The right to buy and the housing bubble

Graeme Brown, director of Shelter Scotland, writes in the Scotsman today:

RTB [Right to Buy] was introduced in Scotland in 1980 and operated largely unchanged for 20 years. Sitting tenants of public authorities had a right to buy their homes for a discount of up to 70 per cent for flats or 50 per cent for houses. The discount depended on how long you had lived there. While modernisation has slowed its impact, the overall consequences of RTB have been hugely popular.

The numbers are staggering – 490,000 social homes have now been sold in a nation of only 2.4 million households. For some households – not the poorest, but those on modest or below average incomes – it gave access to home ownership and to the accumulation of housing wealth that otherwise may never have happened.

In 2007, This Is Money reported that the cost of an average UK property had gone up by 90% over the previous 5 years: the Council of Mortgage Lenders also reported that the buy-to-let market was rising faster than the rest of the house-buying market. Five years later, the majority of new housing benefits are in work, and housing benefit is a profitable subsidy paid to those wealthy enough to take advantage of buy-to-let.

In 1975, the average house price in the United Kingdom was just over £10,000.

In 1980, Margaret Thatcher’s government introduced the Right to Buy.

The policy was massively popular, and served a number of ideological purposes for the Conservatives. Spreading home ownership – at the time, regarded as a critical part of individuals’ economic self-sufficiency – Right to Buy also diminished the responsibilities and size of local authorities. Around 55 per cent of properties were inhabited by owner-occupiers in 1979: by 2003, this figure was 70 per cent.

In 1982, Right to Buy sales hit an all-time peak of over 240,000, and in 1984 the available discounts were increased. In 1985, Labour abandoned its opposition to the policy. 1989 saw sales exceed 200,000 for the second time. Between 1979 and 1995, 2.1 million properties were transferred from the public sector under Right to Buy.

This policy is widely blamed as the cause of the housing bubble. The Conservative government between 1980 and 1997 had never let councils spend the receipts from the sale of council houses on building new council houses.

After 1997, though the new Labour government reduced the discount available on Right to Buy and let councils release three billion of their Right to Buy receipts, Blairite wisdom said that it was better for private building companies to build council housing, if the council could afford it.

Now Westminister is resurrecting the policy for England, while the Scottish government has brought Right to Buy virtually to an end.

David Cameron and Grant Shapps discuss right-to-buy

Is this actually going to affect house prices?

There are various ways of calculating what a £10,000 house would mean in today’s money (in 2010).

  • The purchasing-power comparison (a fixed bundle of goods and services, officially known as the Retail Price Index or RPI) would make that £65,400.00.
  • By wage index – how much a worker gets paid in 1975 versus how much they’d get paid in 2010 – the relative value of £10,000 in today’s money is £103,000.
  • Though the relative average annual income (ie how much you get paid compared to how much everyone gets paid) that used to buy something worth £10,000 in 1975 is £124,000 in 2010.
  • By economic cost – how much a £10,000 house was worth in 1975 by its share of the GDP: in 2010, the same £10,000 house would be worth £137,000.

But in 2010, the average house price in the UK was £213,116.

(Even if you strip out London and the south-east of England: then the average house price was £188,000.)

There are three sets of problems here. The rising cost of houses means more and more people simply can’t afford to buy. Between 1975 and 2010, house prices have been rising faster than RPI, faster than wages, faster than our incomes, faster than GDP. (And house prices are still going up.) Home ownership is steadily becoming something that it would take a Lottery win to achieve.

This means people have to rent: and rents are going up. As others have noted, housing benefit is effectively a government subsidy for private landlords.

The Scottish government recently announced a funding package for the next two years to deliver “around 1,200 homes” which was to include some “council and housing association homes for social rent”.

According to Shelter Scotland, however, between April 2011 and April 2012: 45,322 households applied to their local council to be considered homeless, and though only 35,515 households were accepted as “homeless or potentially homeless” 32,243 of those were assessed as “in priority need”. On 31 June 2012, across Scotland, 10,466 households were in temporary accommodation – 1,205 of them living in B&B accommodation.

There is a housing shortage, and the rate at which new council houses are being built is not going to fix it in a hurry. We all understand (and by “we all”, since this is a Scottish blog, I mean non-Tories) that the Tory myth busily promoted of strivers who don’t claim housing benefit and slackers who do is a nonsense born of the cheap-work conservative need to divide and rule.

Home Truths from England’s National Housing Federation presents a bleak picture, as George Eaton summarises:

the number of working people forced to rely on housing benefit to pay their rent has increased by 417,830 (86 per cent) in the last three years, a figure that is rising at a rate of nearly 10,000 a month. Ninety three per cent of new claims last year were made by households containing at least one employed adult. By 2015, a total of 1.2 million working people people will only be able to stay in their homes through state subsidy.

