The biggest obstacle to a wellbeing economy? Current system winners

This is from a newsletter from Gordon MacIntyre-Kemp, called Reinventing Scotland - focusing on the wellbeing economy. Sign up here to receive it every Tuesday at 7pm. 

THE current housing crisis has so many people falsely convinced they are winners that it may prove the biggest obstacle to implementing the wellbeing economic approach.

Those without assets are less likely to vote, while those with assets to protect (homeowners) vote as if it's compulsory.

Margaret Thatcher realised that people in social housing could afford to strike whereas people with mortgages couldn’t – banks are less forgiving than councils on arrears.

Some claim she was altruistically creating a home owning, shareholding, working class but economists have a special term for that interpretation: bollocks.

The Right to Buy initiative changed the fortunes of many by placing two million new property owners on “the property ladder".

Is a “property-owning democracy” a bad thing? No, but when the government sold off social housing, they also restricted provision of affordable homes and deprioritised social housing policy.

This turbocharged the long-term negative outcomes of a dysfunctional property market. 

The policy artificially inflated property values by creating more demand for existing housing stock. This removed the incentive for building firms and investors to increase the stock of affordable private housing, as they could now profit from meeting the demand for luxury homes for those reaching the top of the ladder.

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Now, across the UK roughly 4.5 million households are private renters (doubled in the last 20 years). Household ownership is only 10% above the 1980 figure and I predict we will be back at 1980s numbers in a decade without government intervention.

Property markets have had ups and downs but over time have grown in value at a higher rate than other investments. 

As a result, asset holders want more property.

Low interest rates in the decade following the financial crash meant cheaper borrowing, so a middle class bidding war pushed prices higher.  

My rough calculations indicate that since 1970, house prices are around 57 times higher but wages are only around 38 times higher. To be competitive in the housing market means you have to already own houses.

Home owners were able to cheaply remortgage homes they already owned and purchase properties for their children or for rental that non asset holders just can’t afford. Euphemistically called ‘the Bank of Mum and Dad’, it’s a guaranteed investment. Sure, house prices can and do fall but as long as rental income is protected, even negative equity is not a problem in the short term. 

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The mortgage on a Glasgow West End, two bedroom flat worth £250,000 (assuming a £150k deposit) could easily be £700.00 a month less than the rent it brings in. That rental income counts towards the mortgage on the next flat and now Mum and Dad’s rental income is £31,200 a year – or £3,744 higher than the average Scottish annual full time wage. 

The property ladder is rigged.

Most people under the age of 30 from assetless families will probably never own their own home. Rent being double the average mortgage means young people can't save for a deposit. No deposit equals no mortgage. 

Don't think I am blaming the middle class asset holders; it's a system failure. The UK pays the second worst pension in the developed world. Rising house prices meant that Gen Xers couldn't put enough aside for retirement – thus they now need rental income for retirement.

If they can afford to help their kids (Millennials) escape the property poverty trap, why wouldn't they? Blame the system – it's an inequality machine.

The housing crisis is a pending economic disaster.

As rents climb higher, lower earners become effectively homeless due to a lack of public sector investment in social housing and increased cost of living.

Higher levels of renting damages long-term financial stability within communities and takes money out of the real economy.

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The property price bubble will burst and families struggling with mortgages will be trapped in negative equity, especially if they have overreached due to incorrect investment assumptions.

The property market has sucked in investment that would have gone into business and entrepreneurial endeavour, lowering productivity and business growth.

Lack of affordable housing is the single biggest barrier to Scotland’s rural economic development. As retiring asset holders downsize to the countryside, young workers are priced out of the market and labour intensive industries such as hospitality, agriculture and tourism suffer. 

The Solution.

First, we have to change how we view rapid growth in house prices. It’s presented as a good thing as people feel wealthier but in reality, they have to sell to realise that wealth and buy into the same overpriced market.

Only the banks and estate agents are really profiting. TV programmes tell us to look for new small coffee shops and artisan bakeries to point to the location, location, location of investment opportunities. But this is a market failure for the many and an opportunity for the few.  

We need rent controls and the government needs to build more affordable homes, both near cities and in the countryside – not the soulless isolated estates of the last 30 years of private profiteering.

Think new garden cities with 10-minute neighbourhoods.

Think fast, efficient, affordable and environmentally sustainable public transport.

Think wealthy nations that don’t operate a housing system that condemns future generations to property poverty.

That is what makes long-term national wellbeing achievable.