Professor Tim Leunig gave evidence.

We will now hear from Professor Tim Leunig, who is the director of Public First. We have until 5.15 for this session. Can the witness please introduce himself for the record?

Professor Leunig:

I can. I am indeed Professor Tim Leunig. I was an employee of the Department that is currently known as the Department for Levelling Up, Housing and Communities, where I served as economic adviser on housing supply to three Secretaries of State—Clark, Javid and Gove respectively—and any number of Housing Ministers, to be honest, one of whom is here. I served almost all of them between Brandon Lewis and Rachel Maclean.

I am now the director of economics at Public First consulting and am chief economist at the think-tank Onward. I am employed by University College London Consultants to train Treasury civil servants. I run a Substack and I am a visiting professor at the London School of Economics school of public policy.

Thank you very much. I call Rachel Maclean.

Q It is nice to see you, Professor Leunig. Why do we have leasehold in this country when other countries do not have it?

Professor Leunig:

I think that is a question that people often ask medics: “Why do I have this?” Who cares? The question is, “Am I going to get any better?” I have not got the faintest idea about the origin of leasehold, but I contend to you that that does not matter; all that matters is whether this is an effective system and, if it is not, what we could do either to improve or replace the current system. Those two questions I can answer, but I am afraid that I get an E grade for my answer to the question that you actually asked.

Q Okay. You are very frank about that. I just thought that you might have some ideas, but let us move on to the point that you just made, which is that we do have leasehold; we are where we are.

We have a Bill in front of us. What is your view on the Bill? Does it address the problems that we have all heard and are familiar with?

Professor Leunig:

It is a step forward; there is no doubt about that. I do not suppose that any person has appeared in front of you today and said, “Oh, this is a terrible step.” I do not suppose anyone has argued that we should keep leasehold for houses or that we should have 99-year leases or 49-year leases or anything like that.

No.

Professor Leunig:

In that sense, it is obviously a step forward. I have not been here all day, but I am guessing that you have had a consensus on that throughout your evidence sessions. I am part of that consensus. I think that it is very good that leaseholders have increased rights to information and that we are eliminating ground rent for longer leases, although I agree with the person who was sitting here before me—whose name, I think, was Beth Rudolf—that 150 years is a rather long thing before you get rid of ground rent. The case for ground rent seems to me to be extraordinarily weak. I think that it would be better to move to commonhold.

First of all, I should say that I am not a lawyer. Indeed, once, when I made a remark about the law in a meeting with one of your predecessors as Housing Minister, said Minister remarked that, as an analyst, I should know better than anyone else that the first four letters of analyst stand for, “am not a lawyer”, which, I have to say, was wittier than most Housing Ministers.

I am not a lawyer. I am an economist, but I can say that leasehold is a peculiarly economically inefficient construct, because it usually constrains a person, for whom the largest single thing they will ever invest in is a leasehold—their house—from doing all sorts of things. It constrains improvements, for example. It also holds them open to the risk of forfeiture, and the risk of forfeiture is particularly bizarre: for a very small amount of service fee, you can lose the entire value of your flat or, occasionally, your house. That is disproportionate to any sense of economic, moral or any other kind of fair play, and it acts as a disincentive to people.

In that sense, leasehold is a fundamentally economically inefficient construct, as well as having dubious morality. For sure, if you do not pay your service charge, there needs to be some way of enforcing, whether it is commonhold or leasehold, but that is why we have things like the small claims court. Ultimately, we have bailiffs if you do not pay a bill. You do not lose your entire property because you failed to pay your telly licence or something like that, and nor should you for a service charge. In that sense, I think that leasehold should be killed off.

