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Sunday 6 July 2008

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Affordable homes ain't no crisis

I rarely disagree with Eamonn Butler but, vaualble as his piece in today's Times is, I think he's got one fundamental point wrong:

[T]he blame for our present mess cannot be pinned on the greed or profligacy of bankers. It lies squarely at the doors of governments. It's for them to fix, and the Bank of England's extraordinary move in swapping bank assets for £50 billion of government-backed bonds is probably the right one.

...The authorities' very anxiety to keep customers safe has made them introduce more and more detailed and onerous regulation. The only banks that can afford to deal with this bureaucracy are the big ones. Regulation has made the banks fat - and their customers complacent. It would be much healthier if the banks were competitive and customers eyed them up more carefully before trusting them with their savings.

Indeed, not even the regulators themselves seem able to see the wood for the trees these days. The market knew that Northern Rock was taking some big risks, but all this complex regulation seemed unable to stop it. Some old-fashioned, simple rules on reserve requirements might have done the job better.

Certainly, some bankers have sailed close to the wind, taking risks to get new business. And when things are booming, that is a perfectly rational strategy: when nearly all customers are getting richer, grab as much as you can. But governments simply added to the frenzy by keeping interest rates low for years. Politicians and central bankers love it when things are booming. But cheap credit is a heady drug. You need more and more of it to get the same high. Before long, you run out of cash and then the hangover begins. It's the politicians, by creating the boom that encouraged us all to borrow too much and made bankers lend us too much, who are ultimately responsible for our financial hangover today.

Well, yes. But the authorities' failure to set more prudent reserve requirements provided the opportunity for banks' profligacy. It did not force banks to be reckless. I have, for instance, a card with a credit limit which seems to me preposterously high. But I choose instead to pay off my bill in full every month. Were I to make use of the full extent of my available credit and 'invest' it on the horses, would that mean that it was the card company's fault when it all went wrong, because they didn't stop me behaving like an idiot? Certainly the company would have a share of the responsibility, and its pleas for recompense when I lost the money would deserve to be met with deaf ears. But the real responsibility would be mine.

And the same analogy, surely, applies to those people who took out reckless mortgages which they couldn't really afford on houses which were stupidly priced, and are now in panic because their low fixed rate has come to an end. Whose responsibility is that? Yes, the lender should be pilloried for being so incautious as to make such stupid loans, and for luring customers in to take them out. But the real responsibility lies with the people who took out the loan.

Taking responsibility for one's actions is, though, becoming an alien concept, as I argued recently in another context.

That said, Eamonn makes one telling point:

In all the discussion of the American sub-prime mortgage market, few people have pointed out that the US Government actually compels banks to make loans to poor people in poor neighbourhoods, regardless of financial prudence. It started with the Community Reinvestment Act of 1977, which aimed to support community groups, but in 1995 the Act was beefed up to give regulators far more powers to punish banks who refused lending to poor neighbourhoods - so-called redlining - because they considered the risks too high. As a result, sub-prime loans mushroomed in the late 1990s, and now the whole world is suffering the consequences.

Indeed, Alice Miles made a related point last week:

Nothing could be more immoral, then, in the current climate, than using government efforts and taxpayers' money to encourage first-time buyers to enter the housing market in order to stabilise the dodgy situation that banks and incautious borrowers have got themselves into through overlending and overstretching themselves: row, row harder, keep us all afloat! Yet that appears to be what the Government's strategy is.

"Here's a nice deal for you, love”: Gordon Brown has turned into Del Boy, and I suppose that would make Alistair Darling his Rodney. They are trying to tempt the banks into continuing to offer cheap mortgage deals on properties that are simply not worth the astonishingly high amounts they have been flogged at in recent years. And trying to encourage you to sign up for them.

Quite. So much for Prudence. So much for Brown's moral compass. But the real point is this:

It isn't as if, to most of the rest of us, a fall in house prices is such a big deal anyway. To most of us, for whom a house is a home, not part of an investment portfolio, tumbling values make sense. To most of us, the loss of 4,000 estate agents isn't much to worry about. Nor is the loss of tens of thousands of City boys.

To most of us, the housing bubble has been an alarming, nonsensical boom that we have scrabbled to keep up with for fear of being left behind, not out of greed but because we wanted a home to live in, one that we owned.

For most of us, a sharp correction will come as a blessed relief. House prices might make some sort of sense again; investors from the City and overseas will leave us alone and stop buying up the places we need to live in. A decent house in the country might become affordable once more for a local person, not just for someone from far away, paying cash. ...For most of us, the mortgage hasn't suddenly become wildly more expensive (coming to the end of a fixed-rate deal? Tough. What part of Two-Year Fixed Rate didn't you understand?). The house might be worth a bit less than yesterday, but so what?

Even negative equity is irrelevant unless you want to sell. All that matters to those of us for whom a house is a home rather than a get rich quick scheme is the cost of the mortgage. And as Alice says, what kind of idiot thinks a fixed rate deal doesn't come to an end, and is surprised that the rate changes? Housing crisis, what housing crisis? More affordable homes ain't no crisis in my book.

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