As the figures suggest, it is excessive rents and substandard wages that are to blame for the inflated housing benefit budget (which will reach £23.2bn this year), not workshy “scroungers”. The cost of privately renting a home has increased by 37 per cent in the past five years, and is set to rise by a further 35 per cent over the next six years. With 390,000 new families formed in 2011, but only 111,250 new homes built, rents have inevitably soared as demand has outstripped supply.

Yet the number of households in Scotland has fallen between 2001 and 2011.

Figure 1: Annual increase in the number of households in Scotland between 2001 and 2011 (Chart)

In the 2011 census nearly 50,000 people in England owned a second home in Scotland/Northern Ireland: in the 2001 Census, it was established that there are about 30,000 second homes/holiday lets in Scotland, the biggest proportion of them in Argyll and Bute (5,158), and Highland (6,215). Councils have the power to reduce council tax on second homes/long-term empty dwellings, but no power to raise council tax in order to penalise those who have homes and do not live in them nor allow others to do so.

This also has an effect on local house prices, rent, and homelessness:

There were very limited alternatives for people to meet their housing needs from within the social rented sector in rural areas where there are high concentrations of second homes. As table 1 shows, the proportion of social rented accommodation decreased in a gradient as the proportion of second/holiday homes increased, whereas the extent of private renting increased as the proportion of second/holiday homes increased. It must be stressed that there was no direct causal link between second homes and the availability of social rented accommodation, but the pattern highlighted here has implications for the housing opportunities of people who live, or want to move to these areas.

All of these factors will influence homelessness and housing benefit levels. But the huge surge in house prices is literally a bubble: and people looking to invest in the market cause bubbles; mere demand cannot push prices up like this. I wrote on World Food Day about how bankers betting on food prices are pushing the price of food up – we’re seeing the effects in our own shopping baskets, and we know the rise in food prices has nothing to do with a shortage of food.

Who is betting on the rise in house prices, and how?

In January, as part of a much longer blog post, I wrote about John Ritblat.

You may never have heard of John Ritblat. He bought British Land in 1970 for £1M. When he retired in 2006, the “real estate development trust” he’d bought for a million was worth almost seven billion pounds, and Ritblat himself has an estimated net worth of £100m. (His successor at British Land, Stephen Hester, went on to become the current CEO of the RBS Group.)

In 2006, Heather Connon wrote in the Observer:

Ritblat takes much of the credit for the revolution in property financing that has occurred over the past two decades. The industry used to be financed with fixed-rate borrowings secured on the property portfolio, but he pioneered techniques like securitisation of assets which, he believes, has transformed the industry into one financed by long-term, unsecured, borrowings.

Alistair Ross Goobey, veteran investor and author of an analysis of the property industry in the 1980s, Bricks and Mortals, agrees that Ritblat was quick to understand the importance of finance in the property industry ‘which a lot of people are only just waking up to’.

A mortgage is not normally a debt that a homeowner should have to worry about. It’s like the national debt, not like a credit card loan: it’s more money than you could repay in the ordinary way of paying off your bills every month, but before Ritblat and “the importance of finance” made fortunes for a few, a mortgage was understood by the lender to be secured against the value of the home: the borrower had decades to repay it, and was also getting a secure home out of the deal.

Securitisation of mortgages explained by Mark Harrison:

Say a lender has 1,000 mortgages owed to it. Each of these mortgages is for (on average) £150,000. Some are less, some are more – but the bottom line is that overall, the customers owe the mortgage company £150 million quid.

What the mortgage company would then typically do was register a NEW company. This new company would be sold to external investors… and would BUY the mortgages from the original lender. Typically, that meant that the lender would carry on doing the administration (and, of course, charging the new company a fee for doing so), but the income each month from the different customers would belong to the NEW company, not the original lender.

How much did the new company pay for these mortgages? Typically a bit more than what was owed.

The important part for the lender is that the risk that the borrowers won’t repay their mortgages has been sold to the buyer, along with the income from those mortgages, but the lender will still get steady monthly fees from each mortgage. The money the lender got from the buyer can be invested in something else to bring in more money, and the buyer makes their profits from charging the borrower just a bit more. Northern Rock collapsed because it over-invested in securitisation of mortgages.

As This Is Money reassuringly describes it in April 2008:

Lenders bundle home loans together and use them to back bonds, which are then bought by big pension funds and other City investors.

It allows lenders to take loans off their balance sheets to free up capital – particularly useful for those that do not have access to savers’ cash as a cheap source of funds.

By the end of 2006, about half of the outstanding mortgages in the UK had been sold off in “securitisation vehicles”, as the Telegraph describes in considering why Northern Rock failed:

In the late 1990s [Northern Rock] became the first UK lender to fully embrace mortgage securitisations – the process where pools of mortgages are packaged up as bonds and sold to investors in the wholesale market.

This was a great wheeze that allowed the bank to grow its lending book without having to attract savers’ deposits. American banks had been doing it for years. Northern Rock would write the mortgage, then sell most of the risk off its balance sheet within a few weeks.

