Why the government shouldn't give millenials £10,000 to buy a property

Why the government shouldn

By David Alexander, Managing Director

 

The recent report The new wealth of our nation: the case for a citizen’s inheritance by the Resolution Foundation aims to bridge the financial gap between millennials and baby boomers that has attracted so much press in the past couple of years.

The gap is said to be unfair and based solely on baby boomers being in the right place at the right time, and the report’s judgement is that financial redress against older people is required to rebalance the situation.

To that end it proposes giving all 25-year-olds a £10,000 citizen’s inheritance that can be used for four purposes: education, pensions, starting a business or – most likely – as a deposit to buy or rent a home. The £7 billion a year that this will cost will be paid for by abolishing inheritance tax and introducing a lifetime receipts tax allowance of £125,000, with a tax of 20% on anything above that figure up to £500,000, after which a 30% tax will be imposed.

This, therefore, is not a tax on the rich – it is a tax on us all. It won’t just be the people who live in Milngavie and Morningside who will pay  it will be everyone, including the millennials who purchase a property or acquire other assets in their lifetime. As a tax on ambition this would be hard to beat, and the assumption that older property owners are simply lucky is wrong.

In the 70s, 80s and early 90s acquiring a mortgage was reasonably difficult. Most baby boomers had to work hard and save for a considerable time to get a home. That home may now be worth many times more than they paid for it – but is that their fault? Are baby boomers to blame for the financial gap between young and old?

The Resolution Foundation report would appear to be solving a real problem – a great shortage of affordable homes for first-time buyers – by causing further problems. The most likely impact of this citizen’s inheritance will be to raise the cost of buying a home. If everyone has more money they will offer more to buy a property. In five years’ time the citizen’s inheritance will need to be £20,000. Instead of addressing house price inflation, it will simply have fuelled it.

The problem with housing is too much demand and too little supply. Therefore actions by national and local government to increase the supply of social housing as well as encourage more investment by the private sector to build more homes and invest more in the rental market would, over time, reduce prices, give more people homes where they want to live, and resolve the issue.

This article was first published in The Times on 24 May 2017 titled "The housing crisis won't be fixed by a citizen's inheritance" [paywall].