The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (23 page)

And yet the same buy-to-let investors then complain their children or grandchildren can’t buy or even rent houses. Meanwhile politicians pretend they care by having ‘first-time buyer summits’. But in reality they make sure they do nothing to offend those voters who own multiple properties, and see increases in house prices almost as a totem of their success. What is more, the government actually makes a number of active interventions in order to sustain this vicious circle.

The government’s last survey of private landlords in 2010 revealed that over half of new landlords (those who’d owned their rental property for less than three years) bought solely in the expectation of cashing in on a house-price rise. A quarter of new landlords and a fifth of all landlords reported zero income from their buy-to-let property. Three-quarters of private landlords were buying properties as an investment pension, and about the same proportion were financed by mortgages. Nearly two-thirds of landlords have no relevant experience or qualifications.

Amazingly, one in five private lets are at least partly funded by the government through housing benefit. Half of these landlords get the housing benefit due to their tenants paid directly to them. Taxpayers underpin rents, help to bail out banks that lend buy-to-let mortgages, subsidise interest payments, and effectively hold massive mortgage books. As if that was not enough, low interest rates from the Bank of England disproportionately aid buy-to-let landlords. And to top it off, when in 2012 the Bank of England announced special funding subsidies to back mortgage and small-business lending, this ‘Funding for Lending Scheme’ was used directly to underpin more buy-to-let lending from bailed-out banks. It could hardly be described as a free market. Some councils are refusing planning permission for rental properties. Yet most attempts at any sort of regulation of buy-to-let are stymied by squeals that the free market is being distorted. So buy-to-let has a dark side. It has undoubtedly pushed house prices up, and reduced the stock of owner-occupier housing. That said, for those suffering from non-existent returns on savings, it is easy to see why they are attracted to the returns from landlordism.

Now that the government owns the majority of this industry, the fact that it creates winners among the rich and wealthy, and losers amongst the poor and young, is a matter of profound public concern. Indeed, in a Treasury Select Committee investigation into the financial crisis, one of the ignored recommendations was for the government to come up with a strategy for what to do with ‘its’ buy-to-let book.

It could – perfectly reasonably – be pointed out that this is part of a healthier long-term trend away from Britain’s obsession with home ownership towards more renting. Instead of the historic UK aspiration of 80 or 85 per cent of households being owner-occupiers, we are heading back down towards the EU average. ‘We’re settling at a new norm, which is probably closer to 65 per cent. Big difference,’ says Peter Williams, the ex-housing affordability tsar. ‘I think [the government’s] not being clear about the debate. Lord Turner [chief of the FSA], in suggestions about the Mortgage Market Review, has said there should be a political debate about this. Well, there hasn’t been one and there should be one.’

Buy-to-let is just the natural endpoint of Britain’s current political, financial and cultural approach to property. The ‘property-owning democracy’, as Mrs Thatcher defined it, is over. She inherited home ownership levels of 57 per cent, which rose to 65 per cent as the first of 2 million council homes were sold under her ‘Right To Buy’ policy. Home ownership reached 71 per cent, at which point Gordon Brown voiced the aspiration that it rise to 80 per cent. It is now back down to 65 per cent. It might be reasonable to suggest Right to Buy was a generational giveaway to Britons born in the 1950s and 1960s. It seems difficult to imagine how it could be repeated. If you strip out the ‘one-off’ of Right To Buy sales, the like-for-like percentage is now already below Mrs Thatcher’s 57 per cent. Lastly, if – as some bond traders believe – the 1.3 million Britons with an interest-only mortgage and an inadequate repayment vehicle are enduring ‘glorified renting’, then you can take the home ownership figure down to around 50 per cent, or where we were in 1971 – or roughly German levels. In other words, the Thatcher ‘property-owning democracy’ was really only a property-owning generation given a one-off gift of their council houses. It undoubtedly felt very real to those who benefited, but it is not proving to be a genuinely transformational and enduring force. At the very least, very high house prices are undoing the political promise of the property-owning democracy. Arguably, though, the property-owning democracy is a myth.

