Liberal-Tories – Desperate and Desolate

Campo, Osborne and Cleggy.  Last of the Summer Whine.  They
 are desperate to win votes, and desolate of ideas. 

The decision of David Cameron to bring forward stage 2 of the help to buy scam by three months to next week, is an indication of just how desperate the Liberal-Tories are to shore up their flagging support, and just how desolate of ideas for doing so, and for growing the economy, they are. The Liberal-Tories now seem prepared to go to almost any length in ruining the economy, just so long as it may win them a few extra votes. Its a strategy that can only end in economic and political disaster. The good thing about them bringing forward the second stage of the Help to Buy Votes scam, is that it thereby brings forward that disaster.

Over the last few weeks, there has been a marked change in the sentiments expressed in the business media. Until then, the talk was about rising house prices being a sign of recovering confidence, and the basis upon which the economy might begin to recover, as consumers, with this new confidence, went out to buy more goods etc. But, in the last few weeks, the business media have instead begun to talk not of rising house prices, but of an already existing house price bubble. The difference in wording is important. Rising house prices have always been portrayed as providing a warm cosy feeling, whereas any mention of a bubble, has signified that trouble is on the way, and its time to take appropriate action.

And, the reality is that no one can deny that there is a bubble. The average London house price, is now more than ten times average household income, whereas the historic ratio is 3.9! That represents a massive bubble. Moreover, it hides an even worse situation. That historic ratio of 3.9 reflected the situation when the average household was made up of two wage earners. Even as late as 1971, married couples made up 70% of households, with single person households making up just 21%. Today, households made up of married, or co-habiting couples, comprise only 52% of households, whereas the number of single person households has rocketed to 41%.

Not, only does this doubling of the number of single person (including lone parent) households explain why it is that there is talk about a shortage of homes, when in fact, the number of houses per head of population is 50% higher today than it was in 1970, but, it also explains why it is harder for people to raise even minimal levels of deposits. It is obviously going to be more difficult for a single person household to raise the necessary deposit than for a two-person household. Furthermore, a house that is 3 times average household income might be affordable for a two-person household, but in real terms is twice as expensive to buy for a single person household. So, a more realistic figure for house prices to average household income would today then be more like 2 rather than 3.9. On that basis the average London house price is about five times the price it should, be.

The reason London prices have bubbled to these levels is complex, but a major factor is that large amounts of foreign money has come in to buy expensive properties, purely for speculation. Buyers are now touted for from all over the world, not for them to live in, but purely on the expectation that their empty apartment buildings will be worth more next year than they are today. But, of course, there have been no shortage of Russian, Chinese and other billionaires prepared to buy up multi-million pound properties to live in, for part of the year, either. Finally, despite the damage caused to the global financial system, and economy, by the bankers, the Liberal-Tories over the last few years have seen to it, that their friends in the City have continued to do well. The policy of easy money has meant that the bankers and investment managers have continued to obtain multi-million pound bonuses, and that has fed into buying up property at inflated prices.

Even the Bank of England, in its analysis, has concluded that it has only been the top 10% that have benefited from QE. QE has blown up asset price bubbles in property, shares and bonds, and it is the rich that are the biggest holders of these assets. At the same time, QE has pushed up inflation, and reduced the value of the pound. That has reduced the living standards of the other 90% whose wages have been frozen, or barely budged. It has reduced the living standards of all those pensioners, dependent on obtaining an income from their savings, which today receive an interest rate that is only a fraction of the rate of inflation. It has reduced the living standards of all those in rented accommodation in London, who with rising property prices also then face higher rents, and for whom the possibility of buying a house is made even more remote.

But, while the Liberal-Tories have blown up another huge property bubble in London, they have only just about managed to prevent the bubble in the rest of the country from busting. On CNBC the other day, one comment pointed out that in the North-West, house prices were falling, and that the Help to Buy scheme had caused a distortion. It meant that new build properties were being subsidised compare to existing houses up for sale. If there are two £100,000 houses, but one is a new house covered by HTB, then it is put in a privileged position compared to the other. The result has been the the price of the new house has risen slightly, but the price of the existing house has fallen, because the seller has to try to make up for the subsidy to the new house. Moreover, they pointed out, where people had come to sell houses, they had bought under HTB, this very fact meant that they were now left in a position that they could only sell the house for less than the price they had only recently paid for it !

The second stage of HTB, which provides a deposit guarantee for all house purchases up to £600,000 will avoid that. But, unlike Part 1, it is totally unrelated to any requirement for a new house to be built. It will lead to not one single new house being built, and will simply be a means of inflating an already massive house price bubble even further. But, even that is likely to be uneven. If you have the resources, then you might be able to take advantage of this scam, and that means that the main place where it will be taken up, and where it will inflate the bubble further, is again in London. But, as Will Hutton pointed out recently, in most of the rest of the country, people still see no prospect of more jobs, certainly not more decent jobs, nor of their living standards rising. Many are already over burdened with student debt, and credit card debt etc. The chance that huge numbers of people in such circumstances will be bribed into buying houses through this scam outside London is probably remote.

If they have any sense they will not. The Liberal-Tories desperate attempt to keep the property price bubble inflated looks like a last gasp of a drowning man. They may entice a few more potential buyers into a market that is already way past its sell by date, but after that the game seems certain to be up. The only gambit they would have left after this would be to get the Bank of England to print even billions more pounds, and then simply give it away to anyone who would be prepared to pauperise themselves by purchasing massively overpriced houses which inevitably will collapse in price.

Its a bit like the way stores push up the price of things so that they can reduce them in the sales. Anyone who buys a house at the current inflated prices must have more money than sense, and they will end up being separated from it, as prices collapse. The Liberal-Tory policy might pull in a few more suckers before that happens, but the policy is fatally flawed, just as was the same policy adopted in the US via Freddie Mac and Fannie May, which resulted in the sub-prime crisis of 2008.

The Liberal-Tories have gone from telling us that their raison d'etre was to deal with the level of debt, to a situation where they are blowing up the biggest debt bubble in history, along with their US equivalents. Moreover, the Liberal-Tories clearly know that that is what they are doing. George Osborne has passed responsibility for the effects of HTB to the Bank of England. But, he has made sure that they can only look at whether it has caused a bubble once a year, starting a year from now!!!! The world is heading for the biggest financial crisis in its history that will make 2008 look mild. The Liberal-Tory policies are part of creating that crisis. Bringing forward the second stage of HTB brings forward the day when that crash happens. The consequences are likely to ensure not only that the Liberal-Tories do not win the 2015 election, but that they do not win another election for many generations to come.