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The Anatomy of a Homeownership Crisis

John C. Weicher

Proponents of repealing the home mortgage interest deduction often cite the United Kingdom as precedent. But the UK doesn’t have a happy story to tell.

In the discussions about repealing our home mortgage interest deduction as part of the Trump Administration’s tax plan, one frequent argument for repeal is that other countries don’t have one, and their housing markets are doing just fine. The United Kingdom is commonly cited as an especially relevant example; they are like us, with the same common-law legal framework.

This rose-colored view, however, is not shared by the British themselves. Earlier this year, the latest UK national housing survey showed that the homeownership rate has been dropping since 2003 and is the lowest in 30 years; it is also the fourth lowest rate in the European Union. This news was greeted with headlines across the political spectrum, from the liberal newspaper The Guardian to the conservative Daily Telegraph. The Resolution Foundation, which focuses on UK living standards, reports that, for the last 40 years, each cohort of young families has had lower homeownership than the cohort before it at the same age. The Legatum Institute, whose objective is “to ensure the legacy we pass on to the next generation is one of increasing prosperity and human flourishing,” calculates that the average new home in Britain is about 800 square feet, 60 percent the size of the average new home in Germany, and even at that size too expensive for most homebuyers. It goes on to state that “People’s impulse to homeownership is right and natural. People who own homes have a stake in their community.” Both of these policy research institutes are developing new programs to promote homeownership.

Political leaders have already created several programs, collectively known as “Help to Buy,” in an effort to reverse the trend. Some will seem very familiar to Americans. From 2013 to 2016, for example, the government offered something very much like FHA mortgage insurance, guaranteeing mortgage loans up to 95 percent of the purchase price. In 2015, the government began making 25 percent contributions into Individual Savings Accounts (much like Roth IRAs) if the account was used for the down payment on a home. In the United States, IRAs and 401(k)s can be used for a down payment, but there is no contribution by the government. More generous assistance is now available in the UK for buyers of newly built homes: the government itself lends them up to 20 percent of the price (40 percent in London). The interest rate on this loan is zero. The buyer does not have to make any repayments until he or she sells the house; at that time the government receives 20 percent of the purchase price. These programs are all quite recent; the reaction to the continuing decline in UK homeownership indicates that they are not regarded as adequate.

The situation in the UK is relevant to the current political discussion in the United States. The UK had a mortgage interest deduction for more than a century. It was part of the original income tax law enacted in 1842, and it stayed in full force until 1974. At that time, the UK homeownership rate was 50 percent. Then the deduction was phased out. Beginning in 1974, the deduction was limited to mortgages of 25,000 pounds or less. Few homeowners were affected; the average house price in the UK was 10,000 pounds. But house prices were rising and the ceiling was not adjusted for inflation. By 1990 it applied to half of mortgage originations. Between 1993 and 1999, the deduction was reduced from year to year; by 1999 it was gone.

The beginning of the repeal process coincides with the beginning of the decline in homeownership rates by age cohort noted by the Resolution Foundation. Renters were having a more difficult time buying a home as lenders required larger down payments. The problem was especially acute for young families. The proportion of homeowners among households headed by a person younger than 25 dropped from 32 percent in 1981 to 10 percent by 2012; among households headed by a person between 25 and 34, the homeownership rate dropped from 62 percent to 43 percent; and among households headed by a person between 35 and 44, the rate dropped from 69 percent to 64 percent. Among older families, the homeownership rate increased.

The difficulties confronting renters in the private market have been overshadowed by a dramatic change in assisted housing programs. During the 1960s, the UK established a small program to allow residents of council housing (the counterpart of public housing in the United States) to buy their homes. When Margaret Thatcher became prime minister in 1979, she made this program a “flagship policy,” first liberalizing it and then establishing a statutory “Right to Buy” allowing council housing tenants to become homeowners. The Housing Act of 1980 set the base price at half to two-thirds of the valuation of the home, depending on how long the family had lived in it. This discount from the market value gave the tenant substantial equity in the home, making it possible to obtain an affordable loan in the mortgage market. While Mrs. Thatcher was prime minister from 1979 to 1990, almost 150,000 families each year bought their council homes. Since then, sales have continued, at a slower pace. As of 2014, about three million social housing units have been sold to their residents—over 10 percent of the housing stock.

Right to Buy gave a substantial boost to homeownership in the UK. The homes would have remained council housing, and remained rental, in its absence. The program accounted for most of the increase in homeownership during the 1980s and 1990s. The homeownership rate peaked at 69 percent in 2002; in the absence of Right to Buy, it would have been 59 percent, about where it was in 1983, despite the growth in the UK economy. Since 2007, the UK has experienced a major recession and an unusually weak recovery, much like the United States. Indeed, as bad as the U.S. housing market has been, the UK market has been even worse. The overall homeownership rate has dropped to 63 percent; without Right to Buy, the rate would be about 52 percent—just about where it was when the UK started to eliminate the mortgage interest deduction, and far below the United States, Canada, and Australia.

The UK experience over the last 40 years is not much of an argument for repealing the mortgage interest deduction in the United States, unless we want to make it harder for our children and grandchildren to own their own homes. And also, as the British try to promote homeownership, they might want to take another look at the mortgage interest deduction.

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