(Image: Tenement House, Glasgow. Source: Wikipedia)
Housing is always a touchstone issue during election campaigns and this one is most certainly no different. Two of the most oft-quoted in the manifestos this time round are: “How can we build “Affordable Housing”?” and “How can we afford to build them at all?” It seems strange that we are quite content to allow banks to borrow, or even flat out create, the funds it requires to supply us with a mortgage for a house but it is almost anathema for a government to do something very similar. I am going to make the very simple case that we need to dispense with this illogical paradigm and start looking at how to build a stable, long term housing policy fit for purpose.
For the purposes of this exercise I looked at a couple of example mortgages available from the commercial banks today. One typical one offered me a £90,000 mortgage with an initial interest rate of 4.2% fixed for 2 years. Assuming that that rate didn’t change over the 25 year term of the mortgage I would be faced with paying £485 per month for those 25 years until the loan was paid off. The total amount repaid (discounting inflation) would be just over £145,000. Given that we are currently experiencing historic lows in our interest rates and that they are unlikely to drop further this gives us the lowest bound to the repayment. Add in, on top of that, the profit margin demanded by a private landlord and the costs soon mount up rather staggeringly. It really is no wonder that many of the UK’s richest people are in the property market.
But what would happen if the Government borrowed that money instead and invested it in a social house for me? Today, May 4th 2015, a 25 year UK bond attracts an interest rate of 2.515% (Source: http://uk.investing.com/rates-bonds/uk-25-year-bond-yield). The first thing to note is that this interest rate is guaranteed to be fixed for the entire 25 year term. There could be no uncertainty over the possibility of unaffordable interest rate rises of the kind which led to so much chaos during the 2008 crash. This opens the way to a long term government housing policy rather than the election-by-election tinkering we see now.
At this lower interest rate we could charge the same £485 per month and expect to have the loan paid off in full almost five and a half years early at a total cost of only £114,500, a saving of £31,000 or 21%. By having the government borrow for us, we can afford five houses for the price of four! Alternatively, the monthly rent could be cut by £80 per month and the 25 year term maintained whilst still undercutting any private landlords (even if they pass on their bank mortgage at cost).
What happens after the loan is paid off could be a matter for government policy. The rent could be maintained, providing the government with a ready and reliable revenue stream. Or the house could be granted at a discounted rate or entirely rent free to the tenant for the remainder of their occupation (with the house returning to the social stock once it is no longer required), or the rent could be reinvested into more housing stock to keep up with demands from population growth and (dare I mention that dreaded word?) immigration. The UK’s population is growing at less than 1% per year meaning that we’d need just one new house built every year for every one hundred in the stock. The rents from those hundred could easily accommodate for that level of demand. Our hypothetical £405 per month rent for 25 years is now just £410 per month, still greatly cheaper than our private landlord and we no longer need to worry about the costs of housing the next generation (wherever they come from).
Of course, many other questions still remain underneath this housing policy such as: where do we build these houses? (the old green belt versus inner city regeneration question), how do we manage (or tax) the land on which they are built?, what infrastructure do we build around them?, or how can we encourage business development in or near these areas to provide jobs for the residents. These are most certainly vital questions to be answered as part of a holistic and complete housing policy but one thing is certain. Neither your bank nor your private landlord concerns themselves with these questions. Even if none of them are answered within this article I believe that I have demonstrated that allowing a government to borrow to invest in our society need not be the terrible thing that some politicians would have you believe it would be. Surely, lining the pockets of the banks and landlords the way we currently are is the least effective, most costly way we could possibly be doing it?