I also think that leasehold is, on occasion, an absolute magnet for sharks and other wretched creatures who disgrace our society and the good name of capitalism. I think it was Edward du Cann who made a remark—before I was born and before at least some of you were born—about the “unacceptable face of capitalism” when companies behave very badly. We see that happening in leasehold with the companies who had doubling ground rents until a property was worthless and the companies who pursue forfeiture over tiny bills. Bluntly, if I am allowed unparliamentary language—I think I am but you are not—there are bastards out there, and your job is to construct the law to constrain those people who have bastard tendencies. Leasehold does not do that; commonhold does. That is why I think that commonhold is a much safer construct for people who are currently leaseholders. It should be the norm and the requirement for all future building, whether that is flats or houses, and we should be looking to move leaseholds to commonholds over time.

Q One of the arguments against making commonhold mandatory now is that it would destabilise the existing leasehold system. There are many millions of leasehold properties, and it is argued that that would result in a lack of confidence, in a lack of investment and in even fewer properties being built. We all know that we want to build more houses, more flats and so on; part of the long-term plan for housing is to build more flats, as I think Mr Scoffin alluded to. What do you make of that argument? Secondly, what do you make of the linked argument that freeholders are providing a very good service in some ways, because that asset class is funding the pensions of NHS and care workers and policemen in the country?

Professor Leunig:

The final point is factually incorrect, because of course the nurses pension scheme is unfunded, so there are no assets behind—

That is probably a bad example.

Professor Leunig:

It is, but people always put forward nurses and policemen when they want an “Oh, woe is us” story. Well, the NHS pension scheme is unfunded; it is underwritten by us as taxpayers and is thus completely and utterly secure.

Although I accept that there are some people who have these in their pension funds, any good pension fund is diversified. No sensible pension fund has more than a trivial amount of its money invested in this class. Of course, if you have a self-invested pension plan and you decided to put it all in this, that is a risk that you took when you decided to invest all your money in it.

Changing to commonhold will make not a jot of difference to the number of houses that are built over the next year, or the number of flats. The number of houses and flats built is determined entirely by whether the builder believes that they can make a profit. This is a for-profit sector, and that is right and proper, as is the manufacture of pens, mobile phones, bits of paper, quasi-plastic cups and everything else. It depends on whether the buyers have enough confidence to buy, on whether they think their job is secure and on whether they can get a mortgage at a rate that seems acceptable and is competitive with renting. That is what matters. It also matters whether the builder thinks the market will be radically better in the following year, in which case they will quite understandably delay building for a bit.

Frankly, the difference between the value you will get for a leasehold and what you will get for a commonhold is at best slight; in so far as it exists, it is based on confusing and bamboozling buyers. Sometimes the builders of a leasehold flat say, “Ah, but we can sell them for less, because we make some money by selling off the right to the ground rent.” If that is true, the buyer is not better off, because they have got it for less, but they have to pay ground rent. The buyer would be perfectly able to pay a little more, because their monthly or annual outgoings would be exactly the same.

The only way in which the builder is able to do better is if the buyer does not realise that they have to pay ground rent and is unable to do a net present value calculation in their head, which I grant you is more than likely—I challenge any of you to tell me on the spot what the net present value of £250 a year discounted by 3.5% a year is, over any number of years you like that is greater than five. Does anybody want to do that off the top of their head? No? I even typed into Google last night, “What is the net present value of £250 discounted at 3.5% over 10 years?” Google did not give me a number as an answer. It is not the sort of thing that we have to hand.

Yes, some people might be bamboozled into this, but a good economy never says, “Great: we can build some more houses by tricking people into being poorer later.” That is not the way to have a well-functioning market—and a well-functioning market is the best guarantee that we will get the houses we need built where we need them and when we need them.

Apologies: I mis-spoke earlier and missed out Richard Fuller.

That’s all right, Dame Caroline. Let’s stick with net present values, shall we, Professor?

Professor Leunig:

Go for it—I’ll get out the calculator.

Q You will be aware that impact assessments are required now for all legislation, very helpfully.

Professor Leunig:

Indeed, yes. It’s a very long one, by the look of it.

Q It is, and it seems very expensive legislation. Do you agree with that?

Professor Leunig:

Yes.

