Tuesday, November 22, 2011

Government-guaranteed 95% mortgages ‘buck the market’

This must be a moral hazard zenith.

Or nadir.

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.


Blogger Dodo's Way said...

Your glass is half-empty on this ine then? Young couples paying as much as £1000 per month in rent to line the pockets of land lords will surely benefit? Building Societies and Banks will not lend more than 80% of the cost of a home. That's an insurmountable hurdle for new families. How many houses are we estimated to be short of? 200,000 per year was it? Yet the building industry has ground to a halt.

People want their own homes to settle in and raise families. Council Housing has gone and what is available is misused. Give the next generation something to apire to. They're not all feckless!

This is different to the 'debt bubble. Then you didn't need to prove income. Then you could borrow 150% of the value of the home. No one really cared.

Let's find out more about the detail before we scoff.

22 November 2011 at 10:03  
Blogger bluedog said...

Dave is not so much heir to Blair, Your Grace, but Son of Broon.

As your many communicants keep telling you, Your Grace, Dave is a dangerous man. He knows nothing about finance or financial markets, and even less about anything else.

Does Dave try so hard because he is still trying to prove he's cleverer than his elder brother Alex, the QC? Perhaps we must pray that Dave doesn't bankrupt Britain out of sibling rivalry.

22 November 2011 at 10:12  
Blogger Jon said...

Some of this isn't unwelcome.

- Freeing up public sector land - 'build now, pay later' will create jobs, and hopefully, useful buildings which which can house people or businesses.

As regards the headline- winning announcement of money to help first time buyers, it does appear to be a bit of a dog's dinner.

- Builders deposit 3.5% of the sale price in an indemnity fund, whilst the government guarantees the equity in the event of sale (not even, it appears, default). Essentially, the government is guaranteeing house price inflation.

In summary, if I was a builder, I'd inflate the value of all of my properties by 5%, put 3.5% aside in the government's indemnity fund and then watch David Cameron act as my estate agent.

If I were a buyer, I'd pounce on this. It's a one way ticket as my lenders are indemnified against loss, in effect, by the government, I ought to be able to get a great rate.

N.B. The above does not constitute investment advice!!

What's sad is that there is no reason why lenders on their own shouldn't insist that builders deposit a proportion of their sale price into an indemnity fund - some of the worst lending is done on new build properties, especially those which have substantial buyer incentives which aren't transparent to the lender.

22 November 2011 at 10:39  
Blogger Papal Bill said...

The problem facing new buyers is not that money is too scarce, but that prices are too high, years of unrestricted credit having turned a generation of owners into debt slaves.
I've yet to hear any politician address this uncomfortable fact.

22 November 2011 at 10:50  
Blogger James Reade said...

Interesting on many counts. You first believe that what banks currently are offering in the way of mortgages is the right price; you believe that financial markets particularly when it comes to mortgages are so efficient that the price is what it ought to be. Really?!?!

Then, you're WAAAAAAAY behind the times. FirstBuy has been around for months now, and is just a continuation of the previous government's scheme to help out first-time buyers.

Of course, it's just a patch on an otherwise horribly twisted and distorted market, and unlikely to be anything towards a proper solution, but it serves its purpose - 2 bed new-build houses are going like wildfire at the moment.

One might look at it as something like a subsidy to correct for what looks a bit like an externality in the market (but can't be since it's likely created in the first place by government regulation on housebuilding and other things over the years) - houses are too expensive, banks are too cautious (and not necessarily because that's what the market thinks, just they are responding to the various incentives put in place by government).

22 November 2011 at 10:54  
Blogger Mr Integrity said...

You rightly say You're Grace that the tax payer takes all the risk but none of the benefits. Shared ownership schemes seemed a much more sensible scheme for both parties. The purchaser takes on less liability and the co-owner gets a rent as well as increasing value.
The UK seems to be somewhat unique in its obsession with home ownership. Europeans are much more comfortable with renting their homes. Not that I think we should emulate Europe in any way fashion or form. There are many things that they do that I am not comfortable with, but it is interesting. It is just one of those things that makes us uncomfortable with all things European (except their wine, countryside, sun, sand all those things that might make us want to travel there, but are then glad to be home again).
Dave is a Chav Liberal and as such his policies are generally created to please everyone. In the end a MAN pleaser, pleases no one but himself.

