Government-guaranteed 95% mortgages ‘buck the market’
This must be a moral hazard zenith.
It’s hard to tell if this unmitigated folly is a high or a low: His Grace is unsure of the unit of measurement or if a negative quantity is beneficial or detrimental. Either way, the proposal for the taxpayer to underwrite 95% mortgages is an offence against all that is moral, just and right. It amounts to the taxpayer-enforced insuring of the individual against incautious investment. No longer caveat emptor, but screwat taxpayor.
The proposal is aimed at first-time buyers. The Government wants to help 10,000 of them to get a foot on the first rung of the housing ladder by providing a mortgage indemnity scheme of about half a billion. At a time of increasing national debt and growing budget deficit (ie failing Coalition policy), the Government is intent on restoring 95% loan-to-value mortgages to improve affordability and inject some life into the housing market.
It is difficult to conceive of a more peccable policy than one which lures you into a state of maximum indebtedness at a punitive rate of interest, especially when debts of such gargantuan proportions built on the shifting sand of inflated property prices were largely responsible for the global credit crunch and the state we’re in. This time, instead of financial institutions selling on the risk of sub-prime mortgages to an ever-cascading carousel of private banks, the taxpayer will act as guarantor of last resort.
As with the bank bailouts, the shareholder (homeowner) takes the profit in times of plenty, but the poor taxpayer takes the hit in the lean years. It is even more invidious when you consider that those who take out these 95% loans will be subject to a higher rate of interest than those who are deemed to present less of a risk: the repayments will be arduous and the emotional costs very high. This is simply piling Pelion upon Ossa. At these thresholds, the ‘dream of home ownership’ can rapidly become a nightmare trap of negative equity and unsalability: the Englishman’s castle becomes his dungeon. House prices are not guaranteed to go on rising in perpetuity: the easier-credit bubble will surely burst, just as it has always done. It is as if we have learned nothing from Gordon Brown’s economic innumeracy.
Of course, Conservatives favour home ownership: Margaret Thatcher heralded a revolution in the property-owning democracy with the sale of council homes to tenants. But these were massively discounted in recognition of decades of paid rent: they were sold at significantly less than their market value, and so presented no financial risk to the buyer. She was, as ever, mindful of the market, famously noting that it cannot be bucked.
David Cameron, however, is taking an enormous risk: he is not only gambling that current property prices will be sustained; he is attempting to ‘buck the market’ by encouraging would-be home owners to a level of indebtedness beyond what the market believes is advisable, desirable, sustainable or moral. Lenders are cautious because they have just learned (the hard way) that debts must be secured. When they are not, you enter into the Looking Glass economics of Wonderland.