Tuesday 13 March 2012

Coalition Government failing on the economics of simplicty

I missed my chance to get really upset at the Coalition yesterday with its idiotic new housing policy. Still finding myself angry today (a long conversation with Bill Quango MP not helping at all with calming me down), I feel compelled to write; although I shall resist the urge to post this in green for effect.

Grant Shapps, one of the Government's brighter minds generally, found himself yesterday trying to defend the latest subsidy to housebuilders and Middle England. 95% mortgages are to be made available to help Wimpey sell more homes.

Now of course we need more homes - this is easy to see, prices are astronomical as demand outsrips supply in many areas. So nothing wrong with creating market incentives to remedy this. Only now the Government has desided to buy into high risk of mortgage loans - higher than the market thinks sensible. I recall in the financial bubble there were companies offering these sorts of rates and higher, Northern Rock, HBOS, Bradford and Bingley - I wonder what happened to them in the dim and distant past of just a few years ago. Oh yes, they all went tits up when the market fell. Markets rise and fall, in the long-term we have a housing shortage - but markets can be irrational and rising rates in the near future are unlikely to be allied with a big jump in house prices. Moreover, the short-term boost to prices of this policy could well lead to a spike in new build prices, then with no subsidy for on-sell a baked in negative equity position for buyers. The risk here is a Government creating negative equity and then being forced into enforcing on people it has lent to - a PR disaster in the making!
Not only is there this risk, but this policy means the Government has to work with lends, housebuilders and sundry advisers to get this daft idea going - all of which is time consuming and expensive.

When, but of course, there are far simpler tools available. Rather than lend more money, the Government could exclude new builds from stamp duty. This would lower the funds needed for a deposit and has the ease of use of already having been in place recently as a policy for properties up to £250,000.

However the Coalition seems to love Gordon Brown's tinkering mantra of making things complicated to appease special interests rather than taking a common sense view.

The ludicrous wealth tax which I wrote about last week is another. People can't pay taxes out of illiquid investments, if you must tax them to pay for redistribution, then ask them to pay when they have the money - i.e. when they sell the property or die.  Put capital gains on own properties at say 10% or increase death duties. Thus money is payable when it is in cash form - not demanded when capital is tied up with no realised gains.

None of this is very hard, it requires a few minutes thinking time and yet the Government has hundreds of advisors at work. But it doesn't work a left wing Lib Dem party and confused Conservative party are unable to articulate simple ideas, we are left with the 'Big Society' and ill-defined NHS reforms - and, of course, tax rises to pay for all the confusion.

Where is the David Cameron from the video above - the one who saw the craziness of over-regulation and spotted the desire for people to create business and work more free from Government control? Instead of following its simplification agenda as promised, the Government is tied up with tax tinkering and trying to find new ways of raising money via some form of class war. New Labour's legacy of divide and rule lives on.


Old BE said...

Great post.

I think that the Govt could do something to ease the housing market. It *is* ludicrous that people who can afford the mortgage payments on the home they are renting often cannot persuade a bank to lend them the capital to buy the home, so instead pay more rent to evil BTL landlords.

However this is a function of the depression in the housing market leading banks to demand lower LTV ratios because they fear prices will fall. This must surely work itself out eventually as house prices fall relative to general prices and wages. It's called the economic cycle.

By the time the scheme is implemented and up and running it may cause the next upswing to become a bubble. Does nobody remember MIRAS?

Budgie said...

Ahem, CU, sorry, but I did realise that Cameron is 'Heath-without-brains' a long time ago. He has wasted the opportunity he had. He copies his hero Bliar who loved impractical wheezes, tinkering with what he did not understand. Time for Cameron to go.

Bill Quango MP said...

Very good CU.
As we discussed, in the village a street party for the Diamond jubilee discovers that they can't get the necessary permits and police presence to close the 4 roads around a market square, for a Sunday morning.

When I told the organisers in MP surgery, they Dave has said that permits are not required and that everyone should just have a street party, they replied, the PM has said they are not needed. But, under H+S legislation, they are. And if, in the unlikely event, an 18 wheeler trundles through an incorrectly licensed and permitted and singed and policed party, the organisers are liable for the millions of pounds of suing that will come their way. So they are unwilling, as it stands, to close the necessary roads.

Pickles might have too much on his plate {literally} to take down the nonsense of over regulation himself, but he must have a battalion of deputies to sweep the nonsense whereby a school Christmas fete needs a licence to serve mulled wine and a survey of BQ's staff reveals many have three or four and some as many as SIX CRB checks? Mostly for after school activities? And a baby needs a passport? Why? Are they planning on traveling on their own?

For God's sake Dave.
Its not hard to be populist!
Or is everyone in the coalition weighed down by the attrition of NHS reforms and the frivolity of gay marriage.


idle said...

I concur.

Limp Dumb said...

Now I thought that the whole objective of this was to sort out intergenerational wealth inequalities due to rentier capitalism viz.

"My house IS my pension"

So sell it then and use the funds to pay for your care! But no they want the state to pay for their care.

"OK, then we'll recover the cost of the help we've given you by collecting it out of your estate"

No comes the cry as they want something to hand onto their children.

The problem with the baby boomers is that they had low mortgages and free tertiary education but want a younger generation to pay for everything while giving nothing up themselves.

And given the imbalance in numbers, pensioners rule.

Budgie said...

Limp Dumb, what on earth do you mean "sort out intergenerational wealth inequalities"? Who says there are "inequalities", why does it matter any way, and who gave you the right to decide, or even "sort" them out? Actually isn't the correct statist terminology "tackle" rather than "sort out"?

Before Brown tipped our economy down the garbage chute the taxes we paid were enough to fund care and pensions; and student fees were not required. Labour introduced universal student fees in Sept 1998. Brown also severely damaged the public's (ie non-state) pensions, and created a housing boom (and bust). Exactly the neo-marxist policies to impoverish the middle class.

It is about time that government services became more productive and efficient, rather than us having to suffer statist whinges about how if we have a house we should all feel guilty and have more taxes stolen off us by the state.

Electro-Kevin said...

We see vast estates of housing built in this region with no apparent reason for it - no local industry or work.

We don't need an immobile work force committed to private housing. We need businesses and factories and cheaper rents.

It seems more and more like Cameron wants an indebted, tax paying democracy rather more than he does a property owning one.

We are arse about face in this country.

Housing is seen as the engine of our economy when all it should be is the product of our economy.

Old BE said...

EK, do you really think that builders are building houses where they is no demand?

What effect do you think these new houses have on the level of rent in your area?

Jan said...

I imagine quite a few will be snapped up by BTL landlords who are no doubt rubbing their hands with glee. Not quite the intention surely. Law of unintended consequences in action perhaps?

Antisthenes said...

As much as I agree with you I believe that the reasons for those mortgage lenders failures was not due to high loan to equity percentages but lack of liquidity. Also the mortgage failure was more to do with the sub-prime market especially in the USA. The bad loan books are full of sub-prime derivatives not the mortgages you are railing against.

CityUnslicker said...

Antisthenes - not the granite piece in Northern Wreck nor the Lloyds book - full to the brim of UK negative equity trash - especially Ulster stuff. Only super low interest rates are meaning they can roll with it.

Interest rates at 4% and Lloyds is bust; another interesting reason as to why rates are to be kept low...

Mark In Mayenne said...

"Now of course we need more homes - this is easy to see, prices are astronomical as demand outsrips supply in many areas. So nothing wrong with creating market incentives to remedy this."

If house prices are astronomical and demand is outstripping supply, please explain to me why we need even more in the way of market incentives?