Shock Horror: John Prescott Had a Good Idea

Image by Oxley Woods Photos via Flickr

Oxley Woods: Cheap but Stylish Housing – and Very Expensive Land

In 2004, John Prescott had one of his better ideas. Which wouldn’t be hard, to be frank.

But this idea was a new scheme to build low cost homes. Mr Prescott challenged the building industry to find ways to build houses for a construction cost of £60,000.

His suggestions included using more modern building methods, like pre-fabricated construction.

The crucial part of his plan, though, was that the land would not be included, but leased from the government. Therefore buyers would simply pay the £60,000 to buy themselves a house, and then pay some kind of lease charge to the government.

We own the land; it’s a valuable public asset. We don’t need to sell it off. We can keep it in trust and we can lease it for essential housing.

The BBC has been reviewing where the scheme got to.

Apparently ten developments were approved, and eight have gone ahead.

The BBC takes the example of a development in Milton Keynes. The developers did not quite manage to meet Mr Prescott’s target of a £60,000 construction cost. The construction cost came out at £85,000, according to the government agency responsible. But still, a far cry from the normal price of a house in that area.

But crucially the land was never separated from the buildings. This means that the average selling price of the homes in that development was a stonking £231,000.

The BBC takes the example of a first time buyer who bought a property in the development for £210,000. She was forced to borrow some money from her parents to fund her “deposit” (sic). That allowed her to get the mortgage she needed – but it still wasn’t enough. She went to the government’s Homebuy scheme, which gave her yet another loan to cover the shortfall.

The BBC does not quote how much cash that buyer had before borrowing from her parents, the bank and the government. But if it was 10%, or £21,000, then she had the money for a quarter of the construction cost of the house.

Instead of borrowing £64,000, as Mr Prescott’s scheme would have envisaged, she ended up borrowing £189,000.

£125,000 of her borrowing was simply to buy the land on which her house was built. The capital repayments alone for her house will cost her £630 a month for the next 25 years – and that’s before you even start on interest.

Once again: of the very large loan payments that she will be forking out to the bank, two thirds will be to cover the cost of the land.

So who benefits?

Did that buyer benefit? Did she heck. Although she is apparently very happy with her house, she will be a debt slave for the next 25 years to pay for it. She will be skimping and scraping, and spending as little as possible on other things, so she can pay the ransome to the bank.

What was that again about high house prices being good for the economy?

The BBC quotes a spokesman for Shelter as saying

Unless we release more land and are careful about how house prices rise, and then we start to build enough homes in the right places and the right kind of homes, none of these schemes will make up for that fundamental lack in government policy.

Well, I agree with that. Milton Keynes is not a place where building land supply is contrained by the physical amount of land (like in central London for example). In Milton Keynes, the building land supply is contrained by planning laws.

Just to save Mark W the trouble, I’ll write his comment for him:

“Or you could introduce a Land Value Tax.”

And I don’t agree with that. But at least surely to God any sensible person ought to agree that we really have to stop all that madness about loving rising house prices?

The FSA Acts at Last on Mortgages

The Main Beneficiaries of High House Prices

The Telegraph declares today “Millions of home owners face restricted lending”.

The Financial Services Authority is acting to restrict the issuing of mortgages based on how much people can afford to pay, based on repayment mortgages (rather than interest-only) and factoring in a potential rise in interest rates.

The Telegraph claims this means

2.2 million existing home owners being refused a new mortgage. These so-called “mortgage prisoners” would be trapped in their homes, unable to remortgage or move.

A further 3.4 million home owners would be able to obtain a new mortgage, but they would be offered less than the amount they would have been able to borrow previously, forcing them to move to a cheaper property.

I can’t quite see the Telegraph’s logic here. These “mortgage prisoners” are to be prevented from taking on new mortgages that they can’t afford. Why is that bad news for them? And why will this prevent them from moving? The clue is in the Telegraph’s own words: “forcing them to move to a cheaper property”. Which might be better described as “forcing them to move to a house they can afford”.

