Some months ago, the Government announced its Help to Buy scheme.
The scheme will provide a Government guarantee so that house-buyers will only have to find a 5% deposit. Sounds great! Helping those hard-pressed housebuyers who at the moment have to find at least a 10% and often a 20% deposit.
It’s not great actually. Many economists have pointed out that it won’t help house-buyers at all. All it will do is increase house prices. If you increase demand without increasing supply, then prices will rise. It is an inexorable fact of life.
House prices are already very high by historical standards, and rising. Many young people are financially crippled by mortgage payments, and frightened to death of interest rate rises. They are only just keeping their heads above water with rates at their current ultra-low levels.
Today’s mortgages are offered at 5% or less. I can remember only a couple of decades ago being quite happy to pay 15%. If rates were to rise to that level, we would see mass mortgage defaults and personal bankruptcies – followed swiftly by banks going bust and the whole financial system crashing down.
So high house prices do actually matter. Quite a bit.
There are many other reasons as well to despise the Help to Buy policy however.
Those guarantees (amounting to £12 billion altogether) will be provided to banks not house-buyers.
If the buyers default (because they can’t afford those whacking mortgage payments) then their house will still be repossessed and sold. Then the Government guarantee will kick in. The taxpayer will step in and pay the banks the excess over the 80% that the banks supposedly were willing to lend without the scheme. Thus the risk is transferred from the banks to the Government – which means us taxpayers. House-buyers don’t benefit – only the banks.
The scheme is very similar to the old Mortgage Indemnity Guarantee (MIG) premiums. Remember those? When I bought my first home, the banks then would only lend 80%. The same as today, we are told – although I have certainly seen 90% mortgages widely on offer.
But you could buy an indemnity policy to protect the bank from your potential default. With that MIG policy, the banks were happy to lend you 95%. It didn’t stop you being liable for the full loan, and it didn’t stop your house being repossessed if you couldn’t keep up with the mortgage payments. If you defaulted, the bank could sell your house for 80% of what you paid, and get the rest from the MIG provider.
Those MIG’s got an awfully bad name. Many pointed out that although house-buyers were paying, the banks were benefiting.
And the Government’s new Help to Buy is precisely the same – except that this time the house-buyers won’t have to pay the premium. We are told the banks will pay it – but that will be “offset” by lower capital requirements to back the loans.
The issue was discussed on the Today programme this morning. A speaker from the Institute of Economic Affairs (I think) pointed out that the real issue is the lack of homes being built. We need around 250,000 per year. We are currently building around 100,000 – the lowest figure since the Second World War. (About half of the need for the extra homes is accounted for by net migration into Britain, but that’s another story.)
The other participant was an Estate Agent(?), who generally welcomed the Help to Buy scheme.
The discussion descended into the realms of the fantastic as the presenter – I think it was John Humphrys – at one point asked, “What do you think should be done then? The Government can’t build houses after all, can it?”
And both the participants solemnly agreed that no, it couldn’t.
Yes, it could actually. In fact, a programme of council-house building would work wonders for this whole problem, but the Establishment seem congenitally unable to grasp that this is even a possibility.
The whole situation is quite ridiculous. It reminds me of the old Bob Newhart sketch in which Walter Raleigh explains cigarettes to Queen Elizabeth. “What do you do then, Walt?” (laughs), “Well, you put it in your mouth and set fire to the end”. Or something like that. Just explaining the thing openly makes its utter absurdity clear.
At the moment, we have a Government that is permitting uncontrolled immigration that is driving up demand for housing. Meanwhile we have planning laws that restrict the supply of building land, and make it more profitable for “house builders” to sit on their land banks than to actually build houses. Why go to all the trouble and risk of building houses when you can make a 5% or 10% “profit” from a rise in the value of your land bank?
We have a government that believes it is not possible for the government to fund house-building, but it is their job to help house-buyers borrow as much as possible from banks. And we have under-capitalised banks who are scared of lending in case house prices crash.
We have housing benefit being paid out to private landlords who ramp up the price of social housing rents to grab as much as possible. We have a private rental market that struggles and that has to charge rents that ordinary people can’t afford, because house prices are so high that landlords can’t afford to buy the houses either.
We have a whole generation who believe that it is classed as a profit when the houses they own rise in value. They then end up in many cases subsidising their own children to buy houses because prices are so high – or moaning because little Johnny is 28 years old and still hasn’t moved out.
The whole country ends up with huge mortgages strung around their necks, spending their whole working lives paying a big chunk of their salaries over to the banks who graciously deigned to lend them the money to buy their homes. And the banks themselves totter under the amazing size of their bloated balance sheets, with the spectre of their own potential bankruptcy hovering over their every move.
And more, of course: the money the banks are lending to the whole ponzi scheme could otherwise be lent to businesses to invest in our future.
It all sounds quite like insanity to me, to be honest. But George Osborne is proud of his “help” for house-buyers.