A “securitisation vehicle” is a limited company set up specifically to isolate the original lender from financial risk. (Also known as a “financial vehicle corporation” or in the US as a “special purpose entity”.) They may be registered in tax havens – Northern Rock’s securitisation vehicle was registered in Jersey. (See Offshore Tax Planning in Securitisation: Why Do We Still Need Tax Havens? for a 2008 academic discussion of this.)

If you had a mortgage in 2006, would you know if it had been sold to a “securitisation vehicle”?

No.

As This Is Money says, so terribly reassuring in 2008:

What does it mean for mortgage borrowers?

You will probably not even notice if your home loan has been securitised. You still make your repayments to the original lender. There have been no scandals affecting borrowers linked to securitisation in this country.

Let’s recap. You go to Bankster and borrow £100,000 to buy a house. You plan to pay off the £100,000 over the next 25 years. Bankster sells the £100,000 to GetawayCar for £105,000. Your mortgage now in fact belongs to GetawayCar, though you don’t know it, and it’s GetawayCar who needs to make a profit from your mortgage repayments despite having paid more for your mortgage than it was worth when you borrowed it.

GetawayCar may profit from this deal in a number of ways:

  • By being based in a tax haven, so not having to pay tax on income from your repayments
  • By putting your interest rates up, or otherwise renegotiating your loan, so you’re paying more
  • By gambling that the value of the houses will rise

When large numbers of investors are all gambling on the assumption that the value of the assets they are trading will go up, whether that’s tulips, dot coms, Facebook shares, or even basic foodstuffs, well, they do.

In the US, investors traded mortgages between “special purpose entities” to an extent that ensured that when the crash came and so many homeowners could no longer afford to pay the mortgage fees, in theory allowing the mortgage lender to repossess, the lenders themselves had built up such a complex and fragile financial structure that they had no legal power to repossess. Instead, in a process observed and documented by Matt Taibbi, they quite literally forged the documentation they were legally required to have in order to be able to repossess.

If you’re foreclosing on somebody’s house, you are required by law to have a collection of paperwork showing the journey of that mortgage note from the moment of issuance to the present. You should see the originating lender (a firm like Countrywide) selling the loan to the next entity in the chain (perhaps Goldman Sachs) to the next (maybe JP Morgan), with the actual note being transferred each time. But in fact, almost no bank currently foreclosing on homeowners has a reliable record of who owns the loan; in some cases, they have even intentionally shredded the actual mortgage notes. That’s where the robo-signers come in. To create the appearance of paperwork where none exists, the banks drag in these pimply entry-level types — an infamous example is GMAC’s notorious robo-signer Jeffrey Stephan, who appears online looking like an age-advanced photo of Beavis or Butt-Head — and get them to sign thousands of documents a month attesting to the banks’ proper ownership of the mortgages.

While other factors obviously play a part in higher house prices, and while I thoroughly agree with Graeme Brown that we need to build more council houses, I disagree that Right to Buy caused the house price bubble.

It’s easy to blame the working-class families who wanted to own their own homes.

But it looks to me as if house prices will continue to rise for so long as the banks see your mortgage not as your route to home ownership but as their route to huge profits.

You might wonder if the sale of UK mortgages to “securitisation vehicles” stopped after the 2008 crash?

Not according to this November 2011 article in the Financial Times, UK lenders to offer new securitisation deals, which announces that Paragon (a mortgage lender that describes itself as “Buy-to-let for serious players”) was planning “a securitisation deal expected to be worth about £150m”.

That follows an announcement from specialist bank Investec that its mortgage lending subsidiary, Kensington, is planning a £204m deal.

“UK banks have been pretty unabashed in their enthusiasm for secured funding generally, and there’s a good bid for UK mortgage collateral internationally,” said Barclays Capital’s Allen Appen. “But Paragon is different. It’s the first non-bank mortgage originator to issue in quite a long time.”

Larger British banks are also aiming to sell securitisations. Lloyds, which reopened the ABS market back in 2009, is offering a £2.1bn securitisation backed by high-quality ‘prime’ mortgages, while Barclays has asked its investment banking arm to gauge interest in another prime mortgage deal.

Complaints about Right-To-Buy have tended to centre on former council houses being sold to profiteers. Banning RTB certainly ensures that can’t happen with council houses that the renter now won’t be able to buy.

But the sharks are still in the water, and still feeding. Keeping some new houses off the market and out of their jaws won’t stop the soaring prices. Only legislation banning securitisation of mortgages would do that.

2 Comments

Filed under Housing, Poverty

2 responses to “The right to buy and the housing bubble

  1. I think RTB was a big mistake and it has had terrible knock-on effects for local authorities and council tenants. I think much of what you say is correct, but while I would agree that RTB did not *cause* the housing price bubble, I think it is one of several contributing factors.

  2. Pingback: Les Misérables and the Universal Welfare State - The Backbencher

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