Q The top line says that the best estimate of present value is £90 million, but then it says that the low estimate is minus £1.5 billion and the high estimate is £1.5 billion. Doesn’t that indicate that the Government don’t have a clue?

Professor Leunig:

Oh, yes, absolutely. That is not necessarily reprehensible, because sometimes you just cannot have a clue.

I am often asked to forecast the future. I say, “Why did economists get the last four years wrong? Because we didn’t predict that Vladimir Putin would invade Ukraine.” Making predictions about the future as a social scientist is, by and large, a mug’s game. All you can do is stand up from first principles and say, “When do market economies work well? They work well when contracts are simple and plain and everybody understands them.” That is much truer of commonhold than of leasehold, which is why I support commonhold rather than leasehold.

Q What is clear, though, is that the business net present value is scored at minus £1.7 billion, so presumably we can pretty much say that the impact on business is going to be—

Professor Leunig:

Does it have a range?

Q Not on my copy; I presume it must have, but this figure is listed at the front.

Professor Leunig:

I have not seen the impact assessment.

Q Well, let me draw on that. The core of this is something I mentioned earlier. If you look at the benefits, there is a total of £2.8 billion of impact monetised, which is under a heading of “transfers” —so transfer of value—and there is £418 million under the heading of “benefits”. The numbers might be different because of other things later, but that is not material to the main point. What strikes you about the intention of the Bill if three quarters, 80% or 90% is about transfers and not efficiencies or benefits?

Professor Leunig:

I would want to read it before giving a definitive answer, but the information that you have given me tells me that this Bill is above all a redistributive Bill. However, both of those are static estimates. The main change in property rights is usually dynamic; for example, what does it do to the incentives for people to improve their own homes? I would be surprised if that were captured in those benefits. If it is captured, I would be interested in seeing over how many years it is captured, and so on and so forth. Of course, a lot of this Bill, as I understand it—assuming that it is like every other Bill—leaves all the important stuff to secondary legislation and regulations. I imagine that those figures, in particular the figure of £2.8 billion under “transfers”, are heavily dependent on exactly how the secondary legislation is written.

Q So it is redistributive, primarily. It sounds that way from those numbers, but there may be some hidden benefits that have not been monetised in the report. That is helpful.

Professor Leunig:

Yes.

Q That is helpful. What is your instinct? Most of this is about removing marriage value payments. In your understanding, what would you expect the geographic distribution of that transfer redistribution to be?

Professor Leunig:

The biggest winners and losers will be in the south-east and in London, because that is where the marriage values are greatest because that is where property prices are highest. If you own a flat in Peterlee, one of the lowest value housing markets in Britain, the marriage value will be trivial at the moment, so changing the rules on marriage values will have a very small effect.

Q So this is a London wealth transfer.

Professor Leunig:

That will be the biggest—

Q Is it right to say that this Bill is a wealth transfer from rich freeholders to rich leaseholders? This is primarily just moving money between rich people, isn’t it?

Professor Leunig:

No. Not every leaseholder in London is rich, by any means. If you are buying a flat for £300,000 in London, that will make you rich by the standards of someone in Peterlee, but I do not think a young couple buying a flat for £300,000 would meet The Daily Telegraph’s definition of “the rich”.

Q So the geographic dimension—there are more leasehold properties in London—and the redistribution argument is stronger than the “all properties in London are expensive compared to everywhere else” argument.

Professor Leunig:

Yes.

Q That is helpful to know. Therefore, does redistribution matter—it could be a social good or not—and does it matter who and how that redistribution happens? Are those things material? Should we be looking at them in detail?

Professor Leunig:

Redistribution is ultimately a political issue; it is about who you think should have the money. Government engages in redistribution all the time. Sometimes it does so explicitly through the tax system— I am looking forward any day to my tax cheque coming back from HMRC for the money I overpaid last year—and in other ways it does so implicitly.

