Friday, 25 November 2011

New Tory Housing Policy Undermines House Prices Further

The Liberal-Tory proposals to bring in a Government backed guarantee for first-time buyers of new houses, were it to work, would be yet another downward pressure on house prices, and would work to disadvantage private sellers of existing houses.

The Government is caught in a cleft stick. On the one hand, it has to recognise the fact that there are vast numbers of people who would like to buy a house, but who simply cannot afford to do so given the current bubbled up prices. So, the Government is trying to introduce measures that would make more houses available. But, it wants to avoid a fall in house prices, for several reasons.

For one thing a large part of the Tory constituency of voters, is made up of people who if not Middle Class, aspire to be so. Their view of their status and well-being is inordinately bound up with what the price of their house is considered to be. That is why the Daily Express, which also caters for this group, continually has ridiculous front page headlines proclaiming that House prices are “surging”. For another, large numbers of people have mortgages on these houses, as well as large amounts of credit card, student and other forms of debt. With, wages being squeezed, inflation rising, and employment prospects uncertain, a fall in house prices, alongside a rise in arrears and defaults could send UK Banks and Building Societies into a tailspin.

So, ironically, the Liberal-Tories, who have built their entire political narrative around a childish comparison of national debt with household debt, find themselves not only trying to get Banks and Building Societies to engage in the kind of reckless lending that led to the first Credit Crunch, but also, through schemes like the one they have just announced, attempting to get people who clearly cannot afford it, to take on large amounts of additional debt!

The Liberal-Tories are trying to get people to take on this additional debt via another scam. Having insisted that Banks and Building Societies lend more responsibly, and at the same time rebuild their Capital ratios, they now complain that the Banks are doing precisely that. The Banks have returned to the policy that used to apply until recent years, of expecting that borrowers should provide a minimum level of deposit, of around 20%. Many first time borrowers seem unable to provide even this minimum deposit. In part, that is because the savings culture that used to exist has disappeared in a society geared to consumerism, and instant gratification. In large part, it is also due to the fact that house prices are around four times their long-term inflation adjusted average, which is manifest also in the fact, that house prices are at historic highs as a multiple of average household incomes.

The obvious response to that was made by David Grossman on Monday's Newsnight. He put it to, John Stewart of the Home Builders Federation that if buyers could not afford to buy, and lenders were not prepared to lend, then house prices in such a market should fall. That is indeed, what orthodox economics, and the apologists of Market Capitalism continually tell us. However, Mr. Stewart, disagreed. First-time buyers could not raise the amount of around £50,000, for a 25% deposit on a new £200,000 house, he claimed. But, also even if prices fell by 50%, they still would not be able to save the £25,000 then required. There are of course, a number of obvious responses to this argument.

Firstly, it suggests that prices need to fall then by more than just 50%. Secondly, if potential buyers are unable to save even this level, it suggests that maybe they are not suitable to be buying such a house. If a couple could not, over a period of years, manage to save even £25,000 for such a deposit, then it suggests that either their income is too low, or the management of their personal finances is so poor that were they to take on such a mortgage they would undoubtedly have difficulty in making the payments, especially given that monthly mortgage payments are inevitably going to rise sharply as interest rates rise from their historically low current levels. It would be a cruel deception to encourage such people to take on debt under those conditions. Finally, first time buyers are generally younger people, who one would not expect to be able to buy a new house as their first home. If the price of new houses fell, then this would make it easier for people who already have a property, but who want to move up to a better new home, to do so. It would then mean that their houses became available at even lower prices for the first-time buyers to move into.

This shows why the Liberal-Tory idea of making this subsidy available to only first-time buyers, and only for new build properties is nonsensical. In fact, as Merryn Somerset Webb commented, later in the programme, the best advice that could be given to first-time buyers, rather than take on more debt, as the Government was advising, was not to be first-time buyers i.e. sit tight whilst house prices continue to fall and rent until prices become affordable. In that interview, she goes on to make the valid observation that what the Liberal-Tory measure amounts to is, not help for the first-time buyers, but a cynical means by which to provide assistance to the house builders, and to ease their cash flow problems.

In 2008, the Governor of the Bank of England, Mervyn King, came out and stated openly that it was not the duty of the Government or the Bank of England to guarantee the loans taken out. It was the responsibility of the lenders to ensure that those who they lent money to were good credit risks, and to pay the penalty via those loans going bad, where they failed to do that adequately. The Liberal-Tories have spent the last two years echoing that message. Now they want to do the exact opposite. In stark contrast to their mantra that you cannot get out of debt by taking on more debt, they want to encourage individuals to do precisely that by racking up debt of all kinds from additional student debt, to now encouraging people to buy over-priced houses they cannot afford. That is in addition to the Government by-passing the Capital Markets, and proposing to provide a guarantee for a new Financial Derivative bundling up iffy loans to small business, via their proposals for Credit Easing.

