Lifetime ISAs: further provision

Savings (Government Contributions) Bill – in a Public Bill Committee am 12:15 pm ar 27 Hydref 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the schedule be the First schedule to the Bill.

With this it will be convenient to discuss new clause 3—First-time residential purchase: Research and impact assessment—

‘(1) Within one year of this Act coming into force the Secretary of State must conduct a review into the potential impact of provisions within paragraph 7(1)(b) of Schedule 1 on house prices in the UK.

(2) The findings of the review must be made publicly available and laid before each House of Parliament

Photo of Peter Dowd Peter Dowd Shadow Financial Secretary (Treasury) 12:30, 27 Hydref 2016

New clause 3 would require the Government to conduct a review within a year of the Act coming into force of the potential impact of the lifetime ISA on house prices in the United Kingdom. The review must be made publicly available and laid before both Houses of Parliament. The Opposition recognise that many people want to own their own home. However, we are concerned that the Government’s housing policy will only inflate house prices further. We have concerns that the LISA will make things even more difficult in a housing environment that is already strained because of the limited number of houses being built nationwide, not to mention the huge cost of housing, particularly in London and the south-east; the average figure is £250,000.

Evidence to the Committee on Tuesday was cautionary. Martin Lewis from, while acknowledging the potential popularity of the LISA, flagged up its potential impact on the housing market. He highlighted that

“Unintended consequences are possible—the lifetime ISA might pump the housing market, which is a concern”.––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 50, Q95.]

The Institute for Fiscal Studies, referring to the Office for Budget Responsibility, made a similar point.

I do not want to over-emphasise the point, but it is worth noting—and perhaps assessing, as suggested in the new clause—the effect of the LISA on house prices overall. It is worrying that fewer homes were built in the last Parliament than under any previous peacetime Government since the 1920s. LISA may help—if that is the right word—to overheat a market that is already short of capacity. The Government’s priority should be to try to mitigate that, not to add to the problem. I do not think that is an unreasonable point to make.

The fact is that people are increasingly chasing a product in a market that has low supply levels. It so happens that the product is a house. The facts speak for themselves. Since I sat on the Housing and Planning Bill Committee around this time last year—it may well have been in this very room—the housing market has remained pretty tight, with supply remaining low. The national planning policy framework, which the Government were warned would create confusion, has done so. That all adds to the broth and is creating problems. By now, according to the plan, and the former Housing Minister, Brandon Lewis, there have should been a better housing supply. Alas, he was wrong.

The lifetime ISA, which will in effect replace the help to buy ISA in due course, provides a Government bonus that can be used towards a deposit on a house—if one can be found. If I remember correctly, concern was expressed by a witness that the help to buy ISA had been poorly articulated, and that the current one was potentially being poorly articulated as well. There was the impression that an ISA could be used for a deposit. Of course, there was a smorgasbord of consternation, anger, disappointment, frustration and bewilderment when many young people found that that was not the case. The problem is that if people are encouraged to borrow money for a house in a tight market, the more house prices rises, the bigger mortgages they need, and so on. The fact that the Government are helping to do that is not helpful. The problem is exacerbated. When the growth of mortgage lending outpaces the supply of housing, prices just keep rising and rising, making it increasingly difficult for people to access the housing market at a reasonable rate. There is no doubt about that.

The Government have identified the right problem but are coming up with the wrong solution. We need to build more houses. That is the only way to solve the housing crisis. New products are fine, as far as they go. Lots of people welcome the LISA—I cannot argue against that—and many people do not, but the comprehensive solution is to deal with the continuing housing supply problem. It is worth noting that the house shortage is simply a physical manifestation of the shortage of skills in the construction sector in general and the housing market in particular.

The Government are almost two years through their five-year housing plan, not counting the previous five years, and we are still falling badly behind on targets. The question is whether the proposals really deal with the substantive issue of supply, and the answer is no. In that context, it is important to look at whether this policy will have an impact on house prices. If it will, in addition to there being a lack of action on housing policy in general, that is a concern. It is legitimate to ask the Government to review the impact on the housing market of this product.

Photo of Kelvin Hopkins Kelvin Hopkins Llafur, Luton North

I rise to support my hon. Friend’s new clause. Many of us have long been concerned about the massive rise in house prices. I will give a simple example. When I bought my first house in Luton in 1969, house prices were three times average earnings. Now in Luton, they are 12 times average earnings.

