A message to boomers (like myself).
Its time to stop salivating over the increased value of your house and think about giving back to the younger generation.
Several years ago I predicted a shift in the political landscape, unless our spoilt, greedy generation stopped thinking only of themselves and focused more on creating opportunity for the young. The new generation need to be able to get decent jobs, buy houses and start families like we did. They need to have the opportunity to enjoy what generations before considered to be their right, and soon that demand will work its way to the ballot box to reshape politics. Today I find myself reading an article on BBC news, talking of a political shift in the USA (https://www.bbc.co.uk/news/election-us-2020-54471388) and it made me want to have my say.
The article talks of a generation of young people, priced out of the housing market and paying the price for the financial crash (which they had no part in). It hints at the beginnings of a rebellion, by young people, who increasingly reject more conservative political policies and even capitalism as a whole. This is happening here too and what we’re going to see is the inevitable kickback from a disenfranchised generation who are on the verge of being excluded from owning homes and joining a club, now increasingly seen as being exclusive to an older generation. What’s more, they have to be continually reminded of it every time they turn on the TV and see a property program or overhear a conversation between middle aged couples, gloating about how much their house would sell for and how little they paid for it. When did we become so disgustingly obsessed about property values and why do we celebrate every time they increase without concern for young people trying to get onto the housing market?
No doubt, some older people reading this will disagree and think that they worked hard for what they’ve got and spin some story about how they struggled in the early years. Well in many cases that’s probably true, but dragging up old anecdotes about sitting on packing crates while you saved for a sofa won’t really win you any sympathy from today's 30 somethings who can't afford their first home. The truth is that millions of home owners born in the early post-war years, enjoyed jobs for life, generous pension schemes and free university education for themselves and their children. Most households based their income on a single wage and housing was still affordable. There was a abundance of social housing bridging the gap between the public/private rented sector with private ownership seen as just an option which many didn’t want the responsibility of. There was empty property and spare land for building on in almost every street and nobody obsessed over the value of their houses. Absolutely nobody would have tuned in to watch a television show devoted to buying and selling property because they weren’t all that interested. They’d rather turn on the TV and watch quality entertainment like an episode of Love thy Neighbour 😳. My generation (born in the mid 60’s) have enjoyed most of this too. We might have endured entry into the property market during the the 80’s property boom, lived with negative equity, seen our defined benefits pension schemes closed mid term and our children might not have qualified for free university education, but we still had most of the privilege of the generation before us. Our tales of tough days when starting out don’t compare to youngsters today who are often only able to earn minimum wage and face average house-prices of over £300,000 (that’s nearly 20 times salary for someone on minimum wage). Remember also, we had MIRAS (some people choose to forget this), and of course we had the biggest public giveaway in our nation’s history with the right to buy scheme. How different the country would look today if millions of council house tenants hadn’t been offered the total “no brainer” decision to buy their homes at prices massively below market value and become the home owners that they would never otherwise have been.
I remember all too well, the feeling of exclusion I felt when I left school in 1982 and we were in the middle of a phase of high unemployment. It was very hard for a young working class lad with no work experience, to get a properly paid job with any prospects. I remember the bitterness I felt from seeing that people as little as 2 or three years older than me had opportunity that I felt I would never have. They simply benefited by accident of timing and were already through the turn-style before the gates were closed. Fortunately for me and people like me, this was relatively short lived. A period of realignment and social economic change, brought growth again and opportunities followed. I prospered from this but I’ve never allowed myself to forget that feeling of desolation and lack of hope for the future. What I experienced, is nothing compared to the bleak future that's being forged for young people right now.
