Theresa May is proposing to once more go to the magic money-tree and hand over £10 billion to her friends in the landed and financial oligarchy, in the form of yet another desperate "Help To Buy" Scam. The policy is advertised as being to help young first time buyers, but as with all of its predecessors it is nothing of the kind. Its no surprise that the Tories are coming out with this further handout to their rich friends, at a time when it has been announced, this week, that house prices in London are falling from their ridiculously high levels, and when the Bank of England has announced that it is concerned at the huge levels of private debt, rising inflation, and the need to raise interest rates, which will further crash the enormous property bubble. May's £10 billion gift to the landed and financial oligarchy, is yet the latest attempt to keep inflated the enormous bubble in property prices, and to protect the banks and other money lenders from a collapse in the value of all that property sitting on their balance sheets.
Previous "Help To Buy" scams, of course, did nothing to reduce house prices. The various "rent to buy" and shared ownership scams introduced by previous Labour governments, also did nothing to reduce house prices. They were no better, in reality, than the use by builders of the tactic of selling property leasehold rather than freehold, as a means of reducing the nominal up front price, but lumbering unwary buyers with further costs down the road. Its a kind of "shrinkflation".
And numerous surveys have shown that "Help To Buy" has always benefitted those who actually had the money to buy in the first place. But, most importantly, what "Help To Buy" does, is to cause house prices to rise, or more likely, in current conditions, not to fall so much. It does nothing to increase the supply of really affordable homes, or to increase the supply of social housing for rent, which would act in the short term to provide for housing need, as opposed to housing demand, and in the longer term to reduce house prices and rents. By simply encouraging additional demand for existing property, without increasing the supply of such property, simple economic theory of demand and supply says that it must push up prices, and thereby make the situation for anyone looking to buy a house much worse. The government nonsensically disputes this by saying that "Help To Buy" is only available for new build property. But, new houses are being built every year, and all that happens is that builders offer to sell these new properties with the government assistance of "Help to Buy". It adds absolutely nothing to the housing stock compared to what it would have been anyway. It also means that some of the more affluent first-time buyers get to take advantage of a cheap short term loan, to buy a house they would have bought anyway, whilst those who can't afford to buy still are not helped. In fact, by pushing prices higher, their position is made even worse.
It comes down to a question of the difference between housing need and housing demand. It's a difference that Marx discusses briefly in Capital III, in relation to the nature of demand in the economy, in general. There are lots of commodities that people need, but if they do not have the money to back up that need, to be able to buy the things they need, at their market price, they cannot buy them. In the terms of economic theory, their need does not constitute effective demand. By contrast, there are numerous people in society, who for one reason or another have money to spend. They may already have used this money to buy a lot of the things they need, and so are hard to persuade to spend more of that money on those items, but likewise they may be tempted to use the money to buy other things they do not actually need, but which they either simply want to have - like a second house - or which they think, it is financially beneficial to have. As I have set out before, the fact that people feel they must buy some particular commodity, in order not to lose out, if its price rises further, has always been the basis upon which such bubbles are inflated, as everyone seeks to be not the last "bigger fool" prior to those prices collapsing.
The surveys of "Help To Buy" show that many of those who took the money were people who didn't need it. The children of wealthy parents, could take advantage of the scheme to get money so as to be able to buy houses up to £600,000. In effect, the state was subsidising these wealthy families in being able to acquire additional family properties, which they hoped down the road, to sell at even more inflated prices, and so obtain a capital gain. "Help to Buy" works by giving people a loan to use to put down a deposit on a house. It effectively gets around the requirement to have a reasonable deposit, and again returns the situation to that which led up to the collapse of Northern Rock, in 2007, where people only needed to have a 5% deposit to get a mortgage on hugely inflated properties.
But, the reality, of course, is that, if someone has not been able to save enough money to put down a modest 10-20% deposit on a house, so as to get a mortgage, they are unlikely to be able to set aside an adequate amount of their income each month, to sustainably meet the mortgage repayment requirements. Giving such people an inducement to buy properties, is reckless and irresponsible, in just the same way that it was before 2007, and which led up to the bursting of the financial bubbles. That is particularly the case in conditions where, house prices are falling, and where interest rates, including official interest rates are set to rise sharply.
As I wrote recently, the small increase, in 2007, in official UK interest rates to 5.75% was enough to put the skids under the financial bubbles of the time, and yet that rate of 5.75% was itself below the average rate of over 6%, over the previous 30 years. It was considerably below the 10% rate that was normal during a large part of that previous 30 years. Yet, with official interest rates currently at 0.25%, even the most minimum absolute increase will represent a huge proportional increase in rates, and a consequently huge effect on mortgage payments, and on capitalised asset prices. The Bank of England only needs to increase its official rate from 0.25% to 0.50%, and that represents a doubling of the rate of interest, not a 0.25% increase, but a 100% increase.
