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Moss John Moss, the Conservative candidate for the City & East London Assembly constituency and a property professional with over 20 years experience in housing and regeneration, says it should be easier to buy property equity

It is a Conservative article of faith that owning your own home is a good thing. After all, one of the iconic reforms of the Thatcher era was Right to Buy, which gave more than a million households a stake in the place where they live and a great incentive to care, not just for their home, but for their neighbourhood as well. And home-ownership is still the aspiration of millions of people, be they young couples in private rented accommodation or families living in social housing. We all want our dream home.

But – and there is a big “but” – what if you bought in August 1988, like I did? Or in 2007 using a 100% mortgage? Where are you now? This article about a flagship redevelopment of one of Bradford’s classic mill buildings, shows just how much trouble you might be in. The flat I bought for £60,000 in Walthamstow in 1988 was sold for just £43,000 four years later. Owners at Lister Mill in Manningham could be looking at negative equity of over £150,000. That’s not a dream, it’s a nightmare.

Recently, suggestions have been made that the Government should step in and underwrite a share of the debt taken out to buy a home, but it is still debt. A better idea might be to move away from the debt-driven market and look to equity investment in housing as a more long-term and sustainable route to stable prices and a lower risk of the sort of housing crash which has led to, or contributed to, severe economic downturns on three occassions in the UK over the past 50 years.

Lots of people bought in to buy-to-let as an alternative to investing in pensions or saving. Many made a lot of money as capital values boomed. Others have seen the value of their pension pot crash as values have fallen, especially outside prime areas. Many “accidental” landlords have rented out their home in order to move for work, and may be hanging on with the rent just covering their costs, but what happens when interest rates start to rise? There is another potential crash lurking just around the corner as banks repossess tenanted homes where the rent doesn’t cover the loan interest.

There is certainly demand for renting property. Rents have risen in almost all parts of the UK and private renting provides over 17% of all homes in England, almost as many as the social rented sector. Those who rent to tenants on Housing Benefit are about to suffer a small haircut as Local Housing Allowances are cut, but in return, they will get guaranteed CPI uplifts going forward. This sector of the market is also becoming more professional and some of the larger housing providers are treating tenants as long-term customers, moving them from social rent, to intermediate and market rents, supported by Housing Benefit, then on in to shared ownership. This is a welcome move away from the myopic focus on the bricks and mortar and the attitude that all “social” homes must remain so forever. What matters is the particular circumstance of the household living in a home and the ability to adapt to that as it changes.

Such organisations are attracting funding from investment houses and pension funds. Places for People, widely regarded as one of the most innovative of the large housing providers, just raised £140m via a retail bond – which was over-subscribed. But where is the route for individual investment in an asset class which in most of the rest of Europe, is seen as a stable and fundamental part of most pension fund portfolios?

The Labour Government opened up private pension investment through Self-Invested Personal Pensions, (SIPPS), but they barred investment in residential let property, probably rightly, fearing this would pour petrol on the flames of an already raging fire. I think it is time to re-visit that decision, with two fundamental caveats.

You can buy shares through a SIPP, so you could invest your pension money in a UK listed Plc which invests in residential property. This could be a vehicle by which people put smaller amounts in to the residential property market, without the costs of direct investment, like Stamp Duty and Capital Gains Tax. With professional management focussed on longer term growth and moderate gearing, your investment is likely to grow and in 10, 15 or 20 years time, mature to give you a nice lump-sum from which to draw a pension.

The benefit here is that investment funds will come in to the market, not debt. This will increase the aggregate demand, hopefully helping to move the market forward to provide the homes which are needed. Developers can secure advance sales and professional management should ensure happier tenants.

The first caveat has to be a limit on the proportion of equity to debt that such corporate vehicles can hold, which I believe ought to be restricted to 2:1. So the listed company might attract £10m from SIPP investors, but be restricted to no more than £5m of additional debt. As SIPPs can borrow up to 50% of invested funds, this would give a maximum amount of debt in the portfolio of just 55%.

I also think that enlightened managers will also recognise the advantage of allowing tenants to buy equity shares, even to staircase out to full ownership, with the proceeds re-invested to maintain the value of the fund.  That ought to be the second caveat, that tenants can buy shares of equity in minimum lot sizes of, say, 10%. I suppose you could call it “Right to Buy Part”.

In return for those two caveats, I think such vehicles ought to be exempt from Capital Gains Tax provided any sale proceeds are re-invested and the investors ought to be exempt from CGT on the increased value of their funds, provided they have been left in for seven years or more.

So whilst this might mean a few less outright owners, struggling to meet the mortgage and fearful of every monthly meeting of the MPC, it is likely to also mean a more homes get built, so helping to keep prices stable. Yes, this will boost the share of private rented properties in the market, but that is no bad thing and if they offered a route to home ownership over time, I don’t see why this shouldn’t help break down the rather artificial barriers which exist between renting and owning, as well as offering a vehicle for investment for the long term, without the spectre of a mountain of debt waiting to come crashing down around our ears.

81 comments for: A stable housing market requires more equity, less debt and fewer owner-occupiers

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