The Council of Mortgage Lenders, who of course are the main beneficiaries of high house prices, predictably said the move was

an overreaction to past problems

It is nothing of the kind. It is a long overdue measure to tackle potential problems in the future. It will reduce the mortgage lenders’ ability to weigh people down under a mountain of debt that they spend their lives paying off – and often struggle to pay at all.

People are upset about government plans to charge £27,000 for a three year university degree – and yet seem quite happy for banks and building societies to lend ten times that amount, and leave borrowers facing a lifetime of debt just to get a roof over their heads.

It is in nobody’s interests for people to borrow four or fives times their income to buy a modest house. It is only a few years since interest rates were at 15 percent. With inflation rising and likely to rise further, we could easily see those rates again before too long. How many of those four- or five-times borrowers could afford the repayments at that rate?

If the Financial Services Authority, and their counterparts across the Atlantic, had taken this action several years ago, we might never have had the credit crunch or the present financial crisis. And our houses might be just that bit more affordable, since a major factor in the price of houses is the availability of credit.

Tighter lending rules will mean lower house prices – which might not be in the interests of those of us who already own a house, but most certainly is essential to the lives and future wellbeing of our children and grandchildren.

Tighter lending rules will also mean fewer people taking on massive loans that they are very likely to regret before too long.

House Price Inflation Isn’t Good News. Really.

The £100 Million House – Do we Really Want All Our Houses to Cost That Much?

The Telegraph yesterday had an article headlined “PwC Warns of ‘Slowth’ Decade for House Prices”.

The article says that UK house prices will not “recover” to their 2007 peak for another decade. That’s after accounting for inflation.

Average house prices roughly tripled under Labour from £77,531 in 1997 to £212,453 in the first quarter of this year – having peaked at £220,000, according to the Department of Communities and Local Government, delivering huge returns for some homeowners even after the recent crash.

it says.

And now prices are “only” going to rise at 2 percent per year in real terms for the next ten years.

And that’s bad news according to the Telegraph.

Think about it. Prices tripled in the period from 1997 to 2010. That means young people buying their first homes had to put themselves in three times as much debt to do so. And the Telegraph thinks it’s bad news that they’re not going to go on rising as fast.

Just for fun, let’s just do a little exercise in imagination to illustrate how utterly stupid this is. Here’s the full Telegraph article, with housing replaced by cars. (I’ve divided all the prices by 10, to be more realistic.):

PwC warns of ‘slowth’ decade for car prices

PricewaterhouseCoopers’ prediction places it alongside other forecasters, Capital Economics and the National Institute of Economic and Social Research (NIESR), which have a less than optimistic outlook for the UK car market.

PwC estimates that prices have already fallen 17pc in real terms, after adjusting for inflation. Although it believes prices will rise at 2pc a year for the next decade, they will not recover the ground lost until 2020.

UK car prices will not recover to their 2007 peak for another decade, once the effects of inflation are included, the world’s largest accounting firm has warned.

NIESR is more pessimistic, forecasting that car prices will fall 8pc in the next five years once inflation is taken into account. Capital Economics has been gloomier still, predicting a crash of over 20pc in the next two years as car prices re-establish their traditional link with earnings.

Average car prices roughly tripled under Labour from £7,753 in 1997 to £21,245 in the first quarter of this year – having peaked at £22,000, according to the Department of Communities and Local Government, delivering huge returns for some car owners even after the recent crash.

PwC said cars remain a relatively good investment but will deliver “slowth” rather than growth over the coming years, as price increases are limited to 2pc annually compared with the 4pc long-run average between 1984 and 2007.

I wonder what the Telegraph would make of the price of a Mondeo rising from £15,000 to £45,000 in just 13 years.

Houses are for living in, not for investing in. Which means house price rises are bad news. Just like price rises in anything that everyone needs to buy.

Of course, price falls can cause massive problems, because people have mortgages and their equity can be wiped out.

But stable house prices are very good news indeed. Let’s hope that PwC’s prediction is correct.

With the Coalition doing their best to stop anyone building any new housing, though, I fear it may be misplaced.