Peter Franklin: Frost is wrong. Conservatives should be pro first-time buyers, not buy-to-let landlords.

20 Jun

Peter Franklin is an Associate Editor of UnHerd.

I’d like to express my gratitude to Lord Frost. Specifically, I’m thankful for his op-ed in Friday’s Daily Telegraph — in which he lays into the Government’s proposed reforms to the private rented sector.

It’s not that I agree with him. Quite the opposite, in fact. But this is an argument that the Conservative Party needs to have with itself — so I’m glad it’s out in the open. Indeed, it should form part of a wider debate as to who it is we exist to represent.

“Everyone” is the easy answer, but that’s a cop-out. In the real world, interests come into conflict — sometimes irreconcilably. Therefore we have to pick sides — just as we did over Brexit. In respect to rental reform the choice is this: do we prioritise the rights of landlords or do we uphold the right to have a home — even if it’s rented?

The reforms introduced by Michael Gove last week come down on the side of the many not the few. In the associated white paper, the Government pledges to abolish no fault evictions, curb unjustified rent increases, end blanket bans on renting to families with children and to make it easier for renters to have pets. The aim is make tenancies more secure and to allow tenants to feel less like guests in their own homes.

It should be said this falls short of the rent controls that some campaigners are calling for — but, nevertheless, Lord Frost is outraged. Gove’s white paper is an “anti-market measure” he insists. And while he admits there are bad landlords, he rejects any regulatory solution as another step “down the collectivist road.”

The first thing to say in response to this that the market-versus-regulation framing is misleading. The reality is that markets wouldn’t exist without regulation — they are the products of an ordered and civilised society. Over the decades and centuries, we’ve come to take a more exacting view of what a civilised society looks like, which is the main reason why we’ve also become a more regulated society. Or are we to regard every social and environmental reform — from the child labour laws to the Clean Air Acts — as another step towards socialism? Surely stopping landlords from evicting their tenants for no good reason falls under the heading of “civilised” not “collectivised”?

But what about the unintended consequences of these reforms? Frost complains that the white paper would leave landlords with less control over their property. And he’s right, the balance of power is undoubtedly shifted towards the tenant. Wouldn’t this therefore mean that landlords compensate themselves by putting up rents? No — and that’s because tenants are already being charged what the market can bear. After all, it’s not as if profit-maximising landlords have been charging less than the going rate.

OK, but what if a heavier burden of regulation causes some landlords to exit the sector? Wouldn’t that reduce supply to the housing market? Again, the answer is no — not if they sell to another landlord or to an owner occupier. The only problem would be if investors decide to sit on their assets instead of renting-out or selling-up.

Lord Frost predicts that the “next step, sooner than you think, will be a ban on leaving houses vacant for more than a few months.” This conjures up a nightmare scenario for ordinary home owners who need to live elsewhere for work or family reasons, but it side-steps a real problem that government does need to tackle — which is when professional property investors leave homes needlessly empty or building plots endlessly undeveloped.

It may even be the case that companies can pump up their balance sheets by restricting supply to the market and inflating asset prices. However, there’s an obvious solution: taxation. If left unused, land-based assets should be heavily taxed and the proceeds used to build houses elsewhere.

No doubt such a policy would be condemned as another “anti-market measure”. Yet taxing land makes much more sense that taxing labour or productive investment. Nothing useful would be disincentivised, only idle speculation. The land itself would continue to exist — and because it can’t be offshored, it wouldn’t be lost to the country.

Of course, I’m not claiming that tighter regulation and heavier taxation would have no impact on the rental and property markets. It would undoubtedly act to disincentivise inward investment — but, in this case, that would be a good thing.

Though we need to build more houses, property prices are a function of both supply and demand. We therefore need to get building while also freezing-out the speculators. The rightful purpose for every new dwelling is to provide a family with a home, not an investor with a sure bet. Perhaps the latter should man-up and learn how to invest in real enterprises instead?

Reducing the pressure on property prices — and therefore rents – is also just what the economy needs right now. Most urgently, there’s the cost-of-living crisis, to which escalating housing costs have made a major contribution. In the not-so-longer-term there’s the looming threat of recession. Unless we can restore consumer confidence, not to mention business investment, then it’s hard to see how we avoid a protracted downturn. All the more reason to stop greedy landlords from bleeding the economy dry.

Lord Frost upholds the principle of property rights, by which he means the freedom to “use your property as you wish.” I too believe that the right to own is the foundation of a free society — but only if home ownership is widespread.

And that’s why we must make a choice. The Conservative Party must stand for the first-time buyer not the buy-to-let landlord, for family formation not property portfolios, and for the property-owning democracy not rentier capitalism.

I realise that this is more of a conservative agenda than a libertarian one, but I don’t apologise for that. Even libertarians should be able to see that a future in which young people are elbowed off the housing ladder by cash-rich investors spells trouble for the centre-right. Either there’ll be a backlash from the Left or the rentiers will win — solidifying their advantage over a dispossessed majority.

These are the new roads to serfdom, and we must avoid them.

The post Peter Franklin: Frost is wrong. Conservatives should be pro first-time buyers, not buy-to-let landlords. first appeared on Conservative Home.

Gerard Lyons: Ministers have an opportunity to cut taxes, drive supply side reform – and help reduce the cost of living

17 May

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

“My Government’s priority is to grow and strengthen the economy and help ease the cost of living for families.” These opening two lines of the Queen’s Speech provided a powerful message.

