INSIDE MONEY: PROGRAMME 1: “TAMING THE BEAST” Presenter: Lesley Curwen Listener: Mary Ray Producer: Jessica Dunbar First broadcast Saturday 24th July 2004 at 12.00pm on BBC Radio 4, Repeated Monday 26th July 2004 at 3.00pm on BBC Radio 4 THIS IS A TRANSCRIPT OF THE LONGER REPEATED VERSION CURWEN: House prices, despite predictions of slow downs or crashes have continued to defy gravity. ANNOUNCER: The financial difficulties faced by many first- time home buyers have been highlighted in a new report. It says that in many cases their parents are having to contribute thousands of pounds. ANNOUNCER: Over half of the people trying to get a toehold on the lowest rung of the property ladder, say prices are going up faster than they can save up any deposit. ANNOUNCER: Now a report from the charity, the Joseph Rowntree Foundation, says nearly half of parents are willing and able to help their children find the first rung with the average contribution £17,000. CURWEN: Rising prices. Great news for people who already own a house but they make getting on to the property ladder a nightmare, because the average cost of a house in the UK has now soared to more than six times the average wage. The Governor of the Bank of England, Mervyn King, recently warned that falls in house prices look more and more likely. Of course there’s nothing quite like the property market for stirring up a mixed bag of emotions, be it greed, fear or frustration. One listener wrote to Inside Money to express her real concern about the volatility of the market. Mary Ray, who’s a home owner herself, lives near Leicester and works part-time for the NHS. RAY: I was listening to yet another radio report about house prices going up at a ridiculous rate and I got cross, because I’ve lived through three booms and I really think the government should be doing something to control house prices, we shouldn’t be here again. I’d like the chance to challenge the government and look at the sorts of options that might be available for them to do that. CURWEN: But Mary, I’ve got to put it to you, that a lot of people will be shouting at their radios here, “we like higher house prices, we’re watching the value of our biggest asset go up and up and up.” What’s not to like? Why should the government interfere with that? RAY: Well first-time buyers haven’t got a chance, they can’t even get into the market. Anyone who’s moving really has to put the money straight back into their next house anyway and the market becomes very volatile and a volatile housing market can create bigger problems for the economy as a whole, and to look just at short-term profits is actually short-sighted in terms of the wider good for all of us that we can have from a more stable market. CURWEN: Mary felt so strongly, she wanted to join us at Inside Money to investigate how the market could be controlled. Now I’ll make it clear straight away what this programme won’t be doing, is making guesses about what will happen to house prices in the near future. Instead we’ll be looking at ways to break the damaging cycle of property boom and bust for good. First, let’s hear from one of the victims of the overheated market. LAURA: My name is Laura. I’m 26 years old. I’m currently working as an information officer in Leicester City Centre. I started my job… CURWEN: Mary met up with Laura who’s a would-be home owner looking to buy near where Mary lives. She’s a graduate and has a decent job earning £22,000 a year. RAY: So you’ve looked in Leicester and you’re hoping to buy? LAURA: Yes. I first started looking at house prices round Leicester and getting the property pages in January and initially they did look to be quite reasonable. I mean it was things that I could afford potentially. They were about £84,000, £85,000 for a two-bed and as time’s gone on and now we’re into the middle of summer, the prices have just got more and more expensive. So they’re now out of my reach. They’re, I would say, approximately £120,000 or higher for a two-bed. RAY: So from what you’re saying, it’s almost impossible for you to actually buy that two-bed terrace. LAURA: It is impossible because the maximum I can borrow is £85,000. So therefore I am priced out of the market. RAY: It must be very frustrating for you? LAURA: It is, it is very difficult. I mean I’ve lived in private properties for the last four years so that’s an awful lot of money to be paying to a landlord that could otherwise go towards paying for a mortgage of my own. Didn’t have this situation in my parents’ generation. I mean everybody moved into the married home and now you’ve got more and more people, late twenties, early thirties, still living at home with their parents and obviously that’s quite a difficult situation. The parents don’t necessarily want their kids, the grown-up children, to be there. And it’s very hard for the children as well. CURWEN: And Laura’s experience is all too common. We know that house prices have increased substantially over recent years but there is some debate over just how fast prices are rising now. The latest official government figures say they’re going up at 10% a year. But figures from the Halifax Bank and other surveys suggest it’s double that rate at 20%. What no-one doubts is that higher prices have made it harder to afford a home. They’ve kept rising because of a combination of juicy low interest rates, the popularity of buying-to-let and the simple fact that fewer houses are being built than in the past. Mary wanted to find out about the government’s strategy on house prices and what kind of new steps it could take. We took her to the offices of the consultancy Capital Economics where