22 November 2011 at 10:55  
Blogger Cam Ma said...

The simple solution is to bring back MIRAS - then taxpayers benefit, while the feckless don't get any more free handouts.

22 November 2011 at 10:55  
Blogger Sam Vega said...

If the government are going into the business of lending money commercially, why don't they try going the whole hog and take up manufacturing?

They could set up, say, a number of car factories. The cars would be cheap and inferior, and the enterprise would be funded by the tax payer because it creates jobs and helps suppliers, and because it is a source of cheap cars. It would of course need ongoing support, but isn't that what governments are for?

The could put these factories in the Midlands, and call them something with "British" in the title...

22 November 2011 at 12:40  
Blogger Corrigan1 said...

I think the key words here are "inject some life into the housing market". Or, to put it another way, give taxpayers money to business people. What is important to remember is that whereas in the past, politics was something one came to around mid-life in order to give some service to society, today it's a career like any other. You leave university, you go into politics at twenty-two and your career arc envisages the lucrative slew of directorships and consultancies you expect as of right at about the time in your life when, in the past, you would have just been entering politics. Trouble is, in order to qualify for those goodies, you have to do the right thing for the people who give them out while you have control of the levers of state. You have to give taxpayers money to business people. See how that works? So if, for example you do something ridiculously Greek like offering a referendum to the people, you get frog-marched out of office so fast you think you were hit by a train.

It's Georgian era corruption, and that's all it is.

22 November 2011 at 12:59  
Blogger Gnostic said...

Time to reinstate tax relief on mortgages don't you think? That would make far more sense.

22 November 2011 at 13:11  
Blogger Marie1797 said...

“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. “
I guess when the buyers, if they do find some that are in a job and can afford the mortgage o on to loose their job and default the government will pay them housing benefit to stay in the house. I agree it's a mad scheme.

Cameron is trying to kick start something that isn't there and can only be brought back up again with new or improved industries and new jobs. We will get these through developing new energy supplies and products, travel infrastructure because people always want and need to travel, and that is one reason we cannot loose our identity to the EussR and become homogenised into nothing leaving Amsterdam or Frankfurt to be the main travel hub for Europe. London needs that development in the Estuary and to improve travelling comfort and speed.

22 November 2011 at 14:09  
Blogger Jon said...

Why should mortgage debt be tax deductible? Why not debt on hire purchase of sofas, or TVs? MIRAS would most help those who have most benefited from the housing boom over the last 15 years, and do nothing to engender social solidarity in those who have been inter-generationally screwed by their parents (who are the very generation who will be made to pay for the profligacy of their immediate forbears!)

Why not just let people buy what they can afford and get out of the way of people who want to build things better and more cheaply?

22 November 2011 at 14:21  
Blogger Dodo's Way said...

So come on, what positive proposals can those who are scoffing at this offer come up with?

Let's face it the Banks are failing to deliver even though their profits sore and senior staff salaries rocket. Average income compared to average house price means most young families will be stuck forever in the rented sector unless their parents 'help' with the deposit. Inflation and low interest rates means they are always playing catch-up. Many will already be saddled with University debt too.

Who benefits? Current property owners and landlords. Try saving a 20% deposit for a new house whilst paying rent. And of course fewer houses mean scarcity and so prices will rise.

This scheme may just trigger a recovery in the building sector and associated industries and enable more people to buy their own homes as well as creating employment opportunities.
MIRAS is a corrrupt suggestion as it helps no one but those who have benefited already.

Young people who want their own home are not the feckless and idle. Let's find a way of giving them a real stake in our country.

I've got a vested interest to declare. I want my 3 adult children to leave me in peace! They are all working, all earning average salaries and paying their taxes. They also pay rents considerably higher than my mortgage that amount to a significant proportion of their income. How on earth will they be able to afford children?

They are casting eager eyes on my pending public sector lump sum! "Daddie ....?" For God's sake let's do something for them and their peers. I will gladly divide my pension 3 ways - it will still be insufficient and I live in an area where properties are relatively inexpensive.

22 November 2011 at 17:01  
Blogger David Lindsay said...

I thought that ruinously expensive houses were supposed to be a Good Thing. But never mind. Apparently not.