Today we have a generation who have been punished by an unprecedented global financial collapse, brought about by the greed and irresponsibility of the generations before them. This has already had a profound impact on many of their lives and it could continue to do so for decades to come. They are the best educated generation in our nation’s history and, regardless of what some think, they’ve generally worked a lot harder at their study than we ever did. In spite of this, swathes of young people are unable to find secure gainful employment. A greater number than ever before live with parents due to their inability to afford their own homes. Rented accommodation has been out-priced, partly due to the lack of social housing and the greed of the buy-to-let sector. Any notion of being able to take the next steps toward adult life must feel totally out of reach to them. Then, just when it must feel that it can’t get worse, we’re hit with the worst public health pandemic in living memory. Worst affected by this has been lower paid workers, many of whom are younger people who’ve been unable to get the proper apprenticeships or get onto a secure career path which was so easy for older generations to do. All of this must already be hard to endure by people, looking at getting onto the property market. Things can’t get much worse surely? Then, the government goes into panic mode. Massive financial decisions are being hurriedly taken without proper due diligence. Decisions that will affect the economy and the prospects of young people for decades to come. Billions of pounds of public money being thrown at people to fill their faces with cheap restaurant food at the cost of the tax payer, a poorly policed furlough scheme (open to fraudsters everywhere) and a surprise reduction in stamp duty. The latter might be seen as something which finally helps young people but look closer, and that’s not really the case. Before the 8th of July 2020, first time buyers were already exempt from stamp duty up to the value of £300,000. Raising this level of stamp duty relief to £500,000 is only going to affect first time buyers purchasing a home for over £300,000. This probably doesn’t account for a very high percentage of first time buyers and any saving for those it does affect is only on the cost above £300K and below £500K. So probably fair to say that the help this offers to young first time buyers is probably negligible. However, and here’s the rub, what it does do, is cause a new property buying frenzy. People who already have homes, wrestle each other to try to take advantage of a short term opportunity to save some stamp duty on moving house. Suddenly, just like the hoards of people queuing to get into every third rate restaurant to scoff food on the “eat out to help out” scheme, they now all wrestle to take advantage of a stamp duty concession. The result of all this, is a reignited buying frenzy and a spike in asking prices for property, way in excess of the tax saving that as made. So who really wins from this? Probably, virtually nobody (except the estate agents). However, of the gains that are made by buyers, the biggest are all taken up by the older generations who already own property and are just swapping houses. In reality, this is nothing more than a poorly thought through, reflex reaction to try to buoy the housing market. Just like "eat out to scoff out" it's doing more harm than good. The longer term effect of it is will only be to further inflate an already massively overpriced housing market. Prices are being pushed even higher and further out of reach of the young. Well done Rishi, give yourself a big round of applause!
If you’ve read this far then you might be asking “if he thinks he’s so clever then what does he think the answer is?”. So always willing to give my opinion on such matters, here it is……
Firstly, governments have to be brave enough to face an electorate living with falling or stagnant property prices. Perpetual property price inflation, above wage inflation, should be seen as toxic and the public need educating to comprehend this. Successive governments have believed that you can’t win an election on falling house prices. Well, wake up and smell the coffee is what I’d tell them. A whole generation of young voters are coming your way and you need to think again. A slow, sustained drop in property prices should be desirable and if the public find that hard to swallow then at least a long period of stagnation coupled with moderate inflation. While governments and central banks continue with monetary policy which distorts normal market forces in order to protect property prices, they will only continue to go in one direction. Lowering of interest rates leading to low mortgage rates, is a short sighted policy and you’re just building the most enormous house of cards. People always borrow to the maximum or above when taking on mortgages because they’ve been conditioned into believing that it’s a safe bet, house prices only ever go up. Low interest rates only mean people borrow more and market driven house prices just rise relative to affordability governed by the ability to borrow more. It's a viscous circle, an increase in how much money can be borrowed doesn't make homes more affordable. It is cancelled out by an equal increase in average property prices as market forces take up the slack of the new money. The net result is that property is no more affordable (in real terms) due to low mortgage rates, but the sums borrowed grow ever greater. The more indebted we become, the harder it is to bear even the smallest rise in interest rates and the more the hands of central banks are tied in the future. We’re now down to practically zero percent base rate and talking of a adopting a negative base rate. I can see the incentive for low rates in order to inspire growth and investment in the wider economy but it’s having the most dangerous effect on household mortgage debt and governments know it but do nothing to rein it in.
In my most humble opinion, the best way to start to address this problem is by totally scrapping stamp duty. Treat private property in exactly the same way as any other asset and make it eligible for capital gains tax. Set a fixed start date for this to be calculated from, let's say 1st January 2000, and establish an indexing scale to calculate the market value of a property on that date (based on average annual house price inflation worked backwards to January 2000). Upon sale of a property bough after 1st January 2000, the purchase price is simply deducted from the sale price and an adjustment made for inflation, giving the capital gain. In the case of a property bought before 1st January 2000 the index scale is used to calculate the market value, backdated to 1st Jan 2000. This calculation is deducted from the sale price and an adjustment made for inflation to produce the capital gain. CGT is levied at the standard rate on any profit that was made. This will instantly change the entire mindset of the country and totally remove the totally absurd burden of stamp duty chargeable to the buyer, shifting it instead onto the seller (but by way of CGT). The beauty of this is that the amount of tax payable is directly proportional to the gain in price (damping down the vulgar enthusiasm for property speculation). The cheaper the property sells for, the lower the tax burden so there's less incentive to make profit. Also, first time buyers will always be totally exempt because no profit is ever made. Additionally, people will fear house price falls a little less as they will pay no CGT on a lower sale price and could even qualify for GCT relief for future years. Finally, it closes any tax loopholes on second properties because they're all treated the same.
It is essential that we, as a nation, get over our short term greed and make way for a more sustainable future. A future that doesn’t leave some gorging on the proceeds of property speculation, only to exclude the young from home ownership and build up a massive burden for them in the future. We can either start to face it and address it now or we can sit back and wait for the youth revolution. It will come and who can blame them?