For example, as somebody who has been employed in universities for most of my academic career, my income was constrained by the fact that Government limits university fees. I teach at the London School of Economics. The fee that we charge for a master’s suggests that we could charge much higher than £9,250 to undergraduates, but the Government do not let us. That is a legitimate decision by the Government. It makes me directly poorer. That is a transfer away from someone like me—broadly speaking, on the richer end of the spectrum—to people who are currently not very well off but who later on will be rich.

That is just the right of a Government to define property rights in such a way that some people are winners and some are losers. The right to borrow Jeffrey Archer’s books from the library, for which he gets virtually no compensation, is exactly the sort of political decision that you are entitled to make by dint of having a democratic mandate. Apart from agreeing with you that there is redistribution, I do not think that there is a great deal that any of us at this straight table can say to those of you around the horseshoe. It is your right, privilege and responsibility to make that decision.

That is very helpful. I will stop there, but I want to come back on discount rates later if I have time.

Professor Leunig:

Excellent.

We have a very enthusiastic witness. I call Barry Gardiner.

Thank you. I make it 296.91, actually, but please correct me if Google thinks I am wrong.

Professor Leunig:

May I ask whether you used a calculator to work that out?

Of course.

Professor Leunig:

Phew! I was once involved in setting a question for Carol Vorderman on “Who Do You Think You Are?”. They wanted her to work out something like that, and I said, “You’ve got to give her a calculator.” They said, “No, she’s Carol Vorderman.” No one can work out 1.02794 in their head, not even Carol Vorderman. They finally agreed to put a calculator to hand, which she used, I believe.

So she didn’t do it in her head.

Professor Leunig:

Even Carol Vorderman cannot do that in her head. If you had said that you had done it in your head, I would have put you above Carol Vorderman.

Q No, no—on my calculator.

Back to the Bill. There is an argument put forward for ground rent—the Government’s proposal is to take it down to a peppercorn or indeed abolish it entirely—that these are inalienable property rights, so there must be compensation and there must be proportionality. Could you elaborate for the Committee on whether the same argument was used when we compensated slave owners for the loss of their property, and whether you think that there is an analogy there?

Professor Leunig:

Property rights are never sacred in the sense of being inviolable, because a property right is over and above the right to be compensated for the loss of property, so a properly inviolable property right would ban the emancipation of slaves, ban compulsory purchase and so forth.

But the Government often take actions that, de facto, end someone’s business. One of the saddest things I did in Government when I was economic adviser to the Chancellor was meeting a group of people affected by Brexit. One of them was a seed potato exporter. Under EU law, seed potatoes cannot be imported into the EU, so on the day that we left, this person’s business was completely kaput. He asked for compensation, but it was not granted. We can argue the rights and wrongs of that, and we can argue the rights and wrongs of Brexit, but it seems to me that the fundamental sovereign right of Parliament is to make decisions that some people like and some people do not like. If people are really unhappy, they can judicially review it. A lot of rich people own ground rents, and they may well be judicially reviewed. Sometimes almost anything is reviewed, certainly in the world of property.

I am not a lawyer, but it seems to me that there is a plausible case for Parliament to stand up and say, “We believe there are social advantages to doing this, and we have therefore done it.” That is the standard defence in law, and we did this at the end of covid. I was involved in the compulsory arbitration for a commercial rent scheme; indeed, it was one of the things I came up with as an idea in my time as a civil servant. At the end of covid, just about every restaurant had a huge accumulated rent debt. The standard commercial clause says that on any day you are behind with your rent, the landlord can go in, occupy the property and seize everything that is in it. We put that into abeyance for covid, without compensation, because we had a public policy reason for wanting restaurants shut.

Q Indeed, we actually did it after the Custins v . Hearts of Oak Benefit Society legal decision in 1967, which had reversed the Government’s decision on marriage value. We then legislated to make it absolutely clear that marriage value should not be counted.

Professor Leunig:

There we are.

Q In 1993, that was turned over. But it is public policy that trumps those property rights.