There must be a tax on the productive value of land per acre, other than that occupied by the homes of the less well off. Perhaps, that would make possible the abolition of stamp duty. In any event, it would establish and enforce the principle that no one should own land other than in order to make use of it. This was proposed by the underrated Andy Burnham when he was a candidate for Leader of the Labour Party. Do not take your eye off that man.

But the root of the problem is the sale of council housing. That policy compelled the State to make gifts of significant capital assets to people who were thus enabled to enter the property market ahead of private tenants who had saved for their deposits. And, as part of Thatcher’s invention of mass benefit dependency, it created the Housing Benefit racket, which is vastly more expensive than the maintenance of a stock of council housing.

I am a good Chestertonian in this as in most, though not quite all, matters. I would dearly love every household to have a base of real property from which to resist both over-mighty commercial interests and an over-mighty State. But within the practicalities of these things, there is also a very strong case that each locality should have a base of real property from which to resist both over-mighty commercial interests and an over-mighty centre.

Already, under New Labour, the powers that be apparently could not distinguish between the respectable working class and the characters from Shameless. So council and housing association tenants, whose rents will go up in April in line with the September inflation figure even though pensions and benefits will not, were to lose security of tenure in order that Shameless characters could be moved in next door to them, or even in place of them.

Those in that actual or potential position should contact Ed Miliband without delay.

22 November 2011 at 17:05  
Blogger Oswin said...

There might well be a case for some such initiative, but now is not the right time. The property market will, in the opinion of many, almost certainly crash. Thus we come to Cameron's real motivation, a desperate attempt to prop-up an overly inflated market, in order to maintain a false confidence, and all at our expense. It really has bugger-all to do with first-time buyers.

The time for such measures will be after a collapse in house prices, when the market has finally bottomed-out; as yet we are nowhere near this level. To do so at present, is to manufacture yet more toxic debt.

As Sam Vega suggests @ 12:40, far better, in the meantime, to promote other useful enterprises, that will seve us well in the years to come; but don't hold your breath!

22 November 2011 at 17:21  
Blogger DanJ0 said...

It seems to me that Cameron is wanting to get the housing market moving for two main reasons: the first is that there's a multipler effect where people who move house buy more goods, and the second is that house prices need to stay high to maintain bank balance sheets. It's ironic though that we are where we are now partly because of high LTV mortgages and very easy credit creating a false boom rather than one built on productivity gains.

22 November 2011 at 17:23  
Blogger Oswin said...

Dodo : I hear what you say, and yes, it all sounds reasonable; but the fact remains that the UK's housing stock is currently vastly over-priced, at a level that cannot, and should not, be maintained. Cheap money built inflated property; money is no longer cheap, ergo something is going to give, and give it most certainly will, and big time! Ireland being the premier example, in this respect.

The Coalition is desperate, for all sorts of reasons, to maintain that the illusion of personal/property wealth will be maintained. But it is just that, an illusion. It is almost inevitable that it is doomed to fail.

If your children bought property now, they would almost certainly suffer significant negative equity, within a year or two; possibly within even just a few months!

That the government seeks to underwrite this venture, demonstrates both their desperation and, extreme foolhardiness....or rather, it would be the latter, excepting that it may never actually see the light of day, as the economic down-turn looms at a startling pace.

I reckon it it little more than a 'smoke and mirrors' short-term measure to shore-up confidence.

You're stuck with your kids for awhile yet, but they might be the better for it, in the long run.

Happy days...:o(

22 November 2011 at 18:16  
Blogger Oswin said...

This comment has been removed by the author.

22 November 2011 at 18:18  
Blogger Oswin said...

DanJo - exactly, you've got it in one! Cameron is either desperate, scamming, or a damned fool...either/or, or all...?

22 November 2011 at 18:22  
Blogger Office of Inspector General said...

Your Grace

If they must tamper with free market ideals, albeit for a laudable reason, then we must have cast iron controls to make sure only those who are living in the property enjoy this leg up. Ways must be found to stop the ‘buy to let’ crowd, illegal immigrants, and other ‘speculators’ from jumping on, although these abuses are probably inevitable, advises a dubious and suspicious Inspector.

