Much attention has focused on the broad support offered by the International Monetary Fund to the Government’s strategy to restore fiscal control – through adopting a rigorous and robust approach to public spending cuts. The Chancellor has, rightly, stressed the importance of credibility in engendering the confidence of global capital markets.
But alongside bringing the public finances under control, we need to keep another form of confidence in mind: that of consumers and businesses whose everyday transactions facilitate economic growth and the distribution of prosperity. Consumers are currently feeling the effect of tax rises, are confronted by uncertainty over commodity prices and the cost of credit, and have entrenched away from spending.
Nowhere is this more apparent than in the housing market, which has, effectively, been starved of first-time buyers through the combination of poor access to mortgage credit and anxiety about the risks of making a purchase. This is a problem that cuts to the very core of our national psyche: we are a nation of home-owners: home-ownership remains a major source of pride to Britons, and a fundamental aspiration for many who are faced with significant obstacles in the current economic climate. Yet a generation of would–be home owners now face the prospect of becoming home renters for years to come.
The Federation of Master Builders has long campaigned for a reduction in the rate of VAT on home repair, maintenance and improvement work, estimating that a five per cent cut could lead to a loss of revenue to the Government of between £102 million and £508 million, but deliver a total stimulus to the economy of around £1.4 billion in the first year alone. Their estimates also suggest that around 34,500 new jobs in the sector (and 81,500 jobs in the wider economy) would be created by such a measure by 2019. Hardly Plan B but it could be a nudge in the right direction.
The most significant hurdles to a more robust housing market, however, are the availability and affordability of credit and the fear that house prices may fall even further.
Mortgage lending fell to the lowest level in April since records began in 1993; the number of mortgages approved for new house purchases was four per cent lower than in the previous month, and nine per cent lower than in April last year. Much of this reverberates throughout the wider housing market and the majority of home owners assess their wellbeing primarily on the value of their homes. Thus the state of the housing market tends to mirror levels of confidence in the wider economy: and the current situation should give us all grounds to stop and think: how best can we stimulate demand?
Mortgage Interest Relief at Source (MIRAS) was introduced in 1969, as a measure to boost home ownership’s appeal: and, until finally abolished by Gordon Brown in 2000, provided borrowers with a reduced amount of interest – around ten and a half million loans at the time of withdrawal. Around twelve hundred different mortgage lenders provided loans under MIRAS, albeit that those who were members of the Council of Mortgage Lenders accounted for nearly all of the loans under the scheme. The cost of operating the scheme was estimated by the Council of Mortgage Lenders to be between fifty and eighty million pounds each year.
Under MIRAS, claiming mortgage interest relief was easy, and involved little more than a declaration certifying qualification. At the time of withdrawal, it was anticipated that products providing payment holidays, flexible payment options, foreign currency options would become available in the market: but the current dilemma is more profound than the variety of financial services instruments available to home-buyers. We were promised that the withdrawal of mortgage interest relief would contribute to the long-term stability of the economy, and improve the functionality of the housing market. So much for fine words.
I believe that the re-introduction of MIRAS – even if only limited to first-time buyers and for a limited time period – would deliver the stimulus that our housing market needs.
Not fashionable I know but pragmatic and perhaps it’s time for a little pragmatism. If we can get the housing market moving, then it is more likely that banks will feel compelled to be more pro-active in supporting mortgages, and there is no doubt that the construction industry, and perhaps the wider economy, would feel the benefits too.
A survey, published by the Halifax, found that 92 per cent of twenty to forty-five year olds thought it was hard for first-time buyers to get a mortgage: with sixty per cent of them indicating that it was virtually impossible. It’s all very well coercing the banks to lend but even the most alluring of marketing ploys will fail if demand isn’t present.
First-time buyers need help, and, with a little support, they might just create the kick start our economy is crying out for.