Professor Leunig:

Correct, and that was what we decided at the end of covid, when restaurants, particularly those that served fine wine, came to us to say, “As soon as we restock our cellar, the landlord will turn up, reoccupy the property, seize all the wine and sell it for the back debt.” They said, “We are literally not willing to bring wine on to the premises.” It was clear that that was an inefficient outcome that risked undermining the high street, risked undermining the future of hospitality and risked undermining a sector that is the biggest employer of young people. We therefore created a compulsory arbitration scheme to prevent that from happening. Nobody judicially reviewed that, even though there were some unhappy landlords, because they understood that we had a public policy purpose for doing so. The weight of evidence that you have heard today suggests that there is a public policy purpose here but, as I say, I am no lawyer.

Q Thank you. That is extremely helpful. Please do refuse to answer if this is outwith your bandwidth, but in terms of the way in which leasehold in particular enables the freeholder to extract a revenue stream and the way in which developers develop properties precisely to extract that revenue stream, do you believe that that has had any bearing on the value of land in the UK and the fact that it appears to be at a higher price—obviously there are density and population issues, but on the whole it seems to be of a higher value—than land elsewhere in comparable populations?

Professor Leunig:

Let us be clear: land for housing is of higher value and agricultural land is of slightly higher value, but industrial land is often not.

Q And there is a huge premium when land is transferred from agricultural to construction use, is there not?

Professor Leunig:

Gobsmackingly. The field with three horses next to Heathrow airport that I go past if I ever go to Heathrow is a tragedy. It is a really dreadful little bit of land. It is used for nothing other than three horses, but its value is constrained, because it is zoned for agriculture. I think the answer is: very little. Most of the large developers are not in this in order to make a fast buck out of ground rent and so on. Indeed, from memory, I think I can put on record that Taylor Wimpey behaved very honourably, having inadvertently had doubling rents in the north-west—

Q You would say that of Persimmon and FirstPort.

Professor Leunig:

Hang on; I will exercise my right to finish the sentence. It actually bought them back from the people to whom it had sold them, and it had not sold them at a particularly high price. It was just a local convention in the north-west that houses were sold on leasehold. The national companies hired solicitors, who did the normal thing in their area. Just as there is in government, there is often a lot more cock-up than conspiracy in the private sector. I am much more worried about the people who buy the leases later on with a view to finding the loopholes and exploiting them, just as people buy up medicines that are not quite out of patent to force the prices up. That is why I think it is good to set up a legal system that prevents the sharks from sharking, or whatever the verb is, but I would not want to tar all developers with that brush. In terms of property prices, I should say that I think it is overwhelmingly the planning system—we can see that if you look at somewhere like Manchester, which has lots of flats where land prices are not that high. Land prices are high in London and the south-east because we do not release enough land for housing.

I will exercise my right to interrupt.

Professor Leunig:

Absolutely.

Q I think you are looking at this from a historical point of view. Your example of the north-west was perfectly apt, but there have been modern developers and companies—and I would cite Persimmon and FirstPort—that deliberately go about creating this as an extractive opportunity. Yes, it is much more modern, but surely it then has an impact, if it is allowed to continue, on land value.

Professor Leunig:

It could do for sure, yes. If you can extract more money for the product that you are able to sell, you are willing to pay more for the constituent parts. However, I would not want anybody here to think that if we move from leasehold to commonhold, houses will suddenly become affordable in the south-east. That would not be a credible economic prediction.

Thank you.

Professor Leunig:

For that, you need to build more houses.

Q I am trying to keep my interventions very brief, because I will be speaking a lot next week, but I could not resist asking you a couple of questions given your history, knowledge and background that is much more than my own. You have emphasised very clearly and articulately the rights of the people sat around this horseshoe to make decisions that will have economic impacts. Can I get your understanding of what you think the economic impact of the Bill as it stands broadly is?

