Thursday, 5 March 2015

Grant Shapps' Natalie Bennett Moment

The Tories' policy for what has been called “Ryanair Housing”, whereby builders will be allowed to cut corners, so as to produce slightly cheaper houses was announced several months ago. With an election coming, and the housing crisis getting worse, Cameron has proposed to double the number of these sub-prime houses, from 100,000 to 200,000. Yet, despite the time they have had to try to think this policy through, when he appeared on Murnaghan, at the weekend, Tory Chairman, Grant Shapps was unable to say how the scheme would be financed. Rather like the way his leader waffles, avoids and evades ever answering any question from Ed Miliband during PMQ's, Shapps was left floundering to provide any response to what is a fairly straightforward and important question. Now wonder the Tories want to avoid appearing on any televised leaders debates. They have got so used to just putting up any old flannel.

I've dealt with what is wrong with the scheme months ago when it was announced. Sub-standard houses, built by the builders being allowed to cut corners in the same way that Victorian terraced housing was jerry-built over a hundred years ago, leading to health and social problems, and creating the urban slums that had to be pulled down in the 1960's; houses built on brownfield sites where no one wants to live and so on.

The simple answer to Murnaghan's question, is that the Tories propose that local councils pick up the tab. That is the same local councils that have already been the hardest hit by the Tories austerity policies. Local Councils are expected to forgo the income they they would receive from any development, in the shape of 106 Agreements, the requirement for builders to provide local amenities and so on, wherever they create additional need from building new developments.

The saving of 20% on the average house bought by a first-time buyer is around £48,000. Multiplied up by the 200,000 houses the Tories are proposing under the scheme, and the loss to Councils is then around £9.6 billion, which is quite a chunk of change to lose following all of the other cuts. The government are not proposing to compensate Councils for this loss of income. But, there are other obvious problems with the scheme.

As one mortgage expert pointed out, when builders have obtained this 20% reduction in their costs, there is no way that it can be guaranteed to be passed on to home buyers. Builders could just inflate their costs by 20%, so as to make out that they had then given a 20% reduction. In those parts of the country, where house prices are falling, because excessive house prices have already killed off potential demand, that will not happen, due to competition, but its in those areas that builders will have little interest in building, which means the excessive prices will continue. In areas like London, builders will have little problem inflating their costs, so as to simply add this 20% gift from the local council to their profits.

As far as mortgages are concerned, the 20% discount will make little difference. Mortgage providers will base any mortgage offer on the discounted price, not the price before the 20% discount. So, a £100,000 house that currently requires a 20% deposit, of £20,000, becomes an £80,000 house that requires a deposit of £16,000 – a reduction of £4,000 in the deposit required, not £20,000. Given that many first-time buyers have difficulty raising the minimum deposit, this small difference is unlikely to change anything much. The real problem is that house prices have just been inflated to ridiculously high levels. They need to fall by much more than this measly 20% to return to any kind of level of sanity.

According to a new report by Shelter, if house prices had kept pace with wages, first time buyers would be paying more than 40% less for a house than they are currently. This is another consequence of the totally mangled and distorted economy that has been created as a result of high debt, and low wages created since the late 1980's by Thatcher, referred to recently, whereby, for example, the payment of Housing Benefit, to workers on these low wages, now accounts for a third of the total income for workers. The annual wage bill is around £54 billion, whilst Housing Benefit alone accounts for £27 billion a year! Take that Housing Benefit away, and either wages in Britain would have to rise by around 50% on average, or else rents would have to be slashed to a level that the Buy To Let landlords would go bust on a huge scale, causing house prices to be literally decimated, i.e. fall to near a tenth of current levels.

That is before, interest rates inevitably rise. One Tory Minister on TV recently commented that in many parts of the country there was no housing bubble, because people in those areas were in negative equity. There is no logical connection between the two. If I took out a 95% mortgage – let alone a 125% mortgage! - on a £250,000 house, i.e. a mortgage of £237,500, the fact that the house is now valued at only £200,000, or £37,500 less than my outstanding mortgage, does not mean that the house is not still massively overpriced, and along with other similarly overpriced houses, is still not in a bubble. It only means that all of the measures the government has thrown at trying to prevent that bubble from bursting, has succeeded, so far in limiting the fall to this £50,000 drop. It does not at all mean that the houses are not still 40% overprices, or that as with any bubble, when it bursts, the reversion to the mean will result in prices falling by much more than that.

In Spain, prices have fallen by around 50%, in the last five years, and are still falling. There are many people in negative equity, but that doesn't mean that the houses are not still significantly overpriced, having risen over the last 20 years by ridiculous amounts. According to an e-mail newsletter I received recently from Spain's largest estate agent, Idealista, there are still around 1.5 million empty homes waiting to be sold. In valencia, 90% of the homes waiting to be sold are being sold by banks! That shows the extent of the banking crisis in Europe. Its only because these banks continue to be pumped full of liquidity by the ECB that they can continue to hold these proporties on their books at these fantasy prices. But it doesn't change the fact of their underlying insolvency.

But, in Britain, house prices have not yet even gone through the necessary price crash that they have experienced in the US, Ireland, and Spain. Its coming, and when it comes it will be huge, and the impact on the banks will be huge too.

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