she spoke to economist Ed Stansfield. RAY: I don’t think enough’s being done to dampen down the housing market. Can you tell me what the government is doing? STANSFIELD: I think when you talk about what the government’s doing, there are two strands to that. First of all, you’ve got the Bank of England who’s responsible for monetary policy, the control of interest rates in the economy and then you’ve got the government, particularly the Chancellor of the Exchequer, who’s responsible for tax policy. Over recent years the Bank of England have deliberately engineered a situation where they’ve kept interest rates extremely low in order to keep the domestic economy relatively buoyant, while the rest of Europe and the US has seen very difficult economic circumstances. And one of the by-products of that has been a boom in the domestic property market. But it’s quite clear if you look at the minutes of the Bank of England’s Monetary Policy Committee meetings, that they are concerned that the level of house prices has become too high and that they are a potential destabilising influence on the economy. Now the Bank of England needs to pull off a balancing act between paying attention to what’s going on in the housing market and paying attention to the broader economic picture. So the Bank of England’s in a fairly tricky situation here. RAY: So what else could the government do to control the present boom? STANSFIELD: I think in principle there are a number of things that the government could do. They probably fall under three main categories. The first I think would be to impose some kind of direct control on the amount of money that people were able to borrow for home purchase. Another option for the government would be, use the taxation system much more actively to try and control the attractiveness of owing property and the cost of owning property in order to dampen enthusiasm. The third thing would be increasing the supply of property because many people feel that the lack of supply, the lack of new property build, has been a contributing factor to the current housing market boom. CURWEN: So three things to look at. Mary was really keen to explore the idea of putting limits on mortgage borrowing. Take Laura who’s been offered a loan which is almost four times her yearly income. That’s far more than would have been offered say ten years ago and some lenders offer as much as five times income. Even that may not be enough for people to afford the home they want. So the pressure is on lenders to offer ever bigger loans. In Mary’s view that only fuels ever higher house prices and lands people in huge debt. So she wanted to see controls on these so- called income multiples. COOGAN: Hi there. RAY: I’m Mary Ray. Pleased to meet you. CURWEN: Mary had come to meet Michael Coogan, the Director General of the Council of Mortgage Lenders which represents all the UK’s biggest lenders. RAY: I’ve been thinking about this a lot and I think there should be official limits on how much people can borrow in relation to how much they earn. What’s your view on that? COOGAN: We don’t agree with monetary controls that impose credit limits on how much lenders can lend or how much borrowers can borrow. We think it would actually create more problems than it would solve. It would only ever be used in any economy as an emergency measure. We don’t think the current economy is in crisis, we don’t think that this is a market which requires that sort of an intervention. The Bank of England is putting interest rates up to try and create the slow down and there are starting to be signs of that, although it’s been taking a longer period than we’d anticipated. So we don’t think that credit controls are necessary, nor do we think it would actually help. First-time buyers would find it more difficult. I think movers would be precluded if first-time buyers weren’t entering into the market. The market, as a whole, could stall if you introduce that sort of intervention. RAY: Aren’t lenders responsible for fuelling the rise in house prices, because you’re letting people borrow more than ever before. COOGAN: I don’t accept that they’re fuelling house prices. The reason house prices are going up is that the demand is exceeding supply and borrowers are therefore having to pay more for the properties they’re buying. Lenders are prepared to pay out money to borrowers for those properties because of the valuations they get from independent valuers and they’re prepared to do that on the basis that there is a significant cushion being provided in many cases by large deposits being provided by the customer themselves. People are borrowing more than ever before but actually it’s still very affordable, both in terms of how much they’re spending on their mortgage, as well as the level of payments with interest rates low in a low inflation environment. RAY: But you mentioned low interest rates. You can’t guarantee that they’re not going to keep going up, maybe even double, can you? COOGAN: We’ve already indicated in our recent forecast that we expect interest rates to go up to perhaps 5¼ by the end of this year and 5½% by the end of next year. But that’s still, historically speaking, at very low levels. Still very affordable even at 5½% and we’re not expecting that to lead to problems for borrowers in the future. And when we look at arrears levels at historic lows, possessions at less than 10,000 per year in an environment where we have 11½ million borrowers, that’s actually a very positive picture of a stable market which is going to continue well into the future, even if interest rates do edge up. CURWEN: Sounds like a no then to Mary’s