The underside of the boom in property prices is beginning to be seen not just in the broken, or perhaps missing, lower rungs of the housing ladder, but also in the state of the finances of those who took out mortgages at the top of the boom. The FSA calculates that just under half (45 per cent) of all people who took out mortgages since 2005 are ‘mortgage prisoners’, unable to remortgage or move house. The majority of first-time buyers since 2005 are also mortgage prisoners, says the FSA. There can be no surprise that housing transactions are still around half normal levels. Even before the bottom rungs of the ladder broke, it appeared that the housing ladder had turned into a one-step house trap.

At the heart of all of this is the unwillingness of anybody in finance or politics to say that ever-rising house prices have been a disaster. In reality, ever-rising house prices constitute what is more or less a zero-sum game, a mechanism that redistributes from the poor and the young to the rich and the old. The test case for this is, of course, Germany. Since 1980 real house prices in the UK nearly trebled, and are still well over double their level in 1995. In Germany, real house prices have fallen 17 per cent since 1995. Which nation is better off? Will there ever be a day when a British chancellor of the exchequer welcomes stable, or even mildly falling, house prices?

The political economy of housing policy is dominated by the connection between rising house prices and the political feel-good factor. Throughout the boom, the Labour government emphasised the low interest rates that benefited owner-occupiers, while the value of their investments soared. British politicians themselves were immune from the downside of the property boom. Their mortgages were and are still paid for. During the biggest housing boom in Britain’s history (and some economists argue in world history), many of the politicians who had the power to rein it in were in a position to benefit handsomely from that boom, at taxpayers’ expense. It’s what might be called culturally corrupt rather than actually corrupt. MPs are able to claim mortgage interest on a second home as an expense, and they can also claim for other costs involved in running this second home – an asset that soared in value during the boom. The huge increase in house prices did not benefit all in Britain. It was a massive redistribution to home-owners from home-seekers. It was a redistribution that led senior Bank of England figures to question privately why younger people weren’t kicking up more of a fuss. MPs’ expenses may anger the public for many reasons. But the question arises: did they indirectly contribute to the severity of this recession?

Our MPs were at the very best immune from the downside of the property boom thanks to their parliamentary perks. At worst some MPs appear to have built small buy-to-let empires on the back of the taxpayer. Politicians talked a good game about ‘affordable housing’, but fundamentally their own personal financial interests – in pure economic terms – could have been to make housing less affordable.

Let’s put it like this: if MPs were as nakedly exposed to the dark underbelly of Britain’s house-price surge as mortgage prisoners or first-time buyers, without the featherbedding of their taxpayer-funded expenses, would there have been more political pressure to rein in the boom?

In March 2013, the many strands of Britain’s dysfunctional relationship with property entwined themselves in a government scheme called ‘Help to Buy’. There’s no getting away from the delight of the Faircloughs, only the second couple in Britain to complete through the scheme on a new-build project on the site of the old St Helens rugby league ground. ‘We’ve got our own home now and we’ve got big ideas,’ said Mark. They got married last year, and now a home and a conservatory is a possibility. ‘Knowing what the mortgages are like now you need a 10 to 15 per cent deposit. We were renting as well as saving up for deposit: it was hard,’ Lindsey told me.

Many couples like the Faircloughs have been hit by what the chancellor calls a failure in the mortgage market since the crisis. Banks that made huge losses have been unwilling to lend to people with small deposits. Help to Buy gets around that by the government providing a loan to top up deposit which should increase housing market transactions from current low levels.

Housebuilders also build to order, they are delivered ‘just in time’ to demand, rather than en masse. If more people move into new homes, construction – a weak part of the economy – will start growing again. Peter Redfern, the CEO of Taylor Wimpey, told me definitely hundreds, maybe thousands of extra houses would be built because of the scheme, creating knock-on growth. ‘It enables us to pick things up to build more homes on the sites we’ve already got open, and also gives us more confidence about investing in future sites and the infrastructure and land to grow the business,’ he said. ‘We’re certainly talking hundreds… probably talking thousands – that’s creating more jobs, and more economic activity locally.’

