In Britain, being a property investor is pretty great. Since the buy-to-let market took off 18 years ago, investors have made an average 16.3 per cent profit on their investment every year. And the great thing about being an investor is that, if you find property is getting a little too risky, or you can get a better return elsewhere, you could sell up and move your money into, say, gold. Or coffee. Or tech start ups.
Things are not so great for those who of us who aren’t investors. As a consumer of housing, I have to live somewhere. I can’t easily choose to change jobs and live somewhere else. I’m captured by this market, to the benefit of those who own property.
This is the fundamental problem with Britain’s housing market. It’s the same market regardless of whether you're a investor, a homeowner or a renter. The sums that investors can pay determine the price you must pay as a house buyer, or as a renter from a landlord who as purchased at that price. Investors can enter or leave the market at will; consumers cannot.
What we need is to retain a free market for people who want to invest in property, but to create an alternative for those who can’t afford, or don’t want to take, the market risk. Call it a secondary market. And, as it happens, it’s possible to deliver this without costing the taxpayer a penny, without breaking the housing market – and without upsetting all those homeowning voters in marginal constituencies.
Here’s the plan. The government should create a £1bn investment fund (no, bear with me, this doesn't cost anything). That money would be used to provide equity for new housing built by private sector developers.
So, for example, the fund might use £50m to take a 50% stake in a £100m development of 1,000 homes. But instead of taking 50% of the profit when those homes are sold, it would take 500 homes on completion. Then it would sell them on, at a little over cost price: it would make enough of a return to cover the interest, and to ensure there’s enough liquidity in the system, but no more than that.
Now – imagine you want to live on that estate: you can buy the same home for either £200,000 or £110,000. If you buy the cheaper home, however, there’s a catch. You haven't made a market level investment – and so, you forego receiving a market return. The rules would state that you could only sell the house on in the secondary market, in which the rate of appreciation is regulated (set at, say, the level of a bank savings rate). There’s also be an absolute cap on income from that property, to prevent you from making too much from rent. Anyone found to be breaching these rules would be liable for a punitively high fine, as well as a potential fraud charge.
The upshot of this would be to give consumers a choice. They could buy a home that doubled as an investment; or they could pay less, but forego that return. No means testing, just an opportunity.
A £1bn fund would only get you so many new houses of course – but there’s one more twist to this plan. The investment vehicle itself would always hold £1bn or more, either in cash or assets; so, in terms of government bookkeeping, it’s never been spent. As a result, you never need another £1bn again. You can keep spending the same one, over and over.
A plan such as this would not only help to create the houses that we need. Over time, the secondary market would give more and more people an alternative. It would break the ubiquitous stranglehold that property investors have on the market today.
Alex Hilton is the director of Generation Rent.