idea about credit controls. Michael Coogan argued people are actually spending far less on their mortgage repayments nowadays so that lessens the danger of taking on a big loan. Her reaction: RAY: On the face of it he’s got all the answers there but then he would have wouldn’t he. CURWEN: Now in the course of that interview, Michael did explain that if the government adopted measures like you want to limit the amount that lenders can lend, people like Laura, our first-time buyer, would find it even harder to get on to the housing ladder. You do realise that’s a consequence. RAY: I can see that entirely in our present circumstances. I think limits on borrowing are a long-term option and if they had been put in place after the late ’80s boom, at the end of the early ’90s crash, then I really think we wouldn’t be here now with yet another boom. I really think there would have been a better chance of slow, sustainable house-price rises. CURWEN: But it didn’t look like borrowing limits have much chance of getting adopted in the face of fierce opposition from the powerful mortgage industry. On to our second subject and here you might want to sit down and take a deep breath because we’re talking taxes. Of course the government could increase existing taxes, such as inheritance tax or stamp duty on house purchases to try to take the froth out of house prices. But we wanted to show Mary an idea for a radical new property tax modelled on a system used in Denmark. This has been proposed to the government as a replacement for council tax by Oxford University economics professor John Muellbauer. He told Mary how it works. MUELLBAUER: In Denmark there’s a property tax on households which is a national tax. It’s roughly 1% of the value of each house. If you had a £200,000 house, then the tax would be £2,000 paid to the central government annually. One feature of the Danish system has to be explained right at the beginning which is very different from ours, and that is that pensioners have the option to defer payment until the house is sold and that’s very important because obviously pensioners tend to have low cash flows and so that ability to defer payment is very important for making the tax feasible. CURWEN: Why do you think that this has a dampening effect on their property market, how does it work? MUELLBAUER: Well, one very simple way of seeing it is that when there’s a house price boom, then with a fixed tax rate of 1%, that means the taxes paid go up relative to income that takes money out of the pockets of households and automatically dampens consumer spending and also makes households aware that if house prices were to rise much further, then that tax liability next year or the year after would become even higher, and so that dampens the speculative fervour that they might have. CURWEN: How well has this system worked in Denmark? MUELLBAUER: In Denmark it’s worked amazingly well. I’m suggesting that we need something similar. I think we could have ½% tax rate rather than the 1%. But the important thing is to link the tax that’s paid to values and to link those values with general trends in local and regional housing markets, so that when house prices rise too much, this automatic tax stabiliser comes on and slows the whole process down. RAY: I could imagine that people would be very frightened to think about this sort of tax being introduced at the top of the market. MUELLBAUER: One has to be very careful in bringing in any radical reform. It has to be phased in, it’s got to be announced in advance and obviously people have to get used to the idea, they have to adjust their expectations to the new realities. That said, I think it’s very important to understand that there are potential very important compensating effects that could come through interest rates, so that the Bank of England is having to raise interest rates far faster than is happening in the rest of Europe. Now obviously if a tax reform came into being that dampened house prices and maybe caused house prices to fall in some areas, then the Bank would have the opportunity to lower interest rates. RAY: What kind of response have you had to your proposals for this kind of property tax? MUELLBAUER: Of course these are controversial proposals and, politics being what it is, political parties are very cautious about even discussing these things. CURWEN: Our listener, Mary Ray, was quite struck by Professor Muellbauer’s ideas. RAY: I think his proposals about a property tax are very interesting and I’m sure it will get talked about. So I’m really pleased we went to see him. It’s a totally new idea to me. CURWEN: Of course a lot of people will be completely horrified by it, the idea of having to pay more money as house prices go up, pay more taxes will horrify some people. RAY: Yes it will. But because it would offer the chance of not having these great hikes in price which make it unstable for everybody, I think it’s really worth thinking about, yes. CURWEN: If you think a property wealth tax might prove unpopular, well hang on to your hats because there’s worse to come. Last year newspaper rumours appeared, vehemently denied by ministers, that the government was considering charging tax on the profit you make from selling your own home. This tax, known as capital gains tax, is already levied on sales of shares and other assets such as second homes or properties people buy-to-let. You can imagine a change like this would trigger public outrage but one man who would like to see it happen nonetheless is Chris Holmes, former head of housing charity, Shelter, who is a research fellow at the Institute of Public Policy Research. RAY: