Capital Leakage From Owner-Occupied Housing: Jim Kemeny and Andrew Thomas

Po/ic,vand Politics. Vol. 12 No.
1(1984),13-30
CAPITAL LEAKAGE FROM OWNER-

OCCUPIED HOUSING
Delivered by Ingenta to: University of Virginia Claude Moore Health Sciences Library
Jim Kemeny and Andrew Thomas
INTRODUCfION
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Despite continuing political support for owner-occupation, the almost

universal enthusiasm which existed during the 1960s and 1970s has be-
come more tempered in recent years. Both the 1977 Green Paper' and
Copyright The Policy Press
the Wilson Committee Report2 raised questions as to whether the capital

demands of owner-occupation exceeded the need to create new housing
assets. Central to this issue is whether some of the demand for mortgage
finance results from the withdrawal of capital from owner-occupied
housing and its expenditure elsewhere. Thus, some observers have
argued that realised capital gains are often spent on consumption, Flink
suggests that in the United States car-sales boom of the 1920s, many
families remortgaged their houses in order to buy cars.3 Kilroy argues
that during the 1972-73 house price boom in Britain, owner-occupiers
took out larger mortgages in order to finance the purchase of consumer
durables.4 More recently, the Bank of England has suggested that an
increase in remortgaging has enabled owners to realise a capital gain for
the financing of consumer spending.s
Beyond such largely unsubstantiated assertions, however, evidence of
capital withdrawal from owner-occupation remains elusive. This paper
will examine the issue of 'capital leakage' , which is defined as the conver-
sion into disposable income of capital invested in housing assets.6 The
discussion will centre on an attempt to quantify the likely dimensions
of capital leakage. In offering a crude estimate we consider the shortcom-
ings of available data, and then conclude by considering the policy impli-
cations of leakage in terms of its distorting effects on both the savings
and housing markets. Before examining the dimensions of capital leakage
a brief summary of background issues is presented.
THE EMERGENCE OF CAPITAL LEAKAGE AS AN ISSUE

One of the most important changes in the British housing market since
14 Policy and Politics
the Second World War has been the increase in owner-occupation.
Between 1945 and 1975 the home-ownership rate more than doubled,
from around 25% to 55%, establishing owner-occupation as the domi-
nant tenure. The rate of increase over this period has averaged I% a year,
and has been even faster than the growth of council housing.
Politicians of both major parties have hailed this transformation of
housing tenure patterns as a major improvement. Government White
Papers on housing, not normally noted for exuberance, have waxed lyri-
cal about the increase in owner-occupation.' There has been periodic
monitoring of progress by government departments, coupled with work

to assess how rates of home-ownership can be increased still further.8
The Conservative government which came to office in 1979 has been
especially anxious to aid this process, seeking to extend the benefits of
owner-occupation as widely as possible.9 These benefits are seen to
include independence, security, increased mobility, a basic desire for
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ownership, and the financial attractiol)s of both declining real housing

costs and an appreciating asset.
The financial advantages of owner-occupation have focused attention
on the potential for capital accumulation. Saunders has seen owner-

occupation as the basis for the formulation of a 'property class' with real
interests,lo Thoms has looked at capital gain and its implications for the
formation and development of housing classes, arguing that rates of gain
are highly varied and not assured; with the ability to capitalise on gains
within the property market relating to the individual's position with
regard to the labour market, and to inherited wealth and position. I I
Farmer and Barrell have suggested that private home-buying is so profi-
table an activity for entrepreneurial individuals that it diverts resources
from other areas of entrepreneurial activity.12
In parallel with this change of tenure pattern, the years from 1968 to
1978 witnessed a transformation of the personal deposit market. During
this period - the years of rapid house price inflation - the share of the
personal deposit market held by building societies rose from 37% to 53%.
This took place at the expense of the banks whose share declined from
43% to 35%, and National Savings which declined from 20% to 12%.13
During that period, therefore, the building societies eclipsed the trad-
ing banks as institutional borrowers of personal savings. In 1968 building
society deposits were £7,700 millions or 13% less than total bank de-
posits. By 1978 they had increased to £36,500 million or 52% more than
total bank deposits,l4 In ten years the building societies dwarfed the
banks in the personal savings market; and by 1978 the total value of bank
deposits was less than the increase in building society deposits over the
previous decade. This was almost certainly one reason for the temporary
increase in bank lending for house purchase which began to occur in the
late 1970s. Since 1978, building society deposits have continued to rise,
increasing by over 80% during the period 1978-82; but bank deposits
Kemeny & Thomas: Capital Leakagefrom Owner-Occupied Housing 15
increased even more rapidly, as did the market share of National Savings.
and consequently the building societies' share of total personal deposits
fell back below 50%, though still substantially greater than bank deposits.
The major restructuring of the personal savings market over the last
15 years by the building societies has not taken place without protest.
Prominent bankers sounded warnings that housing finance was begin-
ning to take a disproportionate share of personal savings and that bank
lending for industry was suffering as a result.ls In the words of the
Chairman of the National Westminster Bank: 'There is little advantage
in Britain having the best housed unemployed in Europe'}h

This criticism was matched by considerable interest in the issue of the
housing capital demands of owner-occupation}' Kilroy argued that the
outstanding debt on owner-occupied housing was rising at a faster rate
than public renting: 'However, in its borrowing requirement, public ren-
tal housing is less demanding because debt increases only when fresh
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investment in new building or renovation takes place. The number of

tenancies increased by some 20% over the last decade as did the number
of owner-occupiers. But the outstanding debt on all local authori ty hous-
ing only doubled, whereas that on owner-occupied housing trebled. '18

