“Sixteen tons, what do you get? Another day older and deeper in debt. Say brother, don’t you call me ‘cause I can’t go – I owe my soul to the company store.”
We are strong supporters of home ownership. Boris Johnson was right to deplore young people’s inability to get on the ‘housing ladder’ in his speech to the Conservative conference last week.
But using a 95% mortgage to finance a house purchase in a market overheated by historically - and chronically - low interest rates is not the way to make the change.
Debt weighs heavily on young people’s ambitions. So, this week we explore the psychologic effect of saddling the young with massive debts for both property and higher education, and we ask whether more could be done to reduce their costs.
One of the other events at the Conservative conference was a vote on new ideas at the Conservative Policy Forum. One of the shortlisted ideas, from Sarah-Jayne Law, was to scrap student loans for tuition fees and replace them with a graduate tax.
The logic of her initiative is to move away from debt, and instead to see the State investing in young people: with the return to the taxpayer coming in the form of incremental tax receipts which would reflect career success among graduates. This tax would apply to graduates of all ages, and all current student debt would be cancelled.
The idea may appeal to many as a fairer, and a more realistic, way to deal with the ballooning problem of unpaid student debt: the chart in the right-hand column, for English student loan balances (included in the Student Loan Company's Statistics Publication), shows how it has grown over recent years. But we are more concerned here with the psychological impact of owing huge amounts of money, whether in student loans or in starter mortgages.
The Financial Conduct Authority, which regulates financial services, places very tight restrictions on the extent to which those businesses can fund their activities with debt. They do this in order to shift risk from the business to its owner(s), so that customers are not exposed and the business is not financially overstressed. The necessary capital is therefore provided by investment in the business, not as a result of loans.
But it’s not just businesses which get overstressed by debt: it also presents a fundamental challenge for people, and particularly young adults just starting their working life. It feeds anxiety, saps energy, and removes hope. It is a form of economic slavery, and it is a tragedy that so much economic progress in the West over the past 70 years has only been achieved as a result of mountains of debt: and this is especially the case when it’s placed on the shoulders of young people.
Sarah-Jayne Law’s proposal is to invest in young people and their futures, not load them with huge amounts of debt which needs repaying.
The Government could look at similarly innovative ideas for first-time home buyers. Shared ownership is already a reality, and it would not be hard to structure public assistance in home ownership as an investment which could significantly reduce the need for a commercial mortgage.
But inflated costs also need addressing. Why should property prices be wholly unrelated to the cost of their replacement? With Covid-19 forcing a re-think of so much of the way we live, is there not an opportunity to see how prices can be radically reduced for first-time buyers?
And, when it comes to higher education tuition fees, we should be looking for common ground between the physical and virtual environments. If the Open University can charge just two thirds of the cost of a physical uni in tuition fees, with no residential costs, let’s embrace more of that virtual reality into undergraduate life. Social gathering is not the prime purpose of a university education; indeed, at the present time it’s proving to be a huge Covid-19 super-spreader, as explained in yesterday’s Sunday Telegraph: worse, even, than the White House.
Young people starting adult life need to see a realistic expectation of achieving their hopes and aspirations. In our commentary on 3 August, we explained the logic of incentivised learning for young people from disadvantaged backgrounds: a practical and live example of providing a psychological boost for their hopes and inspirations.
The way in which financial support is provided for home ownership and higher education is also critical in framing the behavioural economics which govern whether it becomes an encouragement or a deterrent. Even in a family making inheritance arrangements for the next generation, too much money provided too young can undermine the incentive to succeed. However, it is also true that too much money borrowed to finance these over-priced essentials can impose a sense of hopelessness.
It’s time to ensure that policy proposals for levelling up are accompanied by applying the disciplines of behavioural economics - and that means making much more use of investment, and less use of debt.
Gavin Oldham OBE