Last week's pre-Budget report and publication of the initial findings of the Miles review demonstrates yet again the central concern that this Government has over the housing market and
Yet some of the easily envisaged results of the Government stance are contrary to its stated and real concerns. One of the greatest issues facing us is that sustained house price inflation is crippling the first-time buyer market, on which the long-term health of our industry depends.
We now have two clear Government initiatives that will fuel housing inflation and make the problem worse. There is the desire to see long-term fixed rates. Long-term fixes increase affordability as you eliminate borrowers' exposure to payment shock – one of the major cau-ses of non-fault arrears. Suddenly, safe lending at higher multiples will be possible, solving for a few the affordability issue but fuelling inflation in the market by increasing demand in the hot spots.
The announcement that residential housing is about to be allowed as an eligible pension investment class is long overdue. But the opportunity to focus this area of relief to solve the problems in the market appear to have been missed. The likely outcome is going to be significant growth in buy to let through Sipps. I would bet any amount that this will focus on short-term investors looking for capital growth rather than the long-term yield-based investor. After all, effectively making any gain tax-free is an overwhelming
incentive. It will fuel house price inflation in the areas that are already the worst affected.
I must briefly digress from my main theme to identify two
opportunities that do derive from this announcement. Rather than prohibiting personal interest in residential properties, which is the route the Treasury has always seemed to favour in earlier
discussions, Gordon Brown has proposed taxing any derived benefit.
This may well mean you can buy properties for your offspring in your Sipp with significant tax advantages and this could work both for children who need property now and the very young – imagine being able to do a buy to let in your Sipp today that you will pass to your children when they reach 18. All the gain would appear to be tax-free so you are enabling them to buy effectively at historic prices. This needs some more thought but is certainly worth the effort.
The second is a lending opportunity. Who will be the first lender to announce a commoditised buy-to-let product that can be used within a Sipp without the normal personal covenant?
All this will have an impact before the further impetus that may be added to the market by residential Reits and the liberalisation of the pension limits that are packaged with the capping debate. Even at £1,4bn of lifetime limit, with 75 per cent gearing, you will be able to have a tax-free residential portfolio of £5.6bn.
What should be happening? First, the pension and Reit structure for residential should be restricted to investment in the needs market, notably essential worker accommodation. A minimum hold period for residential in such funds should be established.
Imagine a fund providing the equity element for shared-equity mortgages through housing associations. Investors would still get capital growth with better risk spread while meeting the Government's sta-ted aims for social housing. Someone should update the old housing investment trust legislation and use it as a model without the compromised tax position that it eventually fell foul of.
As to the long-term fixed market, I see a slow adoption of the model as Treasury techniques improve to provide alternative solutions to the prepayment problem.
However, a better solution for consumers may lie in examining US style Arms – effectively variable-rate loans with an out of the money cap. Or in its purest form, what about stand-alone interest-rate caps? The borr-ower still gets the best deal from the current short-term market while protecting himself against significant shifts in base rate with a separate effective insurance policy. First Mortgage Securities looked at this 15 years ago after launching short-term fixed rates into the market. Perhaps its time has finally come?
Mark Chilton is chief executive of Clearly Financial