The Wilson Committee, examining the workings of finance markets,
provided a public forum for this debate and much of the discussion took
place in the context of submissions made to the Committee. The Build-
ing Societies Association (BSA) took the opportunity to reply to their
critics}9 It argued that the low level of investment in industry was not
caused by lack of funds but by poor competitiveness; that returns on
industrial investments were too low and so borrowing at competitive
rates was uneconomical. The BSA also argued that although the overall
volume of building society lending was very high, much of this was in
the form of mortgages being 'recycled', mortgages being redeemed on
houses sold and raised anew on houses bought, and so this lending did
not constitute a call on savings.
The BSA's reply to its critics was disappointing, since it side-stepped
the issue of capital leakage from the owner-occupied sector. It argued
that capital moves through the housing market and is eventually
released, either for investment or consumer spending. However, the
impact of this leakage was rather played down, particularly on the
exchange of property; it being implied that released capital became avail-
able for further mortgage lending. So it may. But it could also finance
non-housing investment, and on the exchange of property is perhaps
particularly likely to be devoted to consumer spending.
The inconclusiveness of the debate is largely a reflection of the
absence of reliable data on the scale of capita] leakage. The 1977 Housing
Green Paper drew on the 1973 Movers Survey to analyse the net cash
proceeds of sale and purchase, defined as the difference between the
price received for the house being sold less the outstanding mortgage on
16 Policy and POlilics
it, and the price paid for the house being bought less the amount of the
mortgage. After meeting transaction costs, it was suggested that mean
cash proceeds were around £1500; a total for the UK of £250-£300
million. From the same data it was estimated that something like £100
million of building society lending in 1973 could well have financed
moving owner-occupiers' transaction costs.20 The BSA has estimated
that £4,500 million was realised by last-time sellers in 1979, it being
thought that the building societies might have attracted a third of these
proceeds.21 However, the BSA's published quarterly statistics do not shed
any further light on this question. For example, it is not possible to ascer-
tain whether the volume of net new lending is greater than the amount
justified by the creation of new assets;22 and the equation is made more
difficult because it is impossible to account for owner-occupier equity.
The reason for the substantial empirical problems is that data are not
available on the purchase price, selling price, present and previous mort-
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gage for a set of individual transactions. Consequently, what is a rela-

tively familiar financial restructuring for the individual becomes more
difficult when considered at the macro level. It is worth remembering
that at its simplest, leakage refers to cash taken out on the sale of a house
and not reinvested in the purchase price of another home. People can
choose to take out a maximum mortgage on the purchase of a new house.
The surplus on the sale of their existing home, used perhaps for the
purchase of a car, is not cash profit but comes in the form of a mortgage
loan on advantageous terms compared with ordinary consumer credit.
Equally familiar are the proceeds from sale of property belonging to rela-
tions. With the expansion of owner-occupation following the First World
War, many elderly people who are otherwise not well off own a substan-
tial fixed asset which, on their death, is sold and the proceeds distributed
amongst heirs and legatees. What becomes of this money is unknown.
Some may finance further house buying, but a proportion will be spent
by beneficiaries, perhaps on holidays or consumer durables, and in the
terms of this paper, is leakage from the housing market. The difficulty
is to assess its scale at a national level. In the following section, which
constitutes the main body of the paper, an attempt is made to estimate
in very approximate terms the scale of capital leakage from owner-
occupied housing. A number of different estimates are used to cross-
check the likely reliability of the different data bases.
ESTIMATES OF THE DIMENSIONS OF CAPITAL LEAKAGE

Three different ways of estimating the dimensions of capital leakage are
examined. The first is an investment-based estimate of whether net new
capital investment is greater than the net increase in the cash value of
assets. The other estimates are of the dimensions of consumption. The
second is an estimate of the dimensions of capital withdrawal for the
Kemeny & Thomas: Capital Leakagefrom Owner-Occllpied HOI/sing 17
main kinds of non-housing consumption likely to be financed by realised

capital gains. The third is an estimate of the dimensions of capital with-
drawal by type of withdrawal- principally the extent of encashment,
end of chain sales and remortgaging.
(1) Investment Estimate

Our approach is based on the assumption that capital leakage can be esti-
mated by the extent to which demand for housing finance is rising faster
than the rise in value of the owner-occupied sector. That is, at constant
prices and without leakage, housing finance would only have to expand
to accommodate lending on the extension of owner-occupation, either in
terms of additional dwellings or in terms of value added to the existing
stock. We can express this as:
L = N-V
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Where
L leakage =
N = net advances
=
V increase in value of owner-occupied sector.

This expression can be derived from capital leakage on an individual
transaction. Here, one form ofleakage can be defined as occurring when
profit from one property transaction is not wholly invested in a new pur-
chase. For this purpose, profit is seen as the difference between sale price
and the redeemed mortgage. Thus, leakage may occur when:
(s-m,»(p-m2)
Where
=
s sale price (existing home)
m) =
redeemed mortgage
p = purchase price (new home)
m2 =
new mortgage
This can be restated as:
L = (m2-m.) + (s-p)
Applying this to a first-time purchase, it can be seen that leakage will
not normally occur, as the mortgage is rarely greater than the purchase
price. On the other hand, when a house is being sold with no subsequent
purchase, the redeemed mortgage will almost always be less than the sale
price, and capital will be extracted, with a proportion perhaps being
re-invested in housing.
When these are summed over all transactions I (m2 - m,) represents
the growth in net advances; and I p-Is should be different only by the
new value of the owner-occupied stock, as inflation will affect sale and
purchase prices equally. To obtain an estimate for total leakage, there-
fore, requires figures to be substituted for the growth in net advances and
the rise in value of the owner-occupied stock.
18 Policy alld Politics
(al Growth in net adl'ances
Looking at loans for house purchase. outstanding balances held by all
major lenders for house purchase increased by £7 .090 million between
December 1979 and December 1980.23This is a lower figure than earlier
DOE estimates of the annual volume of additional funds needed to
finance house purchase over the period 1976-86. The 1977 Green Paper
estimated that the demand for additional finance24 for house purchase
would be £5.100 million in 1981, at 1976 prices.25 At 1981 prices this
would represent a figure of £9.690 million.26
(b) Rising I'aille