I understand you’ve got a very controversial idea about taxing people on the homes they live in and not just a second home that they might own. HOLMES: I see them as sensible ideas for trying to slow down house price inflation. I recognise that some people will see them as controversial and criticise me in that way. What I’m suggesting is that we tax the capital gains actually, the real capital gains that people get from the ownership of their housing. It seems to me completely wrong that we tax earned income on higher incomes at 40% and we don’t tax the unearned windfall gains that people get from the rise in prices now of course we see going up by £10,000, £20,000 a year and we should tax that kind of unearned gain. What I’m suggesting is that if people are using the money to buy another house, which may be more expensive, they don’t have to pay it then, it’s rolled over. It has to be paid if people stop owning a house altogether or if they move to a smaller house. CURWEN: So you pay it when you realise the gains? HOLMES: That’s right, yes. CURWEN: But is it likely that any government is actually going to suggest this kind of measure. Wouldn’t it be for them political suicide? HOLMES: Yes. I don’t think it’s realistic to expect that any political party is going to do this for the general election in a year’s time. But, you know, there are examples, if one looks back in the 1980s, Margaret Thatcher said, “mortgage tax relief will be abolished over my dead body.” Everyone said then, no political party will be so stupid as to get rid of mortgage tax relief and then it went, and people saw it was justified. And what I think we need, and that’s why I think you asking for this debate in this programme is very good Mary, is that we need to raise awareness, to put forward the arguments and crucially it comes back to saying, it is not a good thing that house prices go on and on upwards and that is making it more difficult for people on moderate and lower incomes to be able to buy their own home. CURWEN: Doesn’t this attack something deep in the psychology of Brits, that we all think we’re going to make money out of our houses? HOLMES: Well I don’t think there’s anything natural about that, I mean it has been the experience over the last twenty or thirty years. Until sort of the late 1960s house prices didn’t rise more rapidly than prices as a whole. Now it seems to have changed in which they’re going on and on and getting completely out of control. Therefore we need to think as a society about the damage that that is doing and get away from this idea that you can buy a house and without doing anything it will go up by tens of thousands of pounds every year. Of course people do begin to plan on that assumption, but they also get frustrated that their own grown up children can’t afford to buy a house and we can’t have it both ways. CURWEN: Mary was nodding by now. She agreed that society does need to tackle the ups and downs of the housing market but she also thought few politicians will be willing to put their necks on the line by taxing the profit we make selling our houses. So it was time to consider the third and final option, building new homes as a way to bring down house prices, undoubtedly the government’s favourite choice. Ministers have welcomed proposals made by Kate Barker, a member of the Bank of England’s Interest Rate Setting Committee. She put together a review of housing supply which said, for years, too few homes have been built and that’s led to a pent up demand which has pushed up prices. She suggested that creating an extra 120,000 private homes a year in England, plus more social housing could bring down price rises to more normal levels. But that might call for a near doubling of houses built. Some fear that might damage the environment. Others think it’s not achievable. Even if it is possible, some economists doubt it would have the desired effect, making houses more affordable. One of them is Andrew Golland, Senior Research Fellow at Nottingham Trent University. Mary asked him what the Barker Review had found. GOLLAND: It asked the question really how many extra homes do we need to produce in order to be able to have any impact on the overall price of housing, and it suggests that in fact to reduce the price of housing to broadly in line with the level of inflation, we would need to build around an extra 120,000 private homes. So you can see that one needs to build a fairly substantial number of homes to make a very small impact on the price of housing. CURWEN: Are you suggesting that even Kate Barker’s projections about how many new houses you’d need, simply wouldn’t be enough to affect the way house prices have been rising? GOLLAND: It will obviously slow the rate of increase in house prices. They’ve obviously gone up fairly dramatically over the last three or four years in most parts of the country. If we put more houses into the supply pipeline, as it were, then that will slow the rate in increases in house prices but it will only slow it at a rate that won’t, I don’t think, make real impacts on overall affordability. RAY: Will that amount of building alone solve the problem? GOLLAND: No it certainly won’t, no. We’re not talking about making a major dent in the problem of affordability here, we’re still saying, housing is still unaffordable for very many people. CURWEN: And Andrew Golland is not alone here. Professor John Muellbauer who we’d seen in Oxford has similar doubts. Mary had now sized up a range of ideas aimed at taking the heat out of the housing market for good and she was itching to put her case to someone at the heart of government. So Mary