the different affordability pressures faced by people in different situations and in different locations around the country. (Recommendation, Paragraph 84) 56

Shared ownership is a useful tool for getting people into home ownership, but it is not a long-term affordable option for many of the buyers to whom it is marketed. We welcome the government’s announcement of improvements to the shared ownership model, but it must not be the primary form of affordable housing offered through government programmes like the Social and Affordable Homes Programme. These improvements should include the most efficient and equitable way of dealing with properties when the shared owner has passed away. (Conclusion, Paragraph 89)

The government is right to prioritise social rent as the main form of truly affordable housing, but this should not lead to it entirely neglecting intermediate housing such as Rent to Buy and Discount Market Sales, which are intended to benefit those who do not need social rent homes but still cannot afford homes on the open market. Intermediate housing, especially as delivered by Small and Medium-sized Enterprises, can also contribute significantly to the increase in supply of housing in general and home ownership specifically, and for relatively little investment from the government. (Conclusion, Paragraph 93)

We echo concerns voiced by the Committee of Public Accounts that an unacceptable number of homes constructed through Section 106 agreements remain unsold to registered providers of social housing, and welcome the fact that MHCLG is developing a policy package to identify and address the underlying issues. (Conclusion, Paragraph 94)

Before the summer parliamentary recess, MHCLG must update us on its progress in developing and implementing its new policy package to address issues in the Section 106 market. (Recommendation, Paragraph 95) Mortgage finance and other lending

Mortgages are a vital part of the housing market in this country, and as such a necessary component of improving access to home ownership to first-time buyers. The increased availability of high-Loan to Value mortgages can make it possible for people to purchase homes at higher values, but it is a risk to borrowers if mortgage rates rise and subsequently make the purchases unaffordable through high mortgage repayments. (Conclusion, Paragraph 102)

Government must work with mortgage providers and regulators to ensure that renters cannot be denied a mortgage on the grounds of affordability despite evidence of consistent payment of rent at higher monthly values than they would be paying in mortgage repayments. (Recommendation, Paragraph 103) 57

The Mortgage Guarantee Scheme, made permanent by the current government, is having a negligible effect on the availability of high- Loan to Value (LTV) mortgages in the current market and on the affordability of home ownership. It may have a benefit in the event of an economic downturn, which could encourage more lenders to use it. (Conclusion, Paragraph 109)

HM Treasury must monitor, and annually publish, the costs of maintenance of the Mortgage Guarantee Scheme, as well as the impact that it is having on mortgage rates, to ensure that it remains value for money. These could be included in the official statistics of the scheme, or published separately. If costs of the Mortgage Guarantee Scheme rise without it keeping mortgage rates low enough for ordinary people to access, the scheme should be closed. (Recommendation, Paragraph 110)

We support the efforts of the government and regulators to ease prudential and financial regulations, encourage growth and support first-time buyers, as long as adequate care is taken when doing so. In particular, limiting mortgages to 4.5 times a borrower’s income locks too many people out of owning their own home by preventing them from accessing mortgages large enough to cover the current level of house prices, so it is a welcome step for the government, the Prudential Regulation Authority and the Financial Conduct Authority to ease the 15% flow limit rule so that it applies industry- wide instead of to individuals lenders. (Conclusion, Paragraph 115)

The Lifetime ISA has helped many first-time buyers to own a home, but aspects of its design have limited its effectiveness in tackling housing affordability. These aspects include the Lifetime ISA’s nature as a hybrid product supporting both homebuying and retirement savings, its punitive withdrawal charge, and a property price cap that has not increase in pace with house prices. We support the government’s decision to replace the Lifetime ISA. (Conclusion, Paragraph 124)

The announced replacement product for the Lifetime ISA must focus specifically on supporting home ownership, should not risk people losing their initial investments in the event of changing situations, and should not have a price cap that prevents its use in parts of the country. (Recommendation, Paragraph 125)

The Help to Buy programme helped many people into home ownership, and encouraged housebuilding, but contributed to higher home prices and therefore exacerbated the housing affordability crisis overall. While some form of demand-side incentive may be necessary, it would not be appropriate to recreate Help to Buy as it was done before in the current environment. Any future demand-side interventions should aim to reduce year-on-year variability in homebuilding, as opposed to just a short-term fix to increase effective demand. (Conclusion, Paragraph 135) 58 Stamp Duty Land Tax

Stamp Duty Land Tax is a transaction tax that puts barriers in front of people seeking to buy a new home. Despite a discount for first-time buyers, Stamp Duty Land Tax reduces the affordability of home ownership, slows the property market, and ultimately damages the economy. While it is a valuable source of revenue for public finances, Stamp Duty Land Tax must not be maintained in its current form and needs to be reformed. (Conclusion, Paragraph 149)

MHCLG and HM Treasury must begin the process of reforming Stamp Duty Land Tax to improve affordability. Before the end of the calendar year, the government should launch a consultation into potential alternatives to the current tax, which should consider factors including revenue-raising power, impact on friction in the property market, progressiveness, and fairness. Options to consider could include: a full replacement with a revenue-neutral alternative; a reduction in rates to stimulate transaction numbers; an overhaul of banding thresholds to tie more closely with local property prices and remain relevant over time; and an update to reliefs and exemptions so that they better meet the government’s goals. The reform of Stamp Duty Land Tax should be done alongside a review of other property taxes, including council tax as we previously recommended in our report on The Funding and Sustainability of Local Government Finance, to ensure a fair and consistent approach to property taxation. Importantly, all changes considered must be intended to apply for the long term, without short-term “fixes” that can exacerbate the problem by distorting market behaviour. (Recommendation, Paragraph 150) 59