Millions of people are seeing the possibility of home ownership disappearing. Owner-occupation is in decline; it is becoming a smaller sector, and we are seeing an opening up of major social divisions between owner-occupiers and renters. For owner-occupiers, equity will cascade down the generations, and their children and grandchildren will stay in the owner-occupied sector because they will inherit the equity. Those who are not in the sector and do not have sufficient income will remain outside the sector, as will successive generations after them—unless they win the lottery or become extremely wealthy for some other reason, but that will apply to only a small number. The great majority of people will find it very difficult to become owner-occupiers if they do not have equity handed down by their forebears.

Adding extra cash to help people who are already likely to be in a position to buy their own home will simply increase house prices further and take home ownership even further away from those who do not have equity and are unlikely to be able to afford a home. We have to see some action by Government over time at least to stabilise house prices, so that more people can get into owner-occupation, and so that those who aspire to be a homeowner have a realistic prospect of becoming one.

I support what my hon. Friend said. We have to build many more houses. The only way to stabilise house prices is to raise supply, not increase demand, which would just push house prices up. It is not the price of houses that is increasing, but the price of the land on which they are built. The cost of building a house does not increase by that amount; it is the land on which it is built. There is a case for land value taxation and doing something about the price of land.

It is a mad world. In 1969, I thought becoming an owner-occupier was a bit of an adventure, but I could afford it on one income—mine, which was not massively high, because I was a trade union research officer. Nevertheless, I could afford to buy a three-bedroom house with a garage and gardens back and front—a nice, typically British home, which we might all aspire to. If I were trying to buy the same house now, with the same sort of income, in the same town, I would have great difficulty. On my generous parliamentary salary, I might stand a better chance, but not on the salary that I had at the time, so I think my hon. Friend the Member for Bootle is absolutely right, and I support his new clause 3.

Photo of Jane Ellison Jane Ellison The Financial Secretary to the Treasury

The Committee is enjoying the autobiographical journey to Luton North through the ages.

Photo of Kelvin Hopkins Kelvin Hopkins Llafur, Luton North

I used to be a teacher—I taught economics years ago—and I always found that using examples kept the class alive and entertained them. It also helped them to understand the points that I was making.

Photo of Jane Ellison Jane Ellison The Financial Secretary to the Treasury

To that end, he has succeeded magnificently; everyone looks thoroughly engaged, which is not always the case in Bill Committees, it is fair to say.

Before I speak about schedule 1 and new clause 3, I have a couple of points to make. I do not intend to go into a wide discussion about house building. We all agree that we need to build more houses. Earlier this month, the Government unveiled a £5 billion package at the Conservative conference, which will make substantial progress and build on the progress already made.

The help to buy ISA is often unfairly criticised. In a way, those myths then transfer across to criticism of the lifetime ISA, so it is worth putting on the record that the take-up of the help to buy ISA has been high; there have been more than 650,000 of them to date. Where people have used help to buy to buy a home, that home has been worth on average £167,250, which is well below the scheme’s property price cap of £250,000, or £450,000 in London. That underlines the fact that we expect the majority of those who use the lifetime ISA to be basic rate taxpayers.

I will turn to schedule 1 and then make a point or two about new clause 3, because I hope to show the shadow Minister that I can respond to his substantive concern. The schedule sets out some of the detailed rules of the lifetime ISA. It is a long schedule, so I propose to provide only an overview.

Regulations made under paragraph 11 of the schedule will set out who is eligible for a lifetime ISA by specifying who “the investor” is. We intend to provide in regulation that a new account may be opened only by a person aged under 40, and that payments to a lifetime ISA may only be made until an account holder reaches 50. That is to reflect the fact that the scheme, as discussed, is designed to support younger people in getting into the habit of saving. Draft regulations have already been published for consultation, and they will be considered and debated by the House before the product is launched.

Paragraphs 7 and 8 of schedule 1 concern withdrawals. Account holders will be able to withdraw sums from their lifetime ISA at any time; that is consistent with normal ISA rules. Such withdrawals will not be subject to a withdrawal charge in the circumstances set out in paragraph 7, which include account holders purchasing their first home after saving in a lifetime ISA for 12 months or longer, or reaching a specified age, which regulations will set at 60.

Regulations will also set out detailed rules for the processes to be followed when a withdrawal is made to buy a first home. We intend to consult with industry experts to ensure that those regulations are simple to apply and that they meet our objectives for the scheme. Officials have been working hard and openly with industry experts for some months to ensure a product that works well. There will also not be a withdrawal charge when an account holder dies or becomes terminally ill, or when savings are transferred to another lifetime ISA.