Further action is needed to address the cost of living crisis. Also, those affected are not just families, but the vast bulk of households that are being squeezed. If the Government doesn’t appreciate this, then it may have its work cut out.

To its credit, the Government has already announced a host of targeted measures. These include a £150 refund on council tax for those in bands A to D. While welcome, the gains are partially offset by a rise in the average Council Tax in band D of £67.

The main help by far, though, was announced by the Chancellor in the Spring Statement – an increase in the threshold at which the higher rate of national insurance is to be paid. This has now been aligned with the starting threshold for income tax, around £242 per week. There is also the expectation that the Government will act again, as energy bills are expected to rise again this autumn, when the new price cap kicks-in.

Indeed, the cost of living crisis looks set to get worse, before it gets better. UK inflation is set to peak soon, probably above 10 per cent, and will then stay elevated for some time. While inflation is set to decelerate next year, it seems unlikely to return to its two per cent target anytime soon.

It also vital to appreciate that we are very quickly moving away from the main problem being inflation to it being a lack of economic growth. There thus needs to be a reiteration of a clear, executable vision and strategy to grow and strengthen the economy. But first, the cost of living crisis merits further attention.

High fuel and food prices are already exacerbating problems for lower income households, who spend a higher proportion of their income on these areas. At the same time, a large part of peoples’ disposable incomes fund their housing costs. Furthermore, as the retail price index heads higher, rail fares will rise, and changes earlier this year added to the cost of repaying student loans.

While some have savings they can dip into, many don’t. Thus, overall, discretionary spending will be squeezed with widespread negative consequences for retailers and many firms. In turn, there will be upward pressure on costs, prices and wages.

Even the labour market, where unemployment is low, could see change since a sharp economic slowdown is likely, including the possibility of a technical recession with two successive negative quarters of economic growth.

The challenge is that, surely, the Government can’t go on spending taxpayers’ money at every sign of trouble? That is right – but downside economic risks mean intervention is needed, not only to ease the burden but also through low taxes to revitalise growth. The situation also highlights the need to restore both fiscal and monetary stability, once the economy allows, allowing scope to cope with future shocks.

The economic and political shock-absorber is a looser fiscal policy over the next year. Although the budget deficit is higher than one would like, the good news is that it is falling sharply: from £317.8 billion in 2020/21 to £151.8 billion in 2021/22, and is expected by the Office for Budget Responsibility to decline further to £127.8 billion in 2022/23. Moreover, higher inflation is already bolstering tax receipts.

So what should be done? Relaxing fiscal policy and targeted support should not add to inflation since demand is already slowing. Targeted help is needed for those on low incomes, but also there is a need to help the squeezed middle.

Other countries have enacted policies to shield people from rising energy prices, including reduced taxes on energy or VAT; retail price regulation; wholesale price regulation; transfers to vulnerable groups; mandating firms’ behaviour; windfall profits tax; business support; or other measures (such as cutting the green levy in Germany).

While other countries, too, are tightening monetary policy, the UK is unusual in that it is squeezing fiscal policy. Benefits, for instance, were not raised in line with higher inflation in the Spring Statement, when perhaps they should have been. Crucially, the tax take is at an all-time high. The latter needs to be reversed. It includes too many people being dragged into higher tax brackets, and this can only be addressed by raising tax allowances and the levels at which people enter higher tax bands.

Quickly executable targeted measures could include a further increase in the Council Tax rebate. Another would be to use Universal Credit to direct more money to those in most need, while preserving work incentives. A mid-year rerating of benefits to raise them in line with higher inflation may take longer to implement but is another option

Temporary removal of some of the permanent components of fuel duties should be considered although, like many of these measures, further cuts in taxes on energy are not cheap. The temporary five pence cut in fuel duty is set to cost £2.4 billion this fiscal year. Suspending VAT on domestic energy while gas prices remain high has been suggested by some MPs.

Another possible but unlikely option is a temporary suspension of the environmental levy paid on energy bills. It would not, in my view, compromise the Government’s commitment to the green agenda, and could free up about £340 per household per year. The importance of addressing climate change is critical; it is peoples’ ability to pay that is the issue.

There is a clear case for bringing forward the one pence cut in income tax that has been pencilled in for before the next election. The Treasury calculates that this will costs £5.4 billion in its first year, but it would address an important issue in that income tax collection is now heavily concentrated, with roughly four in ten adults only paying it. A broader tax base with low tax rates makes more sense, but that may be a future aim.

There is also a search for non-fiscal measures that can help businesses and households. Measures that both ease the burden on firms and employers, while bolstering their confidence about the future, should figure prominently.

The most obvious is to implement supply-side measures from the Taskforce on Innovation and Growth Report. Although some may take time to feed through, they should bolster business confidence and encourage investment.

Also, measures to turbo-charge the housing market are welcome. Planning reform, while necessary, appears to have taken a back burner. A year ago, in a research paper for Policy Exchange, I outlined measures on the demand side that could help Generation Rent become Generation Buy, including allowing those who cannot afford deposits to use their history of regular rent payment to enter the housing market.

If the economic climate deteriorates, banks should be encouraged to exercise forbearance on loans if firms encounter difficulty. The Bank of England should also re-examine prudential requirements to ensure that these are not having a negative impact on growth.

This proactive policy response to address immediate challenges is complimentary to other areas of policy. It should not threaten the inflation outlook. Crucially, it is consistent with the existing fiscal strategy of reducing the ratio of debt to GDP from its present level of 96.2 per cent and the aim to achieve a significant improvement in the public finances. Strengthening the economy is the aim, easing the cost of living crisis is the immediate focus.