As City AM Editor, Allister Heath, pointed out in the programme, by intervening at this time, in this way, the Government were setting taxpayers up for a fall. House prices are continuing to fall at a time when unemployment is rising, and defaults are bound to rise. It would then be the Government, i.e. the taxpayer, who would then have to pick up the bill. Why, he argued correctly, should someone living in a Council House, who cannot afford to buy a house, and who has not recklessly attempted to do so, have to bail-out someone who has, or, in fact, bail-out the bank, for having made a reckless loan. He is right. There are good reasons that Banks and Building Societies are not lending to people who cannot demonstrate even a minimal commitment to the house they want to buy, in putting up a reasonable deposit. In part, it was making available mortgages on that basis in the past 20 years, which not only led many people into vast amounts of debt, but which also blew up the huge current housing bubble.

According to Rightmove, asking prices for houses fell by 3.1% in November compared with October. It is the largest monetary fall in asking prices since December 2007, when the last Credit Crunch was starting to take hold. But, as I have pointed on in my blog post House Price Crash, the figure for asking prices is highly deceptive. Sellers continue to be deluded as to what a reasonable price for their house is. They want the best of both worlds, by expecting to buy their next house at knock-down prices, whilst still obtaining the previous high price for their existing house. Selling prices are around 20-30% below asking prices already, in some cases more than that. In the last couple of weeks I have been doing a number of leisure drives around the area. It doesn't matter whether I go North, South, East or West, I have never in my lifetime seen so many houses up for sale. In every road there is a forest of for sale signs, and I know that some of these houses, despite having been reduced by more than 20% over recent months, have been up for sale for around a year.

Rightmove also point to the fact that the only reason for a small up tick in sales, and mortgage approvals in recent weeks has been due to Buy-To-Let Landlords, taking advantage of falling prices and easier credit, to buy additional properties. But, that too is a negative contrarian indicator. The Buy-To-Let Landlords are not sophisticated investors. They are amateurs, individuals who have been encouraged by a thousand TV property programmes to believe that its easy to get rich quick through buying and renting property. Such investors are always the last “Bigger fools” to enter an overstretched market before it crashes. Exactly, the same could be witnessed in the Technology Bubble of the late 90's. Then too, no one wanted to hear the lone voice warning of a crash. Those carried along on the wave of euphoria, continued to argue that things would be different this time, right up to the point when the NASDAQ crashed by 75%!!!

But, the FT last weekend showed why the measures are not likely to work anyway. In fact, it will not be the Government that is first in line to pay up, when the loans go bad. The FT reports,

“Instead, homeowners would still lose their deposits before the Government suffered losses, which would be shared with the initial lender.”

They quoted Ian Mulheirn of the Social Market Foundation, who said,

“There are good reasons why lenders are currently demanding high deposits from first-time buyers because they think there's significant risk of continued house price falls. Using taxpayers cash to reflate the lending bubble is a terrible use of public money. It will entice young buyers into an overpriced housing market, jeopardise taxpayers' money, and most of the financial benefits will fall to mortgage providers rather than buyers.”

And, as Capital Economics have pointed out, it is not the requirement for a reasonable sized deposit that is keeping first-time buyers from being able to enter the market. They say,

“Remember that the share of home loans advanced to first-time buyers fell to current levels in 2003.”

According to the BBC, Estate Agents are already reporting that first-time buyers are rarely seen. First time buyers share of the market has fallen to a three year low, down from 22% to 16%.

Were the measures to be in any way effective, then as Allister Heath pointed out they would act to distort the market to the detriment of existing private sellers. Because the guarantee only applies to new build properties, it will in effect be a subsidy to those houses. Private sellers will have to reduce their prices even further to compete. In fact, if the policy were to be really effective in creating a substantial demand for new housing, of the size that would be needed to achieve the Liberal-Tories stated objectives of raising housebuilding, and creating jobs, it would mean that the demand for existing houses would crater, with a consequent effect on their prices.

The reality is that, whichever way the Liberal-Tories turn the housing market is in a crisis, because house prices are many times what they should be, having been inflated on a sea of reckless lending. That is not going to be remedied by encouraging people to take on even more reckless lending. It will only be remedied by a bursting of the bubble, taking house prices down by around 80% to more affordable levels, and by breaking the existing monopoly on land ownership that allows Landlords to extract Monopoly Rents from the super profits of the builders. In the meantime, workers need to utilise their own resources, through their Pension Funds (especially as the Government now wants to stage a Maxwell style raid on those funds to use them for its own purposes), through the Co-op Bank and so on, to begin a process of building large numbers of Co-operatively owned and controlled housing as an alternative to the chaos of the Capitalist Housing market.

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