Mortgage rates, and other interest rates, of course, are only based upon, rather than equal to, the official interest rate. But, even if mortgage rates only rose by say 25%, say from 4% to 5%, that would represent a significant monthly increase, for someone who currently pays £1,000 a month for their mortgage. Many people, currently struggling to make ends meet would struggle to find the additional £250 per month. So encouraging more people to land themselves in this state, of being massively over-borrowed, to fund massively overpriced properties, is totally irresponsible. It is like the drug dealer who gets customers hooked on heroin, in order to provide themselves with future dependent customers. But, that is precisely what Theresa May is again proposing to do.
But, interest rates are not going to simply rise by 100% from 0.25% to 0.5%. Across the globe, economic realities are starting to bite, and market rates of interest are rising. Central banks will have to run to catch up, as they are currently way behind the curve. As interest rates rise, so capitalised asset prices fall in inverse proportion. With London house prices having already fallen by 0.6% ( readers of this blog, over the years, will know that this fall in the asking price of properties significantly understates the fall in actual selling prices) as against this time last year, and with Brexit creating the inevitability of further falls, May is clearly concerned about all of those elements of the landed oligarchy, and the property developers, whose interest the Tories represent, who will see their paper wealth start to fall sharply. Moreover, as those property prices drop sharply, the banks will be exposed, as that property forms a large part of the assets on their balance sheets.
We have been continually told that the banks are now safe compared to 2008, but it has continually been shown to be a lie, with one bank after another, in Europe, having gone bust or having to be rescued or taken over. The vast majority of actual lending by the banks since 2008 has gone to finance property speculation in one form or another. The property sits as capital on the banks books, still at these hugely inflated prices. If those prices collapse, as happened in the US and Ireland, and Europe between 2008-2010, when prices dropped by as much as 60%, then the banks will again be exposed as being effectively bust. That will be exposed even more, because the other major asset they hold on their balance sheets, are all those financial assets such as bonds, and shares, whose prices will also be slashed as interest rates rise.
But, what the Tories will be most concerned about is the fact that the class they represent, the rentier class of the landed and financial oligarchy, holds the vast majority of its wealth in the form of property, shares, bonds, and other derivatives of these assets. If the prices of those assets falls the wealth and power of that rentier class falls with it. Moreover, the entire economic strategy of the Tories, and of the conservative social-democrats like Blair and Brown, over the last 30 years has been built upon the delusion of wealth that this constantly rising bubble of asset prices presented.
The Tories £10 billion gift to the landed and financial oligarchy, via the "Help To Buy" scam is a last gasp attempt to protect that fictitious wealth. It is aimed at preventing the fall in house prices apparent in London, and inevitably spreading to the rest of the country, from gaining pace. If house prices fall, as I set out recently, it will start to cause land prices to fall. Land prices are capitalised rents, and as house prices (for existing houses) fall, the prices that builders can charge for new houses also thereby falls. It means they can pay less of a capitalised rent to the landowner. But, as interest rates rise, that causes capitalised prices of all revenue producing assets, including land to fall also.
Lower land prices will affect the paper wealth of all the owners of those huge landed estates such as the Prince of Wales, and Duke of Westminster, and all the other shire Tories. And, it will affect all of those landlords that also make up a large part of the Tory base, because as land and property prices fall, so the rents they can charge to tenants will also start to fall. But, land and property acts as a competitor for other assets such as shares and bonds, for all those with money-capital to lend. If capitalised land prices fall, it will have a knock on effect on the prices of shares and bonds, where yields are already near rock bottom, and where the potential for future capital gains already look vanishingly small.
May is presenting the policy as supportive of young people whose votes have been flooding to Jeremy Corbyn, but it will do the opposite. If it were successful in preventing the continued fall in house prices, which looks increasingly unlikely, as interest rates rise inexorably, it would only make it even more impossible for young people to buy a house, and would keep existing rents high, at a time when it looks like house prices are about to collapse, which is what young people actually need so as to make buying and renting affordable. If the Tories really wanted to help young people with their housing need, they would instead give this £10 billion to local councils, or to housing co-ops, so as to build more social housing. But, that would hit the vested interests they represent, amongst the landed and financial oligarchy, because it would act to reduce house prices and rents. That is the last thing the Tories actually want to do.
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