At current prices, the value of personal sector dwellings was £ 111,700
million in 1979 and £ 136,200 million in 1980.27At 1980 constant prices
this represents a growth of £5,500 million. An alternative estimate can
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be obtained by looking at the value c;>fnew building, stock transferred

into owner-occupation, and investment in improvement.
i) Value 0/ nell' building

In 1980, private sector completions in the UK were 129,300.28
The average new dwelling price was £26,245.29 Total value of
construction can therefore be estimated at £3,390 million.
ii) Value a/transferred stock
This is estimated as the increase in owner-occupied stock less new
construction. In Great Britain, the owner-occupied stock increased
by 273,000 in the period 1970-1980,30 and new construction in 1980
was 125,730.31 On this basis, transfers were running at 147,000; say
150,000 for the UK. Assuming an average price of £ 17,600,32 the
value of transferred stock can be estimated at £2,640 million.
iii) Value 0/ repair and improvement investment
An estimate of private sector investment in repair and maintenance
of homes can be obtained from the Family Expenditure Survey
(FES). These figures include payments to builders and purchase of
materials. In 1979 the FES showed that the average expenditure of
owner-occupiers on repair, maintenance and decoration was £3.43
a week,33 or £ 178.36 a year. Total expenditure by owner-occupiers34
is therefore in the order of £2, 109 million at 1979 prices, or £2,500
million at 1980 prices.35 In a previous Department of the Environ-
mental estimate using FES data, 46% of total expenditure was
assessed as payments to contractors.36 Adopting this percentage gives
a figure for materials of £1,350 million. This is a best estimate of
increased value, though it includes some 'Do-it-yourself work which
may be either superficial or botched; and the relationship between
maintenance investment and increased value is not known.
Kemeny& Thomas: Capital Leaka!(efrom Oll'net-Occupled HOI/sing 19
Bringing these three factors together gives a figure of £7 .380 million for
the rise in value of the owner-occupied stock as an alternative to the gross
estimated increase in the value of personal sector dwellings.
(c) Total leakage

We have estimated that in 1980 the demand for additional housing
finance (N) was between £7 .090 million and £9,690 million: and that the
increase in value (V) was in the range £5,500-£7 .380 million. Returning
to (L = N - V), total leakage may fall in the range £ 1.600-£2.300

million.
The estimate which has been presented is inevitably crude. Aggregat-
ing from individual transactions can only be based on survey infor-
mation, as data is required on purchase and selling prices, and the size
of redeemed and new mortgage. Data of this quality simply is not avail-
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able. The limitations of national statistics impose other constraints. They

are largely inadequate to the task, and necessitate fairly major assump-
tions. Nevertheless, two other estimates, based again on extremely crude
assumptions, suggest that leakage from owner-occupation in 1980 may

have been within the range £1,400-£2,600 million.
(2) Receipts from Housing Capital

This approach attempts to estimate the likely scale of spending out of
housing capital: taken as the sum of moving costs; consumer spending
by moving owners; consumer spending by legatees; and spending on per-
sonal income schemes. Again it should be stressed that the available data
necessitates major assumptions.
(a) Moving costs

One recent survey has put 'moving costs' (undefined) at £700.3' This
seems low. A DOE estimate suggested that legal services in buying and
selling, estate agent commission and building society valuation fees could
average £500 in 1973.38 Therefore it might be conservatively estimated
that sale and purchase costs averaged £ 1,000 in 1980. A higher estimate
has put housing transaction costs at 6% of the price of the new house. 3~
This would suggest moving costs averaging over £ 1,500 in 1980.
An estimate of total moving costs depends on the annual number of
transactions. There were 67,500 house purchases with a building society
mortgage in 1980,40and assuming an average moving cost of £ 1,000 this
gives a total of£675 million. However. in 1980.47% of building society
mortgages were to first time buyers. and therefore did not involve sale
expenses. At the same time. an unknown number of houses were pur-
chased using cash, short term loans or non-building society finance
(including local authority mortgages), and there were fees on non-

completed transactions. The major alternative source of mortgages was
the banking sector. It has been estimated that in 1980 the banks
accounted for 9% of total net advances.41 The way this is reflected in
property numbers depends on the average size of advances.42
In the absence ofinfonnation on how these factors balance out, build-
ing society mortgage purchases is the best available figure. The total of
£675 million which it provides is almost certainly an under-estimate in
that it does not cover associated costs of moving for which people might
draw capital (removal expenses, new fittings, service connection charges).