Professor Leunig:

First of all, I repeat what I said earlier, namely that it seems to me that a lot of it is up to the secondary legislation. In particular, I think that issues of compensation are entirely in secondary legislation and regulation. As I say, I am not a lawyer; I find it very hard to read a Bill. It is not my skillset at all. I would not like to have your job.

I think that the biggest effect is the dynamic effect of creating a much cleaner and clearer property market. We have a rather ossified property market in Britain; it has become more ossified over time. There are all sort of reasons for that, including the fact that far more people are now under stamp duty, as well as the effect of financial regulations that mean someone needs a relatively large deposit to get on the housing market. There is a bunch of other costs that we really could simplify and get rid of. Take searches, for example. You can buy a house that is two years old and you have to do a completely clean set of searches. Why? When did we last find a mine in central London? We know this stuff pretty well.

I think this is part of clearing up the housing market and if we do so it can have quite big dynamic effects—for example, facilitating the better movement of people in response to opportunity. Such opportunities may be economic. I do not want to sound too Norman Tebbit and say, “Get on your bike.” However, there can be opportunities to go and live next to an aged parent who has suddenly fallen ill, in order to provide better care for them, or opportunities to move nearer to better schooling. Whatever the opportunity is, a more flexible housing market allows people to move to a house that is better suited to their needs.

All those things are good dynamic effects that in the medium term are strongly pro-growth and I see this Bill being part of it, but it is a small step forward. A move to commonhold would be a better step forward to a nice, clean system, where everybody knows exactly what they are buying and nobody is left wondering, “What sort of freeholder is this? Are they an exploitative one? Are they a reasonable one?” Many freeholders are perfectly reasonable.

Q Understood. Question two of three: what are the risks of getting things wrong that the Committee should be aware of when we go into line-by-line analysis of the Bill next week? Where do you see the biggest risks in the legislation?

Professor Leunig:

I see no risks in anything that you plan to do; I really do not think that there are any meaningful risks in moving to 999-year leases over 99-year leases. I certainly do not see any risk in ending leasehold for houses.

However, you might have people coming back with very specific cases of supported housing, for example—you always want to check with specialist groups about things like that—but I see no meaningful risks in this Bill as far as it goes. If you had gone much further, there would have been no meaningful risks either. The fact that commonhold and similar things work in places like Australia shows that it is a perfectly possible and viable system.

The time when you want to be really worried is when you are the first person in the world doing something. Of course, that does not mean you are wrong—right? When we privatised the first utilities, or when we privatised British Telecom, that was not a wrong decision, but there were definitely grounds for caution. However, when you are doing something that is already done in many countries—of all the things you lot have to worry about, I would not worry about that one. Sleep well tonight.

Q Thank you. I have a final question. I know that you were not here all day, but we have heard some very compelling testimony and questions from colleagues about the potential for going further and adding things to the Bill. Next week, we will get into a discussion, as colleagues know, about what we can do and the practicalities of that; we are not going to be able to do everything. However, we think that a very sensible set of propositions have already been put forward. If you had to prioritise, where would you go first in terms of additions, because there is a necessary prioritisation that needs to come in next week’s discussions and on Report?

Professor Leunig:

The only prioritisation meeting I had was with the current Secretary of State for Levelling Up on the LURB—the Levelling Up and Regeneration Bill —because the first draft of the Bill had twice as many clauses as could get through Parliament. We had a meeting for about two hours with the Secretary of State and each part was read out, including what its intention was and how many clauses it required. That is the cost-benefit analysis.

If I say to you, for example, “The lady before said 150 is too big”, I would agree with her; I imagine that is a very sensible change to make. By contrast, I am sure that other people have said, “Go for commonhold for everything in future”. That strikes me as requiring a lot more clauses than the number that would be required to change the 150 figure to 99, or 75, or something.

What I urge you to do is to ask the lawyers—the people drafting the legislation—how many clauses would each change that has been proposed cost. Then you think, “Okay, we can probably manage another 24 clauses”, or whatever it is, “or we can change 24 clauses. Which ones do best in that cost-benefit analysis?” I do not think that it would be sensible for me to give you an answer without knowing that legislative cost.

