http://www.timesonline.co.uk/tol/com...cle3735985.ece
There is no crisis. Buying your own home is a luxury, not a right
The only victims are those encouraged by ministers to take on debts they could not affordI cannot believe it. Worst crisis since second world war. Banks to “lose” £500 billion. House prices to plummet by a third. Great depression threatened. Really? I recall from my economics lesson a different and no less potent phenomenon: mad journalism disease.
Like most people I have found the credit crunch hard to follow. The world economy, we were told, was tooling along under the guidance, at last, of competent central bankers rather than hysterical politicians. In Britain, Europe and America, indeed in Moscow and Shanghai, the experts were in charge. Gordon Brown boasted the wisdom of his putting the nation’s financial affairs in the hands of an “independent” Bank of England.
Now we are allegedly up the creek. The selfsame bankers’ indulgence of personal and institutional greed, their regulatory incompetence and their blindness to speculative bubbles have shown them to be as fallible as politicians. It beggars belief that they could see no danger in so-called collateralised debt obligations, known to the Victorians as “bad paper”.
Abroad the bosses of Citigroup, Merrill Lynch and UBS at least resigned. In Britain the bankers pick up their bonuses, become government advisers and tell the newspapers that armageddon is at hand.
What we have had is another house prices bubble, slightly less pronounced than in the early 1990s. Then it was fuelled by government mortgage subsidies, this time by low interest rates and rotten banking.
Both brought house purchase within the range of people who could not afford it. What goes up tends to come down, painfully for those who have overborrowed, but not for all.
I am thus of the Gordon Brown school of panic aversion.
Certainly the collapse of the American housing market had fed through into a collapse of inter-bank confidence, sustained in turn by the reckless way that bonuses are structured in finance houses. To let dealers gamble with the bank’s cash so they could win millions while the bank took the risk convinces me that close proximity to large sums of money drives men mad.
That is curable. Propping up inter-bank confidence, like maintaining consumer demand, is within the power of financial regulators: witness the swift action of the US Federal Reserve Board. There is no reason for recession - unless you go looking for one - and no reason confidence should not return when the housing market has cooled and when Britons learn to treat house purchase, as in the rest of Europe, as an expensive luxury.
To this end consider the announcement last week from Britain’s biggest bank, HSBC. Its asset base is sound, not being based on dodgy mortgages. It is able to continue lending to the housing and commercial sectors in the normal way. It even offered to pick up any casualties of the mortgage market whose credit was good. The same must surely apply to other banks as soon as they can rid their books of bad housing debt. The underlying economy is sound. Middle Eastern wars may not help, nor does the rise in commodity prices, but wars and surging demand can be spurs to growth, not recession.
The cause of the trouble is the overselling of one product and one alone: housing. It is a massive product, but its overselling was largely confined to America and Britain. Two to three million incautious debtors bought assets they could not afford because banks offered them free money to “get on the housing ladder”. Lenders and borrowers alike were consumed by the madness of housing.
Nowhere is so consumed by this madness as Britain. Buyers impoverish themselves to acquire an asset whose full value they will probably never enjoy, but will pass on to their children or the taxman.
Such behaviour is bizarre when affordable, crazy when not.
More than 70% of Britons own their own homes, against 40% in Germany and 50% in France. Since ownership tends to be inflexible, Britain is probably the most “overhoused” country for its land area anywhere. In most countries only the relatively prosperous buy a house and then not until they are settling down with a family. Most people rent. A flexible economy needs renting rather than owning to ease job mobility and encourage people to put their savings in more productive investment.
As a result of the housing hyperbole, the word housing never occurs in British political discourse except coupled with the word crisis. In an upturn (2006) there is an “affordability” crisis, in a downturn (2008) there is a “negative equity” crisis. Neither is a crisis and both involve winners and losers. In an upturn, rising values can release savings into expenditure. In a downturn, falling values mean more first-time buyers come into play. It is called a market and it will always tend to self-correction.
This does not stop politicians perversely seeking to exacerbate the cycle, usually by trying to make houses cheaper than people could otherwise afford. At the peak of the boom last July I suggested that politicians stop seeking ways to cut house prices. They would merely encourage people to buy who could not afford it, mortgaging themselves for life and pushing prices yet higher.
Yet Yvette Cooper, then the housing minister, insisted that everyone had “a right to a decent home”. She went further and claimed to know exactly how many people had not attained this right: 40,000 a year. They were variously those who wanted to leave home, get divorced, have a baby or merely start on the investment ladder. All must have their need satisfied by the state, meaning, in some vaguely socialist sense, that house prices be somehow brought within reach of their income bracket.
