Come and have a look – cheap, cheap debt! Very, very good – cheap, cheap debt! The £1 fish singer may have been deported, but his spirit lives on in George Osborne’s launch announcement today. The Tory response to Ed Miliband’s cost-of-living pledge seems to be more adventures into sub-prime. The Chancellor will press ahead with a second phase of his deeply controversial Help To Buy scheme – and three months earlier then he planned.
Recent history has taught us to worry when vote-hungry politicians try to manipulate the housing market to provide loans to people who otherwise could not afford them. This is why so many economists are amazed at what Osborne is doing. To see him announcing such housing decisions on a Sunday, to open Tory Party conference, will underline concerns that Help To Buy is not about economics but about votes.
I wrote recently about how bankers are being subsidised by Osborne’s Funding for Lending scheme, allowing them to ski in Verbier and drink champagne they could not otherwise afford. Help to Buy is yet another tool designed to manipulate the market. Only last month Sam Fleming of The Times suggested that:
‘The Governor [Mark Carney] needs to tell the Chancellor (privately if necessary) that the second phase of Help to Buy — under which taxpayers would underwrite £130 billion of mortgages — should be cancelled.’
Rather than cancel Help to Buy, Osborne has brought it forward. So why are people so nervous? Because, in spite of the economy and wages flatlining…
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The number of new home inquiries is growing at its fastest rate in 14 years
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A quarter of all jobs created last year were in the property sector. Danny Gabay, director of Fathom Consulting, says: “We are no longer a nation of shopkeepers, we are a nation of estate agents. And it fills the heart with lead.”
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The Royal Institute of Chartered Surveyors is so alarmed that it is asking the government to cap rises to 5 per cent.
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London prices will rise 69 per cent from 2007-17 , according to BNP Paribas.
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Ros Altman, former government pensions adviser, says ‘the bubble is already here‘
So why unleash even more government-subsidised housing debt into this market? David Cameron said the following to The Sun on Sunday today:
‘The need is now. I have always wanted this to come in and frankly the earlier the better. What concerns me is that you can’t buy a house or a flat even if you are doing OK, you have got decent job prospects and good earnings. I am not prepared to be a prime minister of a country with caps on aspiration.’
It’s far from clear if he realises that George Osborne’s cheap debt gizmos are pushing up house prices even more, making houses even less affordable. Cameron ought to worry about being Prime Minister of a country where banks are offering mortgages at negative real interest rateswhich, when you think about it, is every bit as crazy as the 110 per cent mortgages of yore.
Help to Buy means Osborne’s Treasury gives an interest-free (!) loan of up to 20 per cent of a property’s value to anyone with a 5 percent deposit for a flat up to the value of £600k. The Chancellor now wants this to cover all houses, not just new-build . Depending on who you listen to, the Help to Buy debt injection will increase UK house prices by anything from 1 per cent to 20 per cent thereby putting houses even further out of the reach of ordinary families. It’s Britain’s answer to America’s Fannie Mae, and we all know how that worked out. This is also why Help to Buy has been dubbed ‘right to default’.
Those of us who criticised Gordon Brown’s cheap debt strategy can hardly be expected to applaud now it’s coming from a guy wearing a blue rosette. Yes, Osborne badly wants people to feel better-off. But hawking dangerously underpriced debt is not the way to do it. It didn’t work last time, and won’t work this time.
I’m sure there will be good ideas coming from this week’s Conservative Party conference. But this is, emphatically, not one of them.
UPDATE: The financial services industry is worried about this. Angela Mas from Genworth Financial has this to say:-
“It is very surprising that the scheme is being launched without clarity on key points such as the fee and the way in which capital relief will work…To protect the taxpayer from a house price bubble, it will also be essential for there to be adequate and ‘commercial’ pricing of the guarantee to protect the taxpayer from risk, for there to be vigilant monitoring of the scheme to ensure lending remains prudent, and for there to be an ‘exit strategy’ for when the scheme comes to an end.”
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