Monday, 13 June 2022

Home-Owner-Ism - Guardian and NewsThump on top form

Firstly, from the Guardian.

A good summary of the overall catastrophic outcomes, the interesting bit is this:

Boris Johnson’s latest proposal to expand home ownership by asking housing associations to sell off homes to their tenants at a discount, and allowing people to put benefit payments towards a mortgage, is just the latest in a long line of bad ideas that purport to expand these benefits to more people...

In fact, one minister’s estimate that the scheme could help just a few thousand is probably on the optimistic side: housing associations are independent bodies, which the government would have to bribe rather than force to sell off their stock, and people with modest levels of savings are disqualified from benefits, which begs the question of how many could afford a deposit

This is a bizarre gimmick of a policy, but I'm sure the Tories ran it past their focus groups. Short term, it might keep the bubble going another three years (bubble due to pop in 2025). But long term, the main winners are the banks, who now have a steady stream of rising future income each time the homes are sold to the next mortgaged borrower, as NewsThump explains.

This comparison is slightly misleading:

The monthly cost of the average mortgage is cheaper than rent for the equivalent home; private renters spend 36% of their income on housing, compared with 12% for mortgage owners.

For FTBs on Day One, there isn't much difference. Over the long term, your mortgage payment stay the same or go down and general price and wage inflation exaggerates this effect.

But there is some truth in it, as NewsThump illustrates:

As Boris Johnson began operation ‘Save Boris’ with a pledge to let plebs own bricks, many have said letting benefits count towards the affordability of a mortgage is a good start, but that the amount you are currently successfully paying in rent is probably a better indicator of what you can afford for a house.

Simon Williams, a renter from Wokingham told us, “My wife and I pay just over a thousand pounds a month to rent our modest two-bed house. To buy one on the same street would require a mortgage of about £700 a month, but apparently we can’t afford that."

Backbench Tory MP Derek Despenser-Matthew told us, “Helping people like Simon and his wife is all well and good, but cannibalising the buy-to-let market it doesn’t make as good a headline as appearing to help people on benefits.

"Plus a lot of our donors are buy-to-let landlords, and it would not make good political sense to suddenly start decimating their core customer base. No, it’s much better to get a headline grabbing policy that will unlikely make it into law before the next election cycle and give Boris a few days of breathing space.”


Derek said...

"To buy one on the same street would require a mortgage of about £700 a month, but apparently we can’t afford that."

The sad truth is that he probably can't. When he pays his £1,000/month rent, he's paying for mortgage, structure insurance, maintenance and (if he's lucky) updating. He may also be paying for leasehold fees and other sundry "hidden" expenses. Once he switches to his £700/month mortgage, he's going to have to finance all that from his £300/month saving.

In addition he (presumably) had savings before he bought, savings that he had to use for his down-payment. A £700/month mortgage means something like a £200,000 interest-only mortgage at the moment. Such a mortgage would likely require at least a £10,000 deposit. So buying the house means that he loses out on the (say) 5% income from that. Okay, that might only be about £40/month but it all adds up.

Once he looks into all the costs, £1,000/month rent might begin to look like quite a good deal really.

Mark Wadsworth said...

D, in some extreme cases, that might be true. But as a long term homeowner, in practice, all those overheads are nowhere near £3,000 or £4,000 a year. A few hundred quid for insurance, occasional repairs if you're unlucky.

mombers said...

@Derek valid points but a key difference is the capital repayments. My mortgage is ~£2k but ~£1300 is principal. This could (and should) change of course in 3 years when my fixed rate comes to an end and current rate of 1.59% will likely be 3%+ at least. But even then, more than half of the payment is principal. It's a crazy situation where landowners like me can be increasing their net worth by thousands every month like this, consuming the same housing services as a renter but with vastly different costs

Derek said...

@Mark: well, the extreme cases do exist. I have a couple of friends who fell into the trap and unwisely bought their low-value council house in a poor area of a depressed part of the country. Forty years later they still live in that low-value house but as they couldn't afford to maintain it at the same time as paying the other expenses, it's now going to need a LOT of work to get it into a saleable condition. Quite possibly more than it's worth. Okay, that IS an extreme case but extreme cases do happen, particularly in the less prosperous parts of the UK, so I thought it worth mentioning.

@mombers: that's why I specified an interest-only mortgage. A principal-repayment mortgage is more like a renter who invests as well as paying rent. Such a renter will eventually earn enough monthly investment income to pay for their rent and hence not have to worry about it, just like a mortgage-paying home-owner.

However such renters are rare, to say the least. Most renters are the equivalent of interest-only mortgage borrowers, so I thought it best to assume an interest-only mortgage.