In a speech given to the Northern Housing Consortium, an External Member of the Bank of England’s Monetary Policy Committee that sets the country’s interest rates and the level of asset purchases, David Miles, said that not only would the average age of first time buyers rise but also that the share of owner/occupiers would fall.

This is something we said would happen as far back as October 2009 (Where now the housing market).

In the speech [1], given at York racecourse, Mr Miles pointed out that banks now require larger deposits, leading to a postponement of buying, which for some people will become a permanent condition.

First-time buyers are likely to need to raise more equity than they did in the years before 2007. Some of that may come from outside providers of equity. But it is likely that much will need to come from buyers. It will take time for first-time buyers to accumulate larger deposits, so they will typically buy later and the share of home-ownership will be lower.” He said.

And this comes at a time when the Prime Minister announces his plan to tinker at the edges of the housing market to try and re-stimulate it.

One interesting point he raised was that of the different tax treatment given to owner/occupiers versus those that rent property out.

The imputed income from home ownership – that is, the benefit derived from having a place to live in – is not taxed in the UK. Tax is different for the rental sector; landlords pay tax on rental income. Landlords can offset interest paid on loans against rents received in calculating tax. Owner-occupiers can no longer deduct mortgage interest payments from taxable income. Capital gains tax is not levied on owner-occupied housing (at least for primary residences); but it is levied on capital gains made on rented property. These differences in the tax treatment of owner-occupied and rented property generate incentives for tenure that depend on how investments in rental property are financed. The tax incentives against renting are least when rental property is financed with debt. They are greatest when rental property is financed from equity (e.g. when buy to let investors use accumulated savings to invest in properties to rent out – especially if those savings were in tax sheltered investments). In either case the capital gains system creates incentives that work against renting.”

So the tax system is biased in favour of owner/occupation or renting out on the basis of leverage. And making renting as a tenant less tax efficient than owner/occupation does not help.

But as he says in his speech “changing the tax system is not easy. Losers are invariably created. No one should expect change to come quickly. But so long as the tax system favours owner-occupation we should recognize that – other things equal – this will make the owner-occupation rate inefficiently high.”

It also helps to create the environment for house price bubbles and the subsequent misery when ordinary people have to pick up the bill for the mess.


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