Ifit is simply assumed that 50% of moving costs are met from savings,
this would suggest that around £340 million was taken out of housing
equity to finance mobility. This is consistent with the DOE estimate of
£100 million in 1973.43
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(b) Consumer spending by mOl'ers

Lack of data on sales gives a problem estimating the number of owner-
occupiers who moved home. However, a figure can be derived from the
1977 Green Paper. In 1971 it was estimated that 4·8% of owner-
occupiers in England and Wales moved home.44 With 11,825 million
owner-occupiers in the UK in 1981,45 this suggests 567,600 movers.
Taking the average house price at £23,500,46 movement involves a total
equity of around £13,340 million. If it is simply assumed that moving
owner-occupiers use between I and 5% of this equity on consumer
spending, we have a figure of£133-£667 million. This is a conservative
figure bearing in mind the DOE estimate of £250-£300 million in mean
cash proceeds for 1973,47 which would represent a figure of around
£990-£ 1,130 million at 1980 prices.
(c) Consumer spending by legatees

DOE have estimated that there were around 30 1,000 household dissol-
utions due to death in 1981.48 Assuming that 46% of heads of household
aged sixty or over were owner-occupied,49 this suggests 138,500 owner·
occupier dissolutions. An alternative and higher figure is provided by
DOE; one that includes owner-occupier dissolution for reasons other
than death. Estimates for 1971 showed some 240,000 households leaving
owner-occupied houses, excluding owner-occupiers moving. so
Taking the range 138,500-240,000 suggests a figure of £3,255-£5,640
million for the total equity of stock affected by household dissolution.sl
Again, making a simple assumption that only 20% of this equity is spent
outside the housing market, consumer spending might be estimated at
£650-£ 1,128 million. By comparison, in 1979 the BSA estimated that
£4,500 million was realised by last-time sellers; with perhaps a third of
Kemeny & Thomas: Capital Leakagefrom Owner-Occupied Hal/sing 21
these proceeds attracted to the building societies. 51 On this basis. up to

£3,000 million could have been released as capital leakage. though some
might be directly reinvested in housing. A higher figure is also indicated
to take account of increasing rates of owner-occupier dissolution due to
marital breakdown: a figure likely to be higher than assumed from the
1971 estimates. 53
(d) Personal income schemes

There is no satisfactory basis on which to make this estimate. But if only

0·1 % of owner-occupiers remortgaged or sold their homes to purchase
personal income schemes, this would involve a figure of around £300
million.s4
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Total receipts
Combining these estimates gives a range for housing capital extracted of
£1,400-£2,430 million.
(3) Estimate of Capital Release

Our third and final estimate is based on the assumption that capital can
be released from housing through three mechanisms: encashment; end
of chain sales; and remortgaging.
(a) Encashment
Based on the 1973 Movers Survey, DOE have estimated UK cash
proceeds on housing exchange at £400 million.s5 That would be £940
million at 1980 prices.56 The 1973 survey data is the best available. but
may be modified in the light of changing practices on mortgage advances
and the annual number of transactions. There is no evidence to show
a change in building society lending practices; and anecdotal accounts
suggest that building societies still take little account of sale proceeds
when calculating advances on new purchases. Looking at transactions,
building society advances increased by 23% between 1973 and 1980.57
The estimate of £940 miIlion could therefore be inflated by, say, 20%
to provide a range for encashment of £940-£1,128 million.
(b) End of chain moves

As well as estimating encashment, the 1977 Green Paper looked at the
need to finance the purchase of second-hand houses from sellers who
were not buying other houses. In 1971 it was estimated that 240,000
households were leaving owner-occupied houses; excluding owner-
occupiers moving.58 If this held in 1980, and had to be re-financed at
22 Polic.\' and POlilics
average house prices, the total figure would be £5,640 million. Again.
assumptions have to be made about the proportion of extracted capital
likely to be re-invested in housing. If only 20% of proceeds are spent
outside the housing market, we have a figure of £ I, I28 million.
(c) Remorlgaging
No hard data are available on remortgaging (existing owner-occupiers
taking out a new mortgage without moving), though it would now appear
to be practised on a scale sufficient to trouble Bank of England com men-

tators.5~ At the same time, with the increasing number of elderly outright
owner-occupiers, home income plans60 seem certain to grow in popular-
ity, especially since they were made eligible for mortgage interest tax re-
lief in 198 I. However. remortgaging was probably insignificant in 1980,
compared with capital extracted through encashment and end of chain
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sales. For the purpose of this estimate, a figure of £300 million seems
reasonClble.61
TOlal Release
Combining these estimates gIves a range for capital release of
£2,368-£2,556 million.
SUMMARY
Our initial estimate of capital leakage was based on the demand for hous-
ing finance, suggesting a figure of £ 1.600-£2,300 million. Further esti-
mates were then attempted; receipts from housing capital offering a
figure of £ 1,400-£2,430 million; and capital release providing the higher
figure of £2,368-£2,556 million (see Table I). Overall, therefore, the
range is of the order £ 1,400-£2,600 million a year (1980 prices). This
TABLE 1
Estimates of Capital Leakage (1980 data)
Approximale
scale
Type of eSlimale (£ million)
Surplus of mortgage lending over increase in real value of

assets £ 1,600 - 2,300
Magnitude by type of capital consumption (moving costs,
consumption by vendors and by legatees, and purchase of
personal income schemes) £ 1.400 - 2,430
Magnitude by type of capital release (encashment, end of
chain sales and remortgaging) £2,368 - 2,556
Kemeny& Thomas: Capital Leakage/rom Owner-Occupied HOI/sing 23
is 0·6-1·0% of the total value of personal sector dwellings.62 As a point

of comparison, an estimate of leakage in Australia suggested a figure of
0.6%.63 In tenns of annual transactions. taking the figure for building
society house purchases,64 capital extracted may average £2.000-£3.700
per transaction (at 1980 prices). The higher figure seems more probable.
as we have consistently made conservative estimates about the leakage
of capita] released to last-time sellers. In this respect. it is interesting to
compare our figures with the recent estimate by Lomax. suggesting that,
subject to transaction costs and some construction. £3.781 million might
be taken as a rough estimate of the equity taken out of the housing

market in 1979.65 This is nearly half as much again as our own upper
figure. But even our minimal estimates mean that capital leakage
represented 20-35% of net total advances on house purchase in 1980.
Consequently it must be concluded that as a result of capital leakage
there is a demand for extra housing finance which goes beyond that
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necessary to sustain an expanding owner-occupied sector.

