Monday, 21 November 2011

Coalition fails Housing Econ 101

In an unscheduled break from the unremitting coverage of the euro area pre-Xmas break up, a change of focus for today.

I have a bad cough anyway (2 weeks and counting...), but this was made much worse this morning when I read about the latest wheeze of the Government to push a 'growth strategy.'

Why on earth would we subsidise people's house buying? The single biggest driver of costs in our economy is housing. If we could drop our house prices 30%, rents would be cheaper, mortgages would be cheaper - in fact employers would be able to pay people considerably less to have the same standard of living. Even mobility would improve as people from the North could actually come and live in London and the South East.

Lower house prices are the best route to improving our international competitiveness. Now, normally no one is in favour of this because lower house prices will also destroy a huge chunk of people's savings and all our mortgage banks too. Long-term though, this is a no-brainer.

On the one hand the Coalition says it is in favour of building more houses, another good way of helping to reduce prices - somewhat impacted by the huge immigration levels that push demand - but still sensible.

But really, how can they do these two things at once without seeing the inherent economic contradiction:

Subsidise mortgages = allow people to buy property they can't afford with slim equity

Build more housing = reduce prices, therefore trapping in negative equity anyone who only had slim equity to start with...

Dear oh, dear, this is really Lib Dem ability level of thinking. I have not even got around to mentioning the super low interest rate environment that has helped prevent a crash in house prices during the recession, which will instead now happen when interest rates normalise in the next few years. Long-term, there is certainly little likelihood of house prices rising from here.


Anonymous said...

it's a win in Politics 101. Everyone loves a bit of house price inflation and it makes voters nervous of any party threatening to unpick the scheme.

Sebastian Weetabix said...

Well, this home owner wishes that the prices would come down. If our £500k house drops 30% it will still be worth more than we paid for it 16 years ago... and until that drop happens and first time buyers can get into the market again, the economy is going to be bumping along the bottom. I daresay the Tories don't want a re-run of the early 90s crash on their watch. A vain hope; as soon as the bond bubble bursts (and it will) interest rates are going to go back up to 7-9% or so and there are going to be repossesions all over the shop.

Repossession doesn't have to be the end of the world... one of my sisters bought a pokey 1 bed flat for £57K in Luton (!!) in 1989 - we all warned her against it, but she was always a wilful girl. By 1992 it was worth £23K - if you could find a buyer, which of course you couldn't. So she just flogged all her stuff, walked out on the mortgage and posted the keys back to the Halifax, and bummed round India for a year or so. Twenty years later she owns a nice 4 bed detached in the countryside... because in the end, debts that can't be paid won't be paid, and Halifax gave up chasing her. After 4 or 5 years of respectable employment and several changes of rental address she got a mortgage with someone else. At the time I was somewhat angered by her moral turpitude (moral hazard.. why should I pay my mortgage etc.. she has gamed the system blah blah) but looking back she did the right thing. It's what any banker would have done after all.

We need a property market deflation in this country. Trying to prop up the still ridiculous prices is mad. And if that screws over a load of buy-to-let rent seekers, then frankly, good.

Jan said...

I daresay politicians have more to lose than most of the rest of us if house prices fall too far....especially Dave, Nick and George perhaps.

Budgie said...

Indeed house prices should fall. And in real terms I expect they will fall over the next 5 years. But they should have been lower by now.

But then: mortgages 4%; personal loans 9%; credit/store cards 25%; BoE rate 0.5%. Millions of immigrants. Says it all really.

Anonymous said...

Do try Nell's lemon and honey drink with a shot of brandy and a paracetamol before bed and your cough and malaise will disappear overnight.

Demetrius said...

Isn't this what the Americans tried to do which resulted in a catatrophic collapse of the property market with so many people buying into places they could not afford to pay for or keep up?

dearieme said...

"looking back she did the right thing. It's what any banker would have done after all." That's a contradiction in terms.

Anonymous said...

Budgie, I think you have hit the nail bang on the head, "But then: mortgages 4%; personal loans 9%; credit/store cards 25%; BoE rate 0.5%. Millions of immigrants. Says it all really", especially that last one, note that since the mid 1990's every time there has been an insurge of migrants house prices have risen startlingly (both rich non doms and relatively poor imigrants) they have to live somewhere don't they, so house prices go up and so do rents.

Mark Wadsworth said...

"Lower house prices are the best route to improving our international competitiveness."

Yes of course, see John Major.

Problem is that the people at the top (bankers) need high house prices and the pol's need to be re-elected. Most people in this country are Home-Owner-Ists and couldn't give two hoots about 'international competitiveness' and all they care about is ever rising house prices. As John Major taught us, letting house prices fall means you're in opposition for a long time.

And as my experience teaches me, any thought of shifting taxes from wealth creation to land ownership (which would of course boost international competitiveness as well as pushing house prices down) is surprisingly unpopular, heck knows why.

Budgie said...

MW said: "shifting taxes from wealth creation to land ownership ... is surprisingly unpopular".

Because bitter experience has taught us that any new tax always ends up being an additional tax rather than a substitute tax.

alan said...

a) they are redefining how stupid a stupid person can be.
b) suffering from pathological altruism, and causing more harm to those they are trying to save
c) so petrified about the UK's growth figures that they are prepared to try any harebrained scheme to boost the GDP figures.

Anonymous said...

Mark Wadsworth: "Most people in this country are Home-Owner-Ists and couldn't give two hoots about 'international competitiveness' and all they care about is ever rising house prices."

I think it is a mite more complicated that that Mark.

Most people may be Home-Ownerists but few of those actually own their home, many are still in hock to the bank that holds their mortgage deeds.

If you own an asset outright - for example a house and you are getting utility of that asset, in this case living in the property. Then the actual price of the property no longer is as important as if you still owed 60% of the purchase price to the Bank.

In short it is the Banks, the politicians and some home ownerists that want to see the property prices continue to appreciate.

Those they pretend to care about, the YOUF, would like to see property more affordable.

Anonymous said...

PS. As a homeownerist with 90% equity I am fairly sanguine as to the value of my particular property.

If the value goes down, I don't really mind so long as the value of similar property depreciates by the same proportion.

By the way, who in the UK can really say 'I own my home' when failure to pay the council tax will see you hauled before the courts and banged up?

I dare say it'd be the same with your land value tax, we'd end up renting from the Local tax authority.

Sebastian Weetabix said...

That's the trouble with LVT. It effectively makes everyone a tenant of the state. The bastards have too much power as it is without the possibility to force us out of our homes.

Rudy Mentary said...

Isnt the real problem that these houses (at current valuations) are held as 'assets' on the Banks books, offsetting the mortgages?
Any wholesale reduction in their valuations means the banks books look considerably worse.
As an aside, this is clearly the thin end of the wedge as far as corruption is concerned. As Merryn Somerset-Webb (Name?) said on Newsnight last night, its clearly a bailout for homebuilders with cash-flow problems.
Call it what it is - institutionalised corruption - the Tories are bought and paid for. Italian politics has come to Britain.

James Higham said...

Agree with Dearieme here - contradiction in terms.