Mortgage interest relief at source, or MIRAS, was a scheme introduced in the United Kingdom by Chancellor of the Exchequer Roy Jenkins in 1969 in a bid to encourage home ownership; it allowed borrowers tax relief for interest payments on their mortgage.(1)
In the 1983 Budget Geoffrey Howe raised the tax allowance from £25,000 to £30,000. Unmarried couples with joint mortgages could pool their allowances to £60,000, a provision known as Multiple Mortgage Tax Relief.
This remained in place until the 1988 Budget, when Nigel Lawson ended the option to pool allowances from August 1988. Lawson later publicly expressed regret at not having implemented the change with effect from the time of the budget, as it is generally accepted that the rush to beat the deadline fuelled a sharp increase in house prices.(2, 3)
1) As we well know, the first really big post-war house price bubble was between 1970 and 1973, probably largely as a result of this subsidy, which duly popped.
The UK government then rushed to stoke inflation in order to mask the resulting house price declines. Back in the day the UK still had fairly strict currency controls, so they could do this quite easily and so nominal prices did not really go down at all.
2) So maybe part of the explanation for the recent meteoric rise in house prices, in London and the South East at least, was people rushing to beat the deadline before the new Mortgage Market Review came in:
From 26 April lenders will have to stress test borrowers' affordability to take into account the impact of expected future interest rate increases with reference to market expectations over the next five years...
Coreco director Andrew Montlake says: "Lenders are now stress testing against rates of around 7 per cent, so for those borrowers who do take lower fixes initially they are already being underwritten as being able to afford a higher rate when that expires in two years' time."
Crikey. Seven percent!
3) Getting rid of Domestic Rates and replacing it with the Poll Tax managed to maintain the price momentum for another year or so, but we all remember what happened to house prices after that double sugar rush had worn off - see chart from (1).
Friday, 25 April 2014
My latest blogpost: This might be like 1988 all over again...Tweet this! Posted by Mark Wadsworth at 10:14
Labels: House price bubble