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David T Breaker: A property owning democracy is central to being truly conservative

Of all the things that are truly conservative, the belief and aspiration to see a property owning democracy must be one of the most central and unifying. Indeed though Margaret Thatcher became the most prominent champion of home ownership - and is often wrongly credited with coining the term - the dream of a land in which each has that unique freedom, independence and sense of belonging that comes from holding the title deed to a corner of England's green and pleasant land goes back through Heath, Macmillan, Eden, Churchill, and beyond. Whether One Nation or libertarian, Tory or Whig, home ownership runs through the conservative alliance: a nation in which there are 3.4 million households in rented accommodation is not something that we can be content with, but as much as I want to encourage home ownership - and believe there is a small government role - the Coalition's plans fill me with a deep concern; what has been so far announced could amount to the worst policy yet created by the current Government.

Now although I have concerns about the plans, there is in the policy quite a major shift which I feel has gone largely unnoticed and is a positive development. Previous chatter from the Government regarding housing revolved around the argument that headline housing prices were too high, the Housing Minister Grant Shapps moderating the ideas of the House Price Crash website with talk of prices rising below inflation - a real terms fall - until they were more affordable. There was always three problems with this stance: firstly inflation in the construction industry is very significantly above the CPI/RPI official figures, reducing margins, forcing either prices higher or a reduction in development numbers as viability drops; secondly the fact that waiting for a slow devaluation would take a decade or longer if mortgage criteria were unchanged before housing became buyable with 20% deposits as common today, yet a rapid "crash" would trap millions in negative equity and cause another banking collapse; and thirdly, most seriously, that it is the size of the deposit - most influenced by the loan to value figure - that is the biggest roadblock for first time buyers, who are often paying more in rent than they would a mortgage, and that price instability causes fearful lenders to demand larger deposits as a buffer from negative equity caused losses. Current plans have moved the emphasis from the headline price - a favourite topic of the Daily Express - to the deposit, which being the problem facing millions is the best place to start; this should be welcomed.

Yet although the Government has rightly recognised that deposits are the problem, the solution proposed - a mortgage indemnity scheme, with the taxpayer underwriting mortgages on new homes - is a recipe for disaster. Adding millions to the Treasury's liabilities, exposing taxpayers to losses in the event of repossession, the government is openly rigging the market, and although there is no explicit ruling to lower mortgage lending criteria, by underwriting the debt - socialising losses, privatising gains - a significant moral hazard is caused: why would a mortgage lender and broker, charging a fee and making profits on successful loans, be afraid of lending to an unsuitable buyer when the losses are handed to the Treasury? The answer is that they won't, as we saw in the US where similar schemes - the Community Reinvestment Act, Fannie Mae and Freddie Mac - caused the initial bubble, the burst of which began the financial crisis of 2008.

Now the Government's scheme is nowhere in comparison to the scale of the US interventions, but these interventions across the Atlantic did not occur overnight - small actions become the thin end of the wedge, encouraging and facilitating more if initial outcomes seem favourable - and the risks remain real. With the buyer providing just 5% of the purchase price, any fall in prices - or damage to the property, as is common in repossessions - leaves the taxpayer at a loss; a situation I for one am less than keen on.

And as is always the case with state intervention there will also be negative consequences beyond the initial intentions or expectations. Providing the indemnity scheme only for new build homes - to create building jobs - removes a vital link from the resale chain: first time buyers. If a first time buyer purchase a new house under the indemnity scheme, rather than a resale, the first link in the sales chain is removed and the market blocks. Likewise the market distortion in favour of new build under the scheme, compounded by the £400m grant for developers - a blatant act of crony capitalism, or corporatism as I prefer it called to avoid harming the name of true capitalism - may further damage the market by creating oversupply. (Despite what the Housebuilders Federation says, there's not a massive undersupply of housing: most home seekers are living in a house, they just aren't the owner; they don't necessarily need a house building, they need a house shifting from rental to freehold).

All this however doesn't mean that the government cannot assist home buyers: it can, and should, but to do so it must recognise that government is a large part of the problem rather than the all powerful solution. Stamp Duty could be abolished, for starters, reducing the costs facing home buyers; planning could be reformed to encourage home extensions and the creation of separate annexes, ideal for younger and older individuals whereby multi-generational families buy together, and to allow easier change of use between disused commercial premises and residential; VAT could be removed on building products, if we left the EU, to reduce costs for homebuyers renovating derelict properties or extending; saving for deposits could be supported by allowing dedicated ring fenced deposit savings accounts, in which savers would automatically reclaim their Income Tax and National Insurance Contributions (as with Gift Aid) up to a certain figure on all money saved, thus speeding up saving considerably. Perhaps more controversially, the buy to let industry could be encouraged to scale itself down if tax changes allowed landlords to sell to longstanding tenants without facing Capital Gains Tax on the sales, moving rental property back into the freehold column; new developments on brown field sites could also be made CGT exempt, a far less biased alternative to subsidising developers.

If we are to achieve the dream of a property owning democracy the Government is right to acknowledge that there must be change. A nation in which millions are trapped in the rented sector - and therefore not building up equity by repaying a mortgage, leaving them likely to be dependent on the State for housing in retirement - isn't just a shame for those involved but a ticking time bomb. But equally in this present crisis the Coalition must recognise to a great degree that great quote: "government is not the solution to our problems, government is the problem."


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