Cooper got Kate Barker, a Treasury trusty, to demand that the government requisition as much green belt land as it could to meet this “national need”, as if the notional 40,000 souls could all be put in buses and dumped somewhere in Bedfordshire. This was likely to make zero impact on prices. Meanwhile, Cooper increased the cost of purchase by insisting on home improvement packs. It was classic short-term hysteria-led policy.
Within a year house prices have lost a tenth of their value and some pundits forecast a 30% fall in a year. Presumably those 40,000 “needs” have been met, as hundreds of thousands of potential buyers find the house that was too expensive a year ago is now within their reach, even if the mortgage is rightly more difficult to get. The only victims are those who were encouraged by ministers to take on debts they could not afford, so the government could boast how many people it had “helped onto the housing ladder”. What about those now falling off it?
This giveaway housing culture goes back to Margaret Thatcher. She increased housing subsidies through mortgage interest tax relief by 200% in real terms, to £7 billion in 1990. The impact of this “middle-class bribe” was wiped out by a commensurate rise in demand and thus in price.
Geoffrey Howe, her enraged chancellor, called it “a glaring anomaly, distorting the housing market almost as much as had rent control”. Nigel Lawson, his successor, called it madness.
Journalists are little better, citing over and again the misleading ratio of earnings to average house prices. The ratio is meaningless if it is not adjusted to the cost of borrowing, in other words to the actual cost of purchase to those who need mortgages. This ratio has remained remarkably stable, as house prices reflect the cost of money. It is worth repeating the statistics: the median mortgage payment for first-time buyers was 16% of earnings in 1975, 18.4% in 1980, 27% in 1990 (the last year of madness) and 20% this year. Falling interest rates should reduce this percentage and push the ratio further down, even if mortgages are harder to come by, as they should be.
This is another way of saying the best thing the government can do is leave the housing market well alone. The house price bubble is in large measure politicians’ doing. To that extent the current shock can be laid at their door. They should lower the public’s expectation of living space in general and home-ownership in particular.
Britons cannot sprawl extravagantly over the face of their island. Inducing them to do so makes no environmental sense and no economic sense either.
There is no crisis. Buying your own home is a luxury, not a right
The only victims are those encouraged by ministers to take on debts they could not affordI cannot believe it. Worst crisis since second world war. Banks to “lose” £500 billion. House prices to plummet by a third. Great depression threatened. Really? I recall from my economics lesson a different and no less potent phenomenon: mad journalism disease.
Like most people I have found the credit crunch hard to follow. The world economy, we were told, was tooling along under the guidance, at last, of competent central bankers rather than hysterical politicians. In Britain, Europe and America, indeed in Moscow and Shanghai, the experts were in charge. Gordon Brown boasted the wisdom of his putting the nation’s financial affairs in the hands of an “independent” Bank of England.
Now we are allegedly up the creek. The selfsame bankers’ indulgence of personal and institutional greed, their regulatory incompetence and their blindness to speculative bubbles have shown them to be as fallible as politicians. It beggars belief that they could see no danger in so-called collateralised debt obligations, known to the Victorians as “bad paper”.
Abroad the bosses of Citigroup, Merrill Lynch and UBS at least resigned. In Britain the bankers pick up their bonuses, become government advisers and tell the newspapers that armageddon is at hand.
What we have had is another house prices bubble, slightly less pronounced than in the early 1990s. Then it was fuelled by government mortgage subsidies, this time by low interest rates and rotten banking.
Both brought house purchase within the range of people who could not afford it. What goes up tends to come down, painfully for those who have overborrowed, but not for all.
I am thus of the Gordon Brown school of panic aversion.
Certainly the collapse of the American housing market had fed through into a collapse of inter-bank confidence, sustained in turn by the reckless way that bonuses are structured in finance houses. To let dealers gamble with the bank’s cash so they could win millions while the bank took the risk convinces me that close proximity to large sums of money drives men mad.
That is curable. Propping up inter-bank confidence, like maintaining consumer demand, is within the power of financial regulators: witness the swift action of the US Federal Reserve Board. There is no reason for recession - unless you go looking for one - and no reason confidence should not return when the housing market has cooled and when Britons learn to treat house purchase, as in the rest of Europe, as an expensive luxury.