Q The Minister has just asked three questions to help the Committee; I wonder whether I can ask a question to help the Minister. Do you think that he should include flats within the scope of the Bill? Flats are currently excluded. What is your view on that?

Professor Leunig:

Yes.

He should?

Professor Leunig:

Yes, and it is increasingly important as more and more of us live in flats. Unless we are going to make London look like Houston and stretch all the way from the white cliffs of Dover to Oxford, more people are going to have to live in flats in London. They are going to have to live in terraced houses and flats; that is just a simple, basic sense of physics and geography.

So yes, flats are going to be more important over time. I can see no reason why new flats should not be built on commonhold for anything where planning permission has not already been granted. That gives builders amply long enough. At that point, they cannot turn around and say, “Oh, but our economics were predicated on this.” You have not put in for planning permission. Do it on commonhold. Get on with it. Adjust to the new world order.

I will leave it there. Thank you very much.

I think we had a couple of follow-up questions, first from Rachel and then Richard.

I am sorry, Dame Caroline. When you told me that there was not time, the question went out of my head. I apologise.

In that case, we will go to Richard and it might pop back in again.

Professor Leunig:

Oh no, he is going to test me on net present value.

Q No: discount rates. As I understand it, there are two discount rates that are currently used in the calculations—the capitalisation rate and the deferment rate—and one is sort of fixed by a legal process. In terms of making changes to the marriage value, there is also a change in the way in which the discount rate is going to be determined; it will be done by the Minister by regulation. What are your thoughts about that?

Professor Leunig:

The default rate chooses 3.5% because that is the rate in the Green Book. Again, it is fundamentally a political decision, because you put the rate one way and the value goes up. You put the rate the other way and the value goes down. It is just a political decision. I really do not think that there is a right or wrong answer to that.

The only thing to say is that I would be very cautious in using the current Bank of England base rate because it is so volatile. The idea that if we had made the calculation two years ago we would have used a discount rate of 0.25%, but today we would use 5.25%, is absurd. You need one number that you stick with through thick and thin, and the default rate, I think, is the Green Book discount rate of 3.5%. I am happy to believe that if we were in the Department and I was employed, you could sway my belief that 3.5% is the right answer, but that is where I would start.

Q I am interested because so many other purchase decisions—indeed the mortgage you get—will be subject to market rates at that time. Those rates can go up and down, and that will have a very material effect on the cost of your mortgage, so why take this out of traditional market principles?

Professor Leunig:

Because this is a one-off decision. For example, we saw Paul Johnson mention this week that the cost of student loans has gone up dramatically because of the rise in interest rates. We do not suddenly cut the number of people who can go to university and then increase it when interest rates are low, because we accept that most people de facto get one shot at university when they are 18 or 19. Over the 25 years of your mortgage, you will re-mortgage a number of times so it averages out, whereas this is a one-shot thing. We do not really want people acting strategically on which day to do it. That is why we would prefer to have a single number over time.

It is not a stand-up case; I grant you. You have a case. It is the classic thing of marking to market, right? When you retire, if you have a defined contribution pension scheme, you are to some extent at the whim of the market on the day you retire and in the five years before, as you move out of equities and into bonds. If you are a defined benefit pension holder, de facto we use the scape rate, which is a long-run average. I argue, in effect, for something similar to the scape rate for something like this.

Q At the moment, we do not know what will be in the regulations in relation to how the Minister should go about determining that. Do you have any advice for how he should structure that part?

Professor Leunig:

As I say, my main advice would be to make a political decision and pick an interest rate, rather than to make a political decision without realising you have made a political decision and go for Bank rate, or Bank rate plus two or minus one, and to have complete randomness over the following years.

If there are no further questions from Members, I thank the witness very much. We will move on now to the final panel.

Professor Leunig:

May I say well done? You have had a very long day.