DISCUSSION
There are two main objections to the realising of capital gain through
housing exchange. It has a distorting effect on both the savings and
housing markets.
(1) Distortion of tbe Savings Market

We have expressed leakage on individual transactions as equivalent to
(rn2-rn.)-(p-s). There seems reason to believe that people attempt to
maximise m2-m •• (the difference between the new mortgage and the
redeemed mortgage), and that they are encouraged to do this by existing
subsidies. By taking out a capital gain in return for a higher mortgage,
the owner-occupier is receiving the equivalent of tax relief on a non-
housing purchase. This is because a non-housing purchase is made using
a capital gain which has been assisted by housing subsidies. This is thus
an expensive and ineffective fonn of housing subsidy which tends to
increase inequalities between tenures. It also has the effect of expanding
the mortgage debt and thereby increasing demand for housing finance
from the personal savings sector.
Leakage is in part a symptom of mortgage maximising. On exchange,
owners are taking out a capital gain in return for a mortgage which is
higher than they would otherwise need. This contributes to the growing
owner-occupation mortgage debt, which has almost doubled in real
terms between 1965 and 1980, while the public housing debt has fallen
in real terms over the same period.66 Because of capital gains made from
exchange or by last-time vendors, additional mortgage finance has to be
attracted into the market. Leakage can therefore be seen as an important
24 Polic.\" and Politics
reason for the growth in mortgage demand. At 1980 prices. mortgage
advances from all sources grew at over £7 ,000 million a year during the
period 1976-80.67
Competition for this mortgage finance has an impact on the personal
savings sector, and may mean that interest rates are higher than they need
otherwise have been. Kilroy has argued that the stimulus to maximise
mortgages re-routes money out of the productive economy to finance a
vicious circle of paper values, high house prices, high interest rates and
high unproductive savings.68 It is also argued that the extra demand for
mortgage finance has a negative impact on productive industry. Compe-

tition for funds is seen to increase the cost of industry's borrowing; while
the outstanding performance of subsidised housing as a form of invest-
ment reduces the incentive to risk venture capital. In this sense, the tax
advantages enjoyed by owner-occupation give housing a competitive
edge as a form of investment.
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As a means of wealth accumulation, home ownership has performed

relatively well against other forms of investment over the last twenty
years. It is difficult to judge whether this has been at the expense of more
productive investment. The impact will be influenced in part by the

extent to which liquidated fixed housing assets become available for
other forms of investment (rather than being spent on consumer durables
and services). It will also depend on the demand for institutional finance
to meet investment needs. The Wilson Committee concluded that while
adequate finance was available, there was a lack of demand.69 However,
Carrington and Edwards have argued that demand is extremely sensitive
to the terms on which finance is made available. They suggest that in
Japan and Germany, the savings markets help productive industry; in
the UK the emphasis is on consumption. 70 Following this analysis,
support for the owner-occupied housing market in a way which con-
tinues to increase demand for mortgage finance would be in conflict with
the need to release long term finance to productive industry.
We have suggested that housing capital leakage has an impact on the
personal savings sector, and may disadvantage investment in productive
industry. The arguments are largely speculative because the impact is not
straightforward. Some capital is recirculated in the form of savings and
investment which may benefit the formation of new businesses. An
unknown proportion will go on consumer durables and services. If the
expenditure is on goods and services produced at home, this may re-enter
the economy as productive investment. However, it will not benefit
industry if imported goods are purchased. Also, the inducement to
maximise mortgaging could be argued to minimise certain forms of
discretionary spending, with implications for patterns of expenditure
at different points in the family life cycle. Whether either personal
consumption or productive investment are influenced by higher levels
of interest as a result of competition in the perSonal savings market is
Kemeny & Thomas: Capital Leakagefrom Owner-Occupied Housing 25
an argument which is likely to continue. It is leading economic indicators

like the US exchange rate which have an immediate impact on market
rates, which means that any influence exerted by mortgaging activity
would occur through more difficult to determine distortions of the
productive economy.
(2) Distortion of the Housing Market

Critically, capital leakage from housing is enhanced through an Ex-
chequer subsidy which is ill-directed and expensive. The capital gain is

paid for by tax relief on interest repayments, the exemption from capital
gains tax, and through the higher prices paid by new house buyers using
subsidised debt finance. While capital can be taken out when a property
is sold, this must be balanced by the incoming owner sustaining a greater
IP : 195.34.78.39 On: Sat, 11 Jun 2016 12:56:04
debt load. Not only does this increase the demand for mortgage finance;
it requires a higher exchequer subsidy in the form of tax relief on interest
repayments. Because interest charges on debt are the basis for tax relief,
an increase in mortgage debt means that mortgage tax relief may not fall
in real terms.71
As a subsidy of consumption, the current tax treatment of owner-
occupation encourages maximum mortgaging and fails to stimulate stock
maintenance. Such demand subsidies are sometimes justified in terms of
the assistance they offer individuals to pay more for housing and thus
to stimulate the supply of new and improved units. However, the initial
effectmay be to increase house prices, with the only beneficiaries being
existing home owners. It is uncertain whether there is any long term
inftuence on supply. It could be argued that the inflationary aspects of
capital subsidy are balanced by leakage, but even if this is the case, it
suggeststhat demand subsidies are at best ineffective and offer expensive
help in a regressive way. By giving housing a competitive edge as a form
of investment, the owners of mortgaged property enjoy its convenience
and amenities, while gaining a financial advantage greater than that
accruing to the depositors who make the mortgaging possible. This treat-
ment has increased inequalities between housing tenures, directly contri-
buting to the differential accumulation of wealth. This is reflected in the
increasedproportion of personal wealth held as fixed assets, in the greater
credit opportunities enjoyed by home owners, and in their ability to
replace housing equity with debt to finance more housing consumption.
The opportunity for capital leakage is made possible by the same
mechanisms which encourage an 'entrepreneurial' approach to owner-
occupation;72 criticised on the grounds that it encourages over-
consumption of housing and the creation of wealth through fixed assets
rather than through the productive economy.
Housing policy needs to look for ways in which investment can be
stimulated in the maintenance and replacement of the housing stock; not
26 Policy alld Politics
in subsidies which encourage the accumulation of housing wealth at the