and I headed to the Offices of the Treasury. We were meeting Ruth Kelly, the Financial Secretary to the Treasury. RAY: Hello, I’m Mary Ray. KELLY: Hello and you’re interviewing me, great. RAY: In my view, I don’t think the government has done enough to control prices. You should have developed a long- term strategy when you first got into power. KELLY: We have a long-term strategy. So apart from the low level of interest rates, which is to everybody’s benefit in the housing market and elsewhere, we are very concerned that the housing market over a very long period of time has not been as responsive to people’s desire to buy houses as it has been in other countries. If you compare what’s happened on average over the last thirty years in Britain, house prices have gone up by about 2½% each year, while in other major countries, in Germany for example, they’ve been flat over the same period. So there’s a real difference there. Now what we’ve begun to do is invest far more resources in building houses, both in social housing and now making sure that we have a planning system that is much more responsive to the demand out there. Recently the Treasury commissioned Kate Barker, who’s on the Monetary Policy Committee, to look at this particular issue and she came up with a range of proposals that we’re currently considering. RAY: You’ve talked about increasing supply of new housing, but we’ve spoken to economists who say this isn’t the whole solution because it would be very difficult to achieve the level of new houses suggested in the Barker Review and builders can’t double production overnight. KELLY: Well clearly it’s a very ambitious agenda but we don’t want any sharp adjustments. What we’re trying to do is create stability across the economy as a whole actually in prices with very low stable inflation ever since 1997, and our central view is that house prices should moderate over the medium term. Now what we want to do is not unduly interfere with the operation of the housing market, but just make sure that the access is there for people who need access to housing and are denied it at the moment. CURWEN: In fact the government plans to set up targets for how affordable a house should be in different regions of the country. But Ruth Kelly couldn’t give us any details of how that might work so Mary moved on to the sensitive issue of tax. RAY: Through this programme we’ve been looking at various options for how house prices might be controlled. Experts we’ve talked to feel very strongly that tax is the best way to do it. Would you consider a property wealth tax linked to the value of your home like the one that’s used in Denmark, for instance? KELLY: I think the best way to control prices in the economy is through the Bank of England and one of the biggest changes we made in 1997 was making the Bank of England independent. It is remarkably difficult to try and control house prices on a year-to-year basis. If you’ve got macro-economic stability and you’ve got a housing market open enough so that it is affordable to key categories of people who may currently be excluded from it, I think in the end that’s the right solution. CURWEN: So are you ruling tax measures on property out completely? KELLY: Well we never talk about taxes outside the budget’s round but we have a very clear long-term programme for making the housing market more responsive. CURWEN: So does that mean that you are looking at taxes or not? KELLY: No, we’re not looking at taxes in this context. We have a very clear programme of reform. RAY: But a long-term view isn’t helping all those people now. Gordon Brown prides himself on putting an end to boom and bust. How is 20% house price inflation prudent? KELLY: Actually the debt repayments that people are making on their housing is under half the level of the debt repayments that were being paid out in 1990, for example. So for the vast majority of people they are paying less back as a proportion of their disposable income than they have been historically. That doesn’t mean to say, that first-time buyers aren’t finding it difficult to get a foothold on the ladder, it doesn’t mean to say, that we ignore house prices. We remain extremely vigilant to the risks. CURWEN: The minister’s message was clear, no new taxes to quell the housing market. The government’s plans involve bricks and mortar. Mary Ray’s mission for Inside Money was complete. I asked her what she’d decided about the three methods we’d considered for taming the tigerish property market. CURWEN: Out of all the options that we looked at, which one do you favour now? RAY: My view on limits on borrowing has changed. From my past I had thought that might be a way of controlling how much money was available and therefore controlling prices. I now see it more as perhaps a way to help protect people from unmanageable debt. In terms of building more houses as an option, I am very very worried about the environmental implications but I don’t see it as the answer to control house prices. And in terms of the taxes, I think that maybe the route to potentially achieve the stable market that I think we need. CURWEN: There wasn’t much encouragement from Ruth Kelly to think that the government is actively considering any taxes. RAY: No, it’s very politically sensitive and we’ve got an election coming up. That’s why I think they need the courage to open that debate because overall we need a stable housing market, we don’t need booms. I genuinely believe that the debate is worth having for us to begin to change our view to maybe having more of an altruistic view of how we all need homes. Programme Inside Money – Taming the Beast 19