Monday 21 November 2011
Coalition fails Housing Econ 101
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.