expense of productive industry. We have suggested that some capital
leakage results from maximising m2-ml• The tax advantages of this
would have been limited by maintaining the £25.000 limit. But this is
a crude device. More attractive is the idea of tax relief on a single annuity
principle.?3 But such partial measures do not get to the root of the
problem. What is called for is a thorough-going reform of the housing
subsidy system, with owner-occupied housing being treated just as any
other investment. This would involve re-introducing the taxation of
imputed rent. charging capital gains tax and ending current exemptions
on capital transfer tax. Such changes have been proposed by a number
of observers as part of a complete reform of housing subsidies to all
tenures.?4 The advantage of such a reform for the owner-occupied sector
would be to remove the tax incentives to invest in housing rather than
productive assets. A tax on imputed rent would also encourage higher
IP : 195.34.78.39 On: Sat, 11 Jun 2016 12:56:04
levels of maintenance, since repairs and improvements would be off-set

as an expense incurred in gaining the (taxable) imputed rent.
While we would argue the general case for reform of taxation subsi-
dies, there is realistically little apparent political willingness to tackle this

subject. Even the expedient course of leaving unchanged the £25,000
limit was breached in the 1983 Budget, partly through sustained lobbying
by the BSA, and perhaps, if the conspiracy theory is to be believed, in
return for fixed mortgage interest rates prior to the general election. In
these circumstances, it is argued, there remains open only the pragmatic
route of direct limits on capital leakage at exchange. This might take the
form of upper limits on percentage advances to purchasers at second and
subsequent transactions; or, perhaps more realistically, clear require-
ments on reinvesting the asset value of the existing home. Such direct
limits could be achieved through voluntary action by building societies.
Indeed, similar mechanisms come into operation during periods of mort-
gage famine. But building societies are unlikely to accept voluntary res-
traints on their lending activity in times of adequate funds, partly because
they do not accept it has any negative effects on the savings market, and
also because they are in business to lend funds, and will not impose res-
trictions on themselves which wi!llimit their ability to protect investors.
At the same time, though voluntary regulation seems improbable,
government control would prove difficult. The need, for example. to
allow elderly owners to trade down would create a series of exceptions
which others would exploit to maximise gains. Ultimately, therefore, it
would seem there is little option but to limit the potential of housing
as an investment good. While the political realities are formidable, the
momentum for reform is nevertheless present in the context of reduced
subsidies in the rented sector and the government's difficulties in financ-
ing its own spending programmes while controlling PSBR and seeking
to reduce direct taxation.
Kemeny & Thomas: Capital LeakageIrom Owner-Occupied Housing 27
There are therefore far-reaching housing policy implications of the

'capital. hungry' nature of owner-occupation. Hitherto, the ability of
owner-occupiers to extract housing capital and spend it on consumption
has been seen as an advantage they enjoy over those in the public rented
sector. So it is in one sense, since public tenants cannot substitute debt
for equity in their homes as can owner-occupiers.75 However, it is clear
that in an owner-occupied sector which is not contracting, such extracted
capital must be replaced. Unless the total amount of housing which is
consumed declines. this will presumably result in higher housing costs.
Changes in housing finance should therefore reduce subsidies to

consumption and discourage capital leakage. This would mean that
housing would no longer be privileged as an investment in comparison
with investment in the creation of productive assets. The effect would
probably be to increase the costs of extracting housing capital and
spending it on consumption, but this might be off-set because home
IP : 195.34.78.39 On: Sat, 11 Jun 2016 12:56:04
owners would enjoy more of the benefits ofIow historic costs.

Acknowledgement
The authors are grateful for the comments of Martin Boddy and Glen
Bramley (School for Advanced Urban Studies); to colleagues at the
Centre for Urban and Regional Studies, in panicular to John Doling for
his contribution on the derivation of capital leakage from individual
transactions; and to colleagues at the Swedish National Institute for
Building Research, in particular to Rune Wigren.
NOTES
I. Department of the Environment, Housing Policy Review, Housing Policy:
Technical Volume: Part II. Chapter 7 (London: HMSO, 1977).
2. Committee to Review the Functioning of Financial Institutions (London:
HMSO, 1980).
3. Flink, J. J., The car cuiture. MIT Press (Cambridge (Mass.): MIT Press,
1975),144.
4. Kilroy, B., 1978, 'Housing Finance, Organic Reform', Labour Economic.
Finance and Taxation Association (Glasgow;Civic Press, 1978), 14.
5. Bank of England Quarterly Bulletin. December 1981.
6. This should not be confused with the economist's use of 'leakage' to refer
to the spin-offeffectsof spending programmes.
7. Department of the Environment, Fair Deal for Housing (London: HMSO
(Cmnd 4728), 1971),4.
8. Gilbert, R. S., International comparisons of the owner-occupied and rental
sectors in the English-speaking countries. Paper presented at the National
Ho.using Economics Conference, Macquarie University, Sydney, 1978
(mlmeo).
9. Stanley,J., Home-ownership in the 1980s (London: SHAC, 1980).
10. Saunders,P., 'Domestic property and social class', International Journal of
Urban and Regional Research. Vol. 3 (1978), 233-251.
II. Thoms, D. C, 'The implications of differential rates of capital gain from
owner-occupation for the tranformation and development of housing

