James Vitali gave evidence.

We will hear oral evidence from James Vitali, head of political economy at Policy Exchange. For this session, we have until 2.40 pm. Could you please introduce yourself for the record?

James Vitali:

Thank you very much for inviting me to give evidence. My name is James Vitali. I am head of political economy at the think-tank Policy Exchange. I work on a number of areas, including economics, housing and regulatory reform. By way of quick background, I recently authored a paper entitled “The Property Owning Democracy” in which I argue for the value socially and economically of property ownership, both for democracy and capitalism. I specifically address leasehold reform in that as part of the broader question. My main interest in the Bill is the enfranchisement process.

Q In the paper you have just talked about, you stress the importance of enabling enfranchisement for leaseholders to expand the number of people with authentic property rights. Do you believe that the Bill will make it cheaper and easier for leaseholders to buy their freehold?

James Vitali:

Yes. The first point to make is that I think leasehold is effectively a simulation of ownership. Imagine that ownership comes as a sort of package of rights and responsibilities; leaseholders lack many of those rights and responsibilities. The Bill will make meaningful improvements to the situation of leaseholders, but there are some practical improvements that could be made to the Bill to give practical effect to its intent.

Could you expand on that?

James Vitali:

Of course. There are a couple of things in particular. One has been raised already by Mr Gardiner in the evidence sessions and concerns mixed-use buildings. I think it is great that the threshold is being increased to 50%. That will bring a lot of leaseholders into the scope of potential enfranchisement. But as it stands, there is a provision in the Leasehold Reform, Housing and Urban Development Act 1993 concerning structural dependency rules—shared plant rooms and things like that.

Effectively, as it stands, the provisions in that Act disqualify people who get to the threshold but share service and plant rooms with a commercial unit in the building. That section in the 1993 Act should just be removed. There is already a framework for co-operation between commercial units and residential units in mixed buildings when it comes to services. It should be relatively straightforward to create a framework for co-operation with the Bill.

Q Policy Exchange describes itself as a conservative think-tank, so you and I might find ourselves rather strange bedfellows on this, but I welcome what you said about shared services. This whole section is really about competition and free markets and so on. Would you not agree that the leasehold system has all the hallmarks of monopolistic practices and market failure? It has a lack of choice, uncompetitive prices and high barriers to entry, and there is an inability to substitute a service, all of which are the standard accusations that a conservative think-tank might make of an unfree market, and it is against consumer interest. All credit to you, that is what Policy Exchange is supposed to be promoting: the free market and the interests of the consumer. Leasehold itself and the exploitation we have been discussing over the past few days are really embedded in a non-capitalistic structure, are they not?

James Vitali:

Yes, I quite agree. One of the cases I make in the paper I mentioned is that not only is ownership becoming more concentrated in a narrow stratum of society, but the type of ownership we are offering the aspirant is being thinned out. You were just listening to the suggestion that leasehold is almost mis-sold to consumers. I think aspirant property owners are being mis-sold when it comes to leasehold. They think they are buying into a genuine form of property ownership, but in many ways, as I said at the start, they lack the rights and responsibilities that should come with an ownership tenure, so I completely agree.

Q Thank you. Freeholders, in that sense—particularly in relation to ground rent—are really a rentier class because they are not providing a service in return for the revenue stream they are cashing in on.

James Vitali:

Yes, charges should be connected to the provision of a service, so I think ground rents should be reduced to a peppercorn. Charges should be made through this new and very sensible regime that is being proposed in the Bill for how charges are requested and demanded.

Q I cannot believe we are agreeing quite as much as this—this is wonderful stuff. That rentier class often says, “Well, we do provide a service,” but of course that is to conflate and confuse what they do with the service provided by a managing agent, which of course could be equally well performed by an enfranchised community that has the right to manage their own block. The domain of the freeholder is actually simply the accumulation of the ground rent, is it not?

James Vitali:

I think the key here is whether the leaseholder has a choice in who is providing the service and what service they are providing. Any functioning free market is based on strong property rights and competition. The key here is giving existing leaseholders greater choice over who is managing their building and how it is being maintained, and increasingly giving them the chance to take on those responsibilities themselves.

Thank you very much. In order to preserve both our reputations, I will not say that you agreed with me and I trust that you will not say that I agreed with you.

Q Let me attempt to get back on to Conservative territory, rather than Barry’s territory. There are many experts in this field, and campaigners have done some fantastic work. I am not one of them—I do not know about this—so allow me some naivety in the questions I pose. Is marriage value a real thing?

James Vitali:

I think a lot of the reforms proposed in this Bill are an attempt to reflect better the fact that when the leaseholder purchases the leasehold, they are acquiring the majority value of the asset. In market terms, sure, I suppose marriage value is significant and substantive, but as it stands it seems to me that a leaseholder acquires the majority of the value of an asset when they acquire the leasehold, and that is slowly eroded. I think that is the thing that is wrong in the process.

Q That did not quite answer my question. My question was: is marriage value a real thing? It could be large or small. Can you describe what it is and do you perceive that it is a real thing? I read somewhere about some vases—I do not know why we have these vase analogies sometimes—and I kind of get it. There is vase A and vase B—apparently they have to be Chinese—and when you put the two together, they are more valuable than they are separately. Is that a real thing? Do you understand that as a source of value? If you do, can you explain to me the legitimacy of transferring, at a stroke, £1.9 billion of that from one group of people to another, and that not to be described as a windfall gain?

James Vitali:

Tricky question. If you were to acquire some property that you have genuine rights and responsibilities for the management of, the ability to benefit from in the future and the ability to control, then that form of property would be greater than if you were subject to charges and ground rent. On the point about the £1.9 billion transfer value from freeholders to leaseholders, I did take a cursory look at the impact assessment. I do think that is a legitimate decision for you as parliamentarians to make about 10-year property rights in the UK. I think it is justified.

