Episode 14: The Buy-to-Let Racket
Sometimes, when you try to do something positive, it only draws more attention to what you aren’t doing. Ed Miliband has announced a new policy in relation to private sector rentals: for three years, landlords won’t be able to raise rents above the rate of inflation. It’s not hard to spot that this policy is targeting private sector renters. This demographic is young, and strongly represented in London, the only area of the south-east where Labour have good winning chances. For all the talk about London house prices and the winners from the housing bubble there, more London households rent their homes than own them. The bubble and the rental explosion are the same thing: homes zoom up in price, and a direct result is that fewer people can afford them.
One very obvious solution to the housing crisis is to build more homes. A lot more homes. The Barker Review of Housing Supply in 2004 said that Britain needs to build 245,000 new private sector homes a year. No government has got anywhere near meeting that target. Britain is building fewer homes that at any time since the First World War. The number of homes built in 2014, a decade after the Barker report, was 118,760. The non-Tory parties vie with each other in promising how many homes they’re going to build: 200,000 a year by 2020 (Labour), 300,000 a year by some unspecified future date (Lib Dem), 500,000 total social rental homes by 2020 (Green), 1,000,000 total on previously developed land by 2025 (Ukip). Whoever is in power, I don’t believe that any of these targets will be met.
There’s a missing policy option, though, which no mainstream party seems willing to go anywhere near, but which would have a big impact on rental costs and the affordability of housing. Labour could abolish the tax break on mortgages taken out for the specific purpose of buy-to-let. Gordon Brown abolished the tax break on normal mortgages in 2000. MIRAS – mortgage interest relief at source – had been gradually run down over a period of years, on the not unreasonable grounds that home-owning is already heavily privileged by the tax system. The break for buy-to-let is still there, and is very expensive for the state: as much as £5.2 billion in 2013. That’s a lot of money to be transferred to private landlords, who get all kinds of other exemptions and tax breaks for the cost of running their rental properties. The £5.2 billion could be dedicated to a special fund for housebuilding, which would get us more or less to where we need to be.
It isn’t going to happen, though. The official reason for not touching the tax break is that it would cause rental costs to go up, because the costs of taking away the break would be passed on to renters. I don’t believe that: I think what would happen would be a small panic among speculators who have piled into buy-to-let, followed by a downturn in house prices and rental costs. And that is probably why it won’t happen. The usually understated economist Tim Harford says this of UK housing: ‘House buyers are delusional, the housing market is broken and a housing boom is the economic equivalent of a tapeworm infection.’ The tapeworm needs to be fed, so politicians won’t advocate a policy which will make the market fall, even if that is what the country needs.
And then there’s another reason it won’t happen. More than 200 MPs – that’s a third of Parliament – own buy-to-let properties. More than 100 of them own buy-to-let properties in London. They do that because they know very well just how rigged the system is. If you think MPs are likely to vote for anything which damages the buy-to-let racket, I envy you.