Paragraph 8 concerns the charge that will apply for other withdrawals. That charge will be set by regulations at 25% of the withdrawn amount. That is designed to return the Government bonus and any growth or interest on it, and also apply a small additional charge. That reflects the fact that people should commit to saving into the lifetime ISA for the intended purposes rather than speculatively. In most cases charges will be deducted at the time of withdrawal by the account provider and paid monthly to HMRC.

Paragraphs 3 and 9 provide that regulations will set out the administrative detail of how account providers will claim lifetime ISA bonuses and how providers should pay to HMRC the withdrawal charges that they deduct, along with details of the associated information requirements. There will also be provision for account holders to ask for an HMRC consideration, and to appeal where their bonus claim is refused or they believe a withdrawal charge has wrongly been made, in line with other products of this sort.

Paragraphs 5, 12 and 16 set out penalties for material inaccuracies in information provided to HMRC or non-compliance with information requirements. We believe that those penalties are proportionate, as they are in line with those already in operation for similar failures in relation to tax matters. The general safeguards that operate for tax penalties will apply, including the right to appeal and the right for a penalty not to be applied where there is a reasonable excuse for a failure to provide information.

Paragraph 17 provides for a penalty when a person dishonestly seeks to obtain a bonus they are not entitled to or avoid a withdrawal charge. That penalty is intended to cover serious cases of dishonesty, not innocent errors. Again, individuals will have the right to appeal any such penalty. Finally, schedule 1 sets out withdrawal rules and compliance arrangements, which are necessary to ensure that the lifetime ISA operates effectively and is targeted appropriately.

New clause 3, tabled by the hon. Member for Bootle, requests that the Government assess the impact of the lifetime ISA on house prices in the UK within the first year of the Act coming into force. The Government are committed to supporting people to get on to the housing ladder. I have mentioned some of the products that have come out to support that, as well as the substantial investment in the housing market—particularly the house building market. The lifetime ISA will support younger savers. As we have already discussed, the Government will provide a generous 25% bonus on contributions up to £4,000 a year, which can be used to purchase a first-time home up to a value of £450,000. The lifetime ISA targets a small sector of first-time buyers.

Determining whether the lifetime ISA has had any impact on UK house prices in its first year will be complex. The independent Office for Budget Responsibility has said that savings products that support people to get on to the housing ladder, such as the lifetime ISA, could cause an increase in house prices, but it noted that that effect was highly uncertain, and its predicted impact of 0.3% by 2020-21 is much smaller than overall house price movements. The Committee may be interested to know that the average absolute monthly change in house prices over the past three years has been 0.6%, and that monthly increase is significantly larger than the impact forecast by the OBR for this product.

As we all know, many factors impact house prices, including changes in household incomes, interest rates, mortgage availability and the rate of house building—the supply side. Changes in those factors will have a much greater impact on house prices than the lifetime ISA. In truth, separating out the different causes of changes to house prices is challenging, which will make it difficult to assess the impact of the lifetime ISA in isolation, particularly after just a year of it coming into effect. However, like all policies, the Government will keep the lifetime ISA under review. The Government already publish a monthly UK house price index, which people can use to look at changes in average house prices.

We think that the new clause is unnecessary, and I have outlined the practical problems in coming to the definitive picture that the hon. Member for Bootle seeks. I therefore urge him not to press the new clause. In conclusion, schedule 1 sets out some of the important and detailed rules for how the lifetime ISA will operate, and I therefore ask Committee members to support it.

Photo of Peter Dowd Peter Dowd Shadow Financial Secretary (Treasury) 12:45, 27 Hydref 2016

To start with, I telegraph the fact that we will not pursue this matter. However, it is important to get on the record the fact that where Government policy has an effect on house prices, it is important—given the current state of the housing market, which is overheating due to lack of supply—to have that logged and noted, however marginal the effect appears to be. I am not suggesting that the Minister has brushed that point aside, but it is our responsibility to bring that effect to account.

The Minister quoted some figures on seeking advice for particular products, but 0.3% inflation on housing is a fair old amount of money. If that is 100,000 transactions a year of around £750, that is the best part of £70 million-odd a year added to house prices by this policy alone. If we are to introduce policies that add to an already overheating sector, it is important that as a nation, a Government and a Parliament, we take into account their impact. That additional £750 for that person is £750 not going somewhere else in their budget. I only say that to try to get that issue into the smorgasbord of issues that we have to take into account. I will not be pursuing the matter.

Question put and agreed to.

Schedule 1 accordingly agreed to.

Clause 2