22 November 2011 at 18:30  
Blogger Shacklefree said...

I wonder if this is all part of the plan. Every policy of modern western politicians involves more instability for Western economies. Even now the politicians are continuing to bribe their way into another period in power. Sooner or later it must come crashing down because we are throwing good money after bad because we have for generations refused to accept the possibility of failure. We have a failed education system because the politicians decided that nobody was allowed to fail exams. We have a failed welfare system because someone decided that those who fail to work should not be penalized. We have failed families because someone decided that fathers are a non-essential add-on and that single mothers are perfectly capable of bringing up children on their own. We have a failed democracy because politicians give the electorate another chance to vote again if they didn’t vote sensibly the first time. Western society is becoming more and more schizophrenic. Who benefits from such inconsistency in public policy and who will pick up the pieces when it all reaches its inevitable conclusion?

22 November 2011 at 18:51  
Blogger Dodo's Way said...

Oh to be in the SJ and not have children looking to he 'Bank of Dad'!

I see them working their socks off to basically pay rents to property speculators. They are fortunate to be in employment and, returning to the previous thread, I can tell you the benefits they would be 'entitled' to would not keep body and soul together.

I'm afraid we've somehow managed to get our country in "a fine 'ole mess, Stanley."

22 November 2011 at 18:57  
Blogger Office of Inspector General said...

Too many people chasing too little accommodation, and when you do get new build, they are truly tiny.

The Inspectors advice to young people: Get out and get out quick, don’t look back. Canada, Australia, New Zealand. New opportunities, where work is rewarded, not taken in taxes and given to poor EU states. The Inspector wishes he’d gone, had the chance you know, but he stayed. Didn’t think it would get this bad, you see. Didn’t think England would be colonised by Johnny Foreigner. Didn’t think Parliament would allow it. Thought the people might say something.

Hear that, that’s 3 blasts on the ships horn, we’re going down slowly, won’t be long now…

22 November 2011 at 19:16  
Blogger Office of Inspector General said...

Dodo. From what you’ve posted, it looks like your children will always have your best interests at heart, at least until the day you retire !. Sweet dreams tonight, old chum...

22 November 2011 at 20:54  
Blogger Dodo's Way said...

Bless them, who can accuse them of turning to their family for assistance?

In some ways it was easier for me growing up. My parents had bugger all. In fact, I ended up supporting them - so lost out on both scores.

22 November 2011 at 22:14  
Blogger Office of Inspector General said...

Dodo. It seems to be getting harder for the young, especially those who want to start a family. Let down by our politicians, so they are. If the Inspector was a young man today, he’d be off, as hard times ahead are only too obvious, they are here now ! And who could blame him...

22 November 2011 at 23:05  
Blogger Dodo's Way said...

We come from hardier stock. Our ancestors survived the likes of Cromwell, William, centuries of persecution, the potatoe famine and the English occupation. This is nothing in comparison.

Chin up.

23 November 2011 at 02:02  
Blogger Jon said...

Steady, Dodo. The problems we face now are largely down to a Scottish occupation of certain Downing Street residences and the constraints imposed by bailing out Scottish banks! (After the Bank of Scotland wrecked staid old Halifax).

This recession was caused by your second Darien scheme! And you haven't even come close to paying the interest on the first one yet!

As for your kids - it's the problem of the age. I'd have thought someone as committed to nuclear families as yourself would have had them staying with you rather than paying rent ;-)

23 November 2011 at 13:22  
Blogger Dodo's Way said...

Simplw words of encouragement to a fellow from Erin's fair Isle. As for me, please do not consider me Scottish! What they got up in their attempt to become a world power has nothing to with me. God help them if they ever achieve Home Rule!

Nuclear families become extended families. Am I to shelter, feed and cloth them and their spouses?

23 November 2011 at 17:50  
Blogger Oswin said...

Dodo: Top Tip: talk to your children more often; engage with them upon your favourite themes; reintroduce 'family prayer'; insist upon regular church attendance; purchase a wee Angelus bell, and tinkle accordingly.

You'll have 'em out of the house before you know it!

Further, prior to your new regime, make a list of all jobs that require an employee to live away from home, and then obtain, and leave strewn around, all suitable pamphlets/literature pertaining to such occupations.

23 November 2011 at 18:30  
Blogger Dodo's Way said...

You're a bad man!

23 November 2011 at 23:07  

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