Q I have one final question, if I may. I know it is not quite at a stroke, because I think it is when they come up, but is there any way of mitigating? It seems to me that when you take something away from one person incompletely and you cannot actually say, “Well, the value wasn’t there”—I understand fee-for-service but marriage value is different from that—there is no other mitigation for the loss of that party, and there is not in the Bill. We can agree that marriage value needs to go; we are finally going from class A of people to class B of people. We could, however, then put in some mitigation for those who are having a loss, which would be usual if they had not done something materially wrong. What do you think about that?

James Vitali:

I think that is where the dividing line lies between you and Mr Gardiner, and perhaps you and I and Mr Gardiner.

Oh, it is much wider than that.

James Vitali:

Indeed. I think a balancing act needs to be struck in this Bill between spreading genuine property rights more widely and compensating those existing freeholders. If you seek to diffuse property ownership, but in the process undermine or dilute property rights, you are undermining the thing that you are trying to spread more evenly. That is a technical question for the way that you finesse this Bill, but I do not think it is a substantive issue with the desire to give leaseholders greater control and rights over their property.

Exactly.

Q On the point of marriage value, Mr Vitali, let us go back to free market principles. You and I would agree that a free market is one in which properties are sold between a willing seller and a willing buyer—would you not?

James Vitali:

indicated assent.

Q Of course, the argument that Mr Fuller sought to put forward to you was based on the old cup and saucer analogy, or the pair of vases being more valuable than the one. In this situation, we do not quite have a willing seller and a willing buyer. We have an encumbered buyer, because they are trammelled by the fact that they have lived in that property for the past 30 years, and they now see it becoming worthless. When the Custins v. Hearts of Oak decision in 1967 went through, the Government immediately came back in primary legislation, and legislated to abolish marriage value precisely because of that purpose. If I might impair my socialist credentials even further, it was Margaret Thatcher who sought to abolish it outright, and it was only the foolishness of the subsequent Prime Minister, John Major, that brought it back in for flats in 1993. Is that not your understanding of how a free market should actually work, between a willing buyer and a willing seller?

James Vitali:

I will deflect and answer a slightly different question. It is interesting that the leaseholder enfranchisement process is kind of redolent of and similar to right to buy, in that it is a no-fault compulsory purchase of an asset. The difference with right to buy is that compensating the state is a different consideration from private citizens who have property rights. All I would say is I think it is important that the compensation mechanisms in the Bill are such that it does not feel like the things we are trying to spread more equitably—property rights—are being diluted by the state.

We will agree on that one.

Q James, we are fortunate to have you here, as somebody who thinks a lot about the property sector. We are legislating in one area; quite often, there will be implications in the broader sector. Have you put any thought into that? Could you share any views on unintended consequences that we might need to watch out for elsewhere in the property market?

James Vitali:

Delighted to. That is probably the thing that I have been thinking about the most in terms of the implications of the Bill. I understand that there is an intention for a ban on leasehold houses to come forward on Report. One thing that I am really worried about is that what will effectively be created is a two-tier system of housing or tenure types in this country, between the countryside and our cities. It is very possible, if we deal with houses and not the tenures for flats, that we will create secure, authentic property rights outside of our urban areas and create in our urban areas a slightly more precarious, maybe outdated type of tenure.

As it stands, that has not been given enough consideration, because it also does not conform with the Government’s wider strategy on housing, which, broadly speaking, is to densify our urban areas and increase housing supply in our cities. There are political considerations around why they are doing that—it is a lot more deliverable to focus on the densification of cities—but there are very good economic reasons for that too: the agglomeration effects of building housing supply in a city are greater than elsewhere. We need to incentivise people living in flats in dense cities, and if we deal with leasehold as it pertains to houses, not flats, it will work against the Government’s quite legitimate and justified broader housing strategy.

So your solution is to deal with houses and flats.

James Vitali:

It seems to me that commonhold is broadly out of the scope of the Bill now. It would be my gentle encouragement that some incentives be included in the Bill for the take-up of commonhold. The Law Commission individual who came on Tuesday said that it is very complicated and there are lots of unintended consequences that need to be taken into account, but I think some small incentives—for example, on mixed use and the threshold for conversion—could be introduced, which might incentivise the take-up of commonhold. But before that I think it should be considered whether new leaseholds come with a share of the freehold. That would be a sensible, deliverable addition to the Bill, and it would deal with the problem that I outlined of a two-tier housing market.

Barry, very quickly.

Q On mixed use, you made a very good case about the reasons for looking at the shared services previously. Would you be in favour of seeing the Bill say that the threshold should increase not simply from 25% to 50%, but maybe to 75%?

James Vitali:

I have not given that too much thought, I must say; 50% seems absolutely reasonable. I think there are some practical issues in getting to that 50% threshold in itself. I have heard stories about the process by which leaseholders whip around the building trying to get together enough—

Q Sorry—this is not about the number of people for an enfranchisement; this is on the shared services point that we discussed earlier. It is about if it should be where the actual commercial element of the building is more than 50%. The limit was 25%; now it is proposed to be 50%. Actually, given that the right to manage would apply only to the leasehold part of the building, it would seem fair that that should be as high as, say, 75% commercial and 25% leasehold, because at the moment it is one person—the freeholder—who is the counterparty for the shared services. In this case, it would be the managing agent of the right to manage leaseholders.

James Vitali:

I must say that I have not given that a lot of thought. I think increasing it to 50% will have a significant effect itself, but you may wish to go further.

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witness very much on the Committee’s behalf.