classes', International Journal of Urban and Regional Research. Vol. 5,
No.2 (June 1981), 205-217. See also, Kemeny, J., (with Karn, V. A. and
Williams, P.), Polarisation in the Inner Birmingham Housing Market.
1972-1979. WP 81 (Birmingham: CURS, University of Birmingham, 1981).
12. Farmer, M. K. and Barrell, R., 'Entrepreneurship and Government Policy:
The case of the housing market', Journal of Public Policy. Vol. I. No.3
(1981), 307-332.
13. Building Societies Association, Building Societies and the Savings Market
(London: BSA, 1979), 8.
14. 1bid.,8.
15. See, for example, Lord Coham of Croyden, 'Home ownership could have
raised industry's borrowing costs', Building Society Gazelle. Vo\. III, No.
139 (December 1979), 1490-1492; Leigh-Pemberton, R. 'Banks, Building
Societies and Personal Savings', National Westminster Bank Quarterly
Review (May 1979), 2. See also the symposium, 'Housing Finance: Whose
Patch?' Bankers' Magazine. Vol. 223 No. 1625 (August, 1979).
16. Leigh-Pemberton, R., Op. Cit., 2.
IP : 195.34.78.39 On: Sat, 11 Jun 2016 12:56:04
17. Llewellyn, D. T., 'Do building societies take deposits away from banks?',
Lloyds Bank Review. Vol. 31 (January 1919),21-34; Kilroy, B., op. cit.,
1978; Kilroy, B., 'Housing Finance: Why so privileged?', Lloyds Bank
Review. No. 133 (July 1979), 37-52; Kilroy, B., 'Housing finance gone
cuckoo', Roof, Jan 1980, Vol. 5, No. I (January 1980),4-5; Kemeny, J.,
The myth of home ownership: Private versus public choices in housing ten-
ure. (London: Routledge and Kegan Paul, 1981).
18. Kilroy, B., 1979, op. cit., 40.
19. Building Societies Association, Evidence submilled by the BSA to the Com·
millee to Review the Functioning of Financial Institutions (London: BSA,
1978).
20. Department of the Environment, Housing Policy: Technical Volume. Part
11 (London: HMSO, 1977), 116. (The data refers to owner-occupiers moving
to another owner-occupied home).
2!' Building Societies Association, Mortgage finance in the 1980s (London:
BSA, 1979),69.
22. Newly-built owner-occupied houses; houses added to the owner-occupied
stock by the sale of public and private houses; and improvements to the
stock.
23. BSA Bulletin. No. 28 (October 1981), Table 4.
24. Based on assumptions concerning new mortgage lending, repayments, liqui.
dity and fixed assets. New mortgage lending was assessed in terms of pro-
jected demand, from new household formation and to finance transactigns
within a growing owner-occupied sector.
25. Department of the Environment, Housing Policy: Technical Volume. Parr
11 (London: HMSO, 1977), Table VII. 32.
26. Based on second hand house price inflation: BSA Bulletin. op. cit., Table
17.
27. Central Statistical Office, National Income and Expenditure (London:
HMSO, 1980), Table 11.11.
28. Department of the Environment, Housing and Construction Statistics
1970-80, (London: HMSO, 1981), Table 72.
29. Ibid., Table 116.
32. Taken as 75% of second hand house prices: BSA Bulle/in. op. cit., Table
17.
Kemeny & Thomas: Capital LeakageIrom Owner-OccZlpied HOl/sing 29
33. Department of the Envi ro n ment.Family Expenditure Survey: Report for
1979 (London: HMSO. 19 8).O
34. Based on a figure of 11.825.000. Central Statistical Office, Social Trends No.
12 (London: HMSO. 1982). Table 8.4.
35. Department of the Environment, Housing and Construction Statistics
197~1980. (London: HMSO. 1981). Table 2.
I (London: HMSO, 1977), Table B1.
37. Alliance Building Society Housing Research Unit, Searchingfor and buying
a house (University of Surrey, 1978).
38. Department of the Environment, Housing Polic.r: Technical Volume. Part
11 (London: HMSO, 1977), 116.

39. King, M. A. and Atkinson, A. B., 'Housing policy, taxation and reform'.
Midland Bank Review. (Spring 1980), 7-15.
40. BSA Bulletin, op. cit., Table 10.
41. 'Bank lending for house purchase', Ibid., 24-26.
42. Now that DOE have discontinued the 20% sample survey of sales reported
to the Inland Revenue, there is no adequate data to account for bank lending
IP : 195.34.78.39 On: Sat, 11 Jun 2016 12:56:04
or non-mortgage sales.
43. See Note 20.
I (London: HMSO, 1977), 96.
45. Central Statistical Office, Social Trends No. 12 (London: HMSO, 1982),
Table 8.4.
46. BSA Bulletin, op. cit., Table 17.
47. See Note 20.
I (London: HMSO, 1977), 118.
49. Central Statistical Office, Social Trends No. 12 (London: HMSO, 1982),
Table 8.10.
50. Department of the Environment, Housing Policy: Technical Volume, Part
11 (London: HMSO, 1977), 113.
51. Based on average house price of £23,500. BSA Bulletin, op. cit., Table 17.
52. Building Societies Association. op. cit., 1979.69
53. Ermisch, J., 'Housing in the eighties: Demographic impetus and policy
response" Policy Studies. Vol. 2, Part I, (1981),34-48.
54. Based on 11,800 sales at an average value of £23,500.
55. See Note 20.
56. Based on house prices inflation of 135% over the period 1973-1980. BSA
Bulletin, op. cit., Table 17.
57. BSA Bulletin. No. 27 (July 1981), Table 7.
58. See Note 48.
59. Bank of England Quarterly Bulletin, December 1981.
60. The remortgaging of property to purchase annuities, SO providing additional
income.
61. A figure consistent with that used in the estimate for housing capital receipts.
62. Valued at £243.1 bn in 1979. Central Statistical Office, Financial Statistics
(February 1980), Supplementary Table C.
63. Kemeny, J., The Great Australian Nightmare. (forthcoming).
64. BSA Bulletin. No. 28, (October 1981), Table 10.
65. Lomax, D. F., 'The banks and the housing market', National Westminster
Bank Review (February 1982). 2-12. The estimate was based on net
additional credit for house purchase. It uses only building society advances;
assumes incorrectly that advances are the same on new and existing houses;
and does not account for transaction costs and investment in increased value.
Lomax uses advances on new and existing houses. and apportions gross
building society advances as £7613 million for existing houses in 1979.
Deducting repayments of principal (£3,832 million) left £3.781 million as
the estimate of extracted equity.
66. Kilroy, B., 'The real competition for resources in housing', Housing Reviell'
(July-August 1981). 113-116.
67. Out-tum prices from BSA Bulletin and adjusted to constant prices using rate
of house price inflation.
68. Kilroy, B., 1981, op. cit., 115.
69. Committee to Review the Functioning of Financial Institutions, Report.
Cmnd 7937. (London: HMSO. 1980\.
70. Carrington, J. C. and Edwards, G. T. Financing Industrial Investment