To this end consider the announcement last week from Britain’s biggest bank, HSBC. Its asset base is sound, not being based on dodgy mortgages. It is able to continue lending to the housing and commercial sectors in the normal way. It even offered to pick up any casualties of the mortgage market whose credit was good. The same must surely apply to other banks as soon as they can rid their books of bad housing debt. The underlying economy is sound. Middle Eastern wars may not help, nor does the rise in commodity prices, but wars and surging demand can be spurs to growth, not recession.
The cause of the trouble is the overselling of one product and one alone: housing. It is a massive product, but its overselling was largely confined to America and Britain. Two to three million incautious debtors bought assets they could not afford because banks offered them free money to “get on the housing ladder”. Lenders and borrowers alike were consumed by the madness of housing.
Nowhere is so consumed by this madness as Britain. Buyers impoverish themselves to acquire an asset whose full value they will probably never enjoy, but will pass on to their children or the taxman.
Such behaviour is bizarre when affordable, crazy when not.
More than 70% of Britons own their own homes, against 40% in Germany and 50% in France. Since ownership tends to be inflexible, Britain is probably the most “overhoused” country for its land area anywhere. In most countries only the relatively prosperous buy a house and then not until they are settling down with a family. Most people rent. A flexible economy needs renting rather than owning to ease job mobility and encourage people to put their savings in more productive investment.
As a result of the housing hyperbole, the word housing never occurs in British political discourse except coupled with the word crisis. In an upturn (2006) there is an “affordability” crisis, in a downturn (2008) there is a “negative equity” crisis. Neither is a crisis and both involve winners and losers. In an upturn, rising values can release savings into expenditure. In a downturn, falling values mean more first-time buyers come into play. It is called a market and it will always tend to self-correction.
This does not stop politicians perversely seeking to exacerbate the cycle, usually by trying to make houses cheaper than people could otherwise afford. At the peak of the boom last July I suggested that politicians stop seeking ways to cut house prices. They would merely encourage people to buy who could not afford it, mortgaging themselves for life and pushing prices yet higher.
Yet Yvette Cooper, then the housing minister, insisted that everyone had “a right to a decent home”. She went further and claimed to know exactly how many people had not attained this right: 40,000 a year. They were variously those who wanted to leave home, get divorced, have a baby or merely start on the investment ladder. All must have their need satisfied by the state, meaning, in some vaguely socialist sense, that house prices be somehow brought within reach of their income bracket.
Cooper got Kate Barker, a Treasury trusty, to demand that the government requisition as much green belt land as it could to meet this “national need”, as if the notional 40,000 souls could all be put in buses and dumped somewhere in Bedfordshire. This was likely to make zero impact on prices. Meanwhile, Cooper increased the cost of purchase by insisting on home improvement packs. It was classic short-term hysteria-led policy.
Within a year house prices have lost a tenth of their value and some pundits forecast a 30% fall in a year. Presumably those 40,000 “needs” have been met, as hundreds of thousands of potential buyers find the house that was too expensive a year ago is now within their reach, even if the mortgage is rightly more difficult to get. The only victims are those who were encouraged by ministers to take on debts they could not afford, so the government could boast how many people it had “helped onto the housing ladder”. What about those now falling off it?
This giveaway housing culture goes back to Margaret Thatcher. She increased housing subsidies through mortgage interest tax relief by 200% in real terms, to £7 billion in 1990. The impact of this “middle-class bribe” was wiped out by a commensurate rise in demand and thus in price.
Geoffrey Howe, her enraged chancellor, called it “a glaring anomaly, distorting the housing market almost as much as had rent control”. Nigel Lawson, his successor, called it madness.
Journalists are little better, citing over and again the misleading ratio of earnings to average house prices. The ratio is meaningless if it is not adjusted to the cost of borrowing, in other words to the actual cost of purchase to those who need mortgages. This ratio has remained remarkably stable, as house prices reflect the cost of money. It is worth repeating the statistics: the median mortgage payment for first-time buyers was 16% of earnings in 1975, 18.4% in 1980, 27% in 1990 (the last year of madness) and 20% this year. Falling interest rates should reduce this percentage and push the ratio further down, even if mortgages are harder to come by, as they should be.
This is another way of saying the best thing the government can do is leave the housing market well alone. The house price bubble is in large measure politicians’ doing. To that extent the current shock can be laid at their door. They should lower the public’s expectation of living space in general and home-ownership in particular.
Britons cannot sprawl extravagantly over the face of their island. Inducing them to do so makes no environmental sense and no economic sense either.
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