The mechanics of the scheme are rather intriguing. From mid-2013 the Treasury has been paying between £20,000 and £120,000 in cash per home directly to housebuilders. It adds to the national debt for five years, but not the annual deficit, because the Treasury takes a 20 per cent stake in the house. Although it is borrowed money, it doesn’t count as public-sector borrowing but as a ‘financial transaction’ instead. The banks fund 75 per cent, a less risky and therefore cheaper mortgage, and the buyer pays a 5 per cent deposit. It basically opens up affordable mortgages to buyers with small deposits.

Was there not a simpler solution to jump-start the market? Why not let the market clear, and prices fall to reflect falling real incomes, weak economic growth? Indeed, why doesn’t Taylor Wimpey just cut the prices of its homes? ‘Life’s not that simple,’ Redfern tells me. He mentions the impact on local existing homes if new home prices were cut. ‘I don’t think it’s very desirable for people who have already bought from us, and people in the surrounding village. Everybody wants a certain stability in housing.’

Yet there was no loosening of planning law. So the combination of taxpayer-funded and guaranteed mortgages, central bank-subsidised banks and limited housing supply, led to the inevitable: an artificial rise in house prices. The policy of deploying housing spend on benefit rather than houses continued. Since 2000 the UK has spent £140 billion on housing, and double that, £280 billion, on housing benefit. One form of spending supports jobs, construction, and living standards. The other supports landlords, house prices, and rent inflation.

Are we going to load the burden of adjustment from a decade-long bubble onto people who happen to have been born in the 1980s and 1990s? Progressive voices keen to redistribute through benefits have said very little about the overarching negative redistribution caused by the trebling of house prices. All political parties claim to want to foster ‘social mobility’, yet it seems that where you live will be determined more now by where your parents lived.

The recent history of property in Britain is wrapped up in notions of freedom and the social mobility of owner-occupation and right-to-buy. Yet right now, Britain faces a return to a more traditional relationship with the land, in which property is the principal agent for holding back opportunity-for-all. The property ladder was a one-off opportunity for a lucky generation-and-a-half. Now we are back to a kind of neo-feudalism, in which your quality of life depends on who your parents are, and what they owned.

Dramatis personae

Bob Diamond, Barclays, various (1996
–2012), chief executive (2010–12)

Cristiano Ronaldo, Portuguese footballer

Alistair Darling, UK chancellor of the exchequer (2007
–10)

John Varley, Barclays chief executive (2004
–11)

Eric Daniels, Lloyds chief executive (2003
–11)

Peter Sands, Standard Chartered chief executive (2006
–)

Fred Goodwin, Royal Bank of Scotland chief executive (2001
–08)

Monty Slater, prospective RBS customer, Stockport

James Crosby, HBoS chief executive (2001
–06); non-executive, then deputy chairman of the FSA (2004–09)

Andy Hornby, HBoS chief executive (2006
–08)

Christine Lagarde, French finance minister (2007
–11)

Beth Jacobson, former loan officer, Wells Fargo

Sheila Dixon, mayor of Baltimore

Brad Setser, economist, subsequently US Treasury

Joe Cassano, AIG Financial Products, Mayfair, London

Lord Turner, chairman of the FSA (2008
–13)

Lord Myners, Treasury minister

Mervyn King, governor of the Bank of England (2003
–13)

Shriti Vadera, adviser to Gordon Brown, Business Department minister

Hector Sants, FSA chief executive (2007
–12)

Marcus Agius, chairman of Barclays (2007
–12)

On 13 May 2007 Bob Diamond had only one aim: to give a wide berth to Cristiano Ronaldo. Europe’s best-paid banker was no fan of Europe’s soon-to-be best-paid footballer. It was bad enough for Diamond – a Chelsea season-ticket holder – that he had to hand that year’s Premier League trophy to Manchester United’s Ryan Giggs and Gary Neville on the Old Trafford pitch. Diamond had become used to presenting it to Chelsea captain John Terry. Now he was faced with handing a winner’s medal over to Ronaldo, for whom he had developed a Chelsea fan’s dislike, on account of what he felt was the young Portuguese forward’s arrogance.