(London: Macmillan, 1979).
7]. David Webster's evidence to the House of Commons Environment Com-
mittee showed a fall in subsidies on the HRA. Tax relief on mortgages was.
at the same time, tending to increase, though with the £.2.5,000 limit having
an increasingly important effect (HC 714, pp. 28, 34-35).
72. Farmer, M. K. and Barrell, R., op. cit., 198 I.
IP : 195.34.78.39 On: Sat, 11 Jun 2016 12:56:04
73. Housing Centre Trust, Housing Finance Review (London: HCT, 1975):
Kilroy, 8., op. cit., 1978. .
74. See Goss, S. and Lansley, S. What price housing? A review of housing sub-
sidies and proposals for reform (London: SHAC, 1981); Grey, A. et aI.,
Housing Rents. Costs and Subsidies: A Discussion Document (London:

CIPFA, 1981 [1978D; Stafford, D. C. 'Housing Policy; Objectives and Strate-
gie~' in Leaper, R. A. B. (ed.) Health. Wealth and Housing (Basil Blackwell,
1980).
75. In the Labour Party's discussion document on council housing, A future for
public housing: A Labour Party discussion document (London, 1981).
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Po/ic,vand Politics. Vol. 12 No.

CAPITAL LEAKAGE FROM OWNER-

Jim Kemeny and Andrew Thomas

Despite continuing political support for owner-occupation, the almost

the Wilson Committee Report2 raised questions as to whether the capital

THE EMERGENCE OF CAPITAL LEAKAGE AS AN ISSUE

monitoring of progress by government departments, coupled with work

ownership, and the financial attractiol)s of both declining real housing

on the potential for capital accumulation. Saunders has seen owner-

in Britain having the best housed unemployed in Europe'}h

investment in new building or renovation takes place. The number of

ing only doubled, whereas that on owner-occupied housing trebled. '18

gage for a set of individual transactions. Consequently, what is a rela-

ESTIMATES OF THE DIMENSIONS OF CAPITAL LEAKAGE

main kinds of non-housing consumption likely to be financed by realised

(1) Investment Estimate

V increase in value of owner-occupied sector.

(b) Rising I'aille

be obtained by looking at the value c;>fnew building, stock transferred

i) Value 0/ nell' building

(c) Total leakage

to (L = N - V), total leakage may fall in the range £ 1.600-£2.300

able. The limitations of national statistics impose other constraints. They

assumptions, suggest that leakage from owner-occupation in 1980 may

(2) Receipts from Housing Capital

(a) Moving costs

(including local authority mortgages), and there were fees on non-

draw capital (removal expenses, new fittings, service connection charges).

(b) Consumer spending by mOl'ers

(c) Consumer spending by legatees

these proceeds attracted to the building societies. 51 On this basis. up to

(d) Personal income schemes

There is no satisfactory basis on which to make this estimate. But if only

(3) Estimate of Capital Release

(b) End of chain moves

to be practised on a scale sufficient to trouble Bank of England com men-

Surplus of mortgage lending over increase in real value of

is 0·6-1·0% of the total value of personal sector dwellings.62 As a point

be taken as a rough estimate of the equity taken out of the housing

necessary to sustain an expanding owner-occupied sector.

(1) Distortion of tbe Savings Market

mortgage finance has a negative impact on productive industry. Compe-

As a means of wealth accumulation, home ownership has performed

productive investment. The impact will be influenced in part by the

an argument which is likely to continue. It is leading economic indicators

(2) Distortion of the Housing Market

chequer subsidy which is ill-directed and expensive. The capital gain is

in subsidies which encourage the accumulation of housing wealth at the

levels of maintenance, since repairs and improvements would be off-set

dies, there is realistically little apparent political willingness to tackle this

There are therefore far-reaching housing policy implications of the

Changes in housing finance should therefore reduce subsidies to

owners would enjoy more of the benefits ofIow historic costs.

owner-occupation for the tranformation and development of housing

11 (London: HMSO, 1977), 116.

70. Carrington, J. C. and Edwards, G. T. Financing Industrial Investment

Housing Rents. Costs and Subsidies: A Discussion Document (London:

( Social Policy & Adninistratiorl

A.J. Culyer Economics without economic man?

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Published by BASIL BLACKWELL. Oxford. England

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