Let’s not go back to sub-prime loans
THERE are two ways one can address a problem caused by faulty policies: by tackling its root causes – or by addressing some of its manifestations, and risk creating more issues thanks to the law of unintended consequences which plagues all government actions. Regrettably, when it comes to house prices, the government is largely going for the second option, albeit with a small nod towards the first. There are massive problems in the housing market – but today’s announcement that the government is going to partly underwrite mortgages for first time buyers and move some risk onto taxpayers is a terrible, short-sighted blunder.
Developers will also be able to bid for public money to finish stalled developments: this implies yet more corporatism to fund projects nobody really wants. Have we all forgotten the sub-prime crisis in the US? Over there, politicians concerned that many poor people couldn’t afford homes forced and bribed lenders to lower credit standards and extend mortgages to those who couldn’t afford them. In the short-term, this boosted home-ownership; but it all ended in tears. It is good to care about the poor and young people who can’t get onto the housing ladder; but it is bad to give people false hope, to create moral hazard or to privatise gains and socialise losses in the housing market.
The root cause of the problem is that far too few homes of the right kind have been built in the right places in recent decades. This was caused by ridiculous command and control regulations and planning procedures inherited from the post-war Labour government of the 1940s. This artificial scarcity has pushed up house prices – though they are now falling at an accelerating rate and are already down by 20-30 per cent in real terms across the UK. Prices fell by £7,528 (or 3.1 per cent) last month, the largest cash fall since December 2007 and third largest percentage fall on record, Rightmove calculates.
The government wants to offer banks a guarantee to make sure that five per cent deposits once again become the norm, rather than the 17 per cent currently demanded of borrowers on average. It is true that deposits are often crippling, though in part this is merely a return to a more sensible way of lending money. The problem during the bubble was that stupid banks lent 95 per cent, 100 per cent and even 125 per cent of a home’s value. That was fine when everybody was able to meet mortgage payments and house prices kept going up. But when the music stopped and prices collapsed, banks repossessed homes but were left with huge losses. In bad times, deposits need to be large to protect the financial system; small deposits only work if everybody is sure that house prices are under-valued and bound to surge. The government’s policies will cost the taxpayer dear.
We have just come out of a major crisis caused by too much money being lent too cheaply to too many people who couldn’t afford it, underwritten by the state. Let’s not do this again. A better solution is for the private sector to be allowed to build far more homes. But solvent buyers also need to learn some patience – it should be normal to have to scrimp and save for several years before one can afford a deposit. And the government needs to accept that not everybody will be able to own their own home – and that trying to boost credit at any cost is a recipe for disaster.
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