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Mervyn King's housing warning is too little, too late Mervyn King's housing warning is too little, too late
(4 months later)
The French call it l'esprit de l'escalier, that brilliant thought on the way out, too late for some brilliant aperçu. Alas, that is Sir Mervyn King's parting contribution as he warns that the Help to Buy scheme risks setting off a housing bubble. In his long years at the Bank of England he presided nonchalantly over one housing boom after another, declaring it was none of the bank's business when setting low interest rates that helped prices triple in the decade before the crash. Remember Shelter's startling comparisons: a basic loaf of bread would cost £4.36 if its price had risen at the same rate as housing in the past 40 years; a chicken would cost £51.18.The French call it l'esprit de l'escalier, that brilliant thought on the way out, too late for some brilliant aperçu. Alas, that is Sir Mervyn King's parting contribution as he warns that the Help to Buy scheme risks setting off a housing bubble. In his long years at the Bank of England he presided nonchalantly over one housing boom after another, declaring it was none of the bank's business when setting low interest rates that helped prices triple in the decade before the crash. Remember Shelter's startling comparisons: a basic loaf of bread would cost £4.36 if its price had risen at the same rate as housing in the past 40 years; a chicken would cost £51.18.
The result of the bank's blind eye and successive government policies has been an economy addicted to property inflation. What's not to like when soaring house prices create apparent growth? Property values fill the gap in good pensions, pay for nursing home care of the old, let parents borrow to subsidise university fees or for a deposit to get the next generation on the ladder to the magic kingdom of ever-rising prices. It's a bit late now for Sir Mervyn to talk of taking away the punch bowl, just as perky ministers boast of green shoots, turning corners and Danny Alexander's "increasing momentum".The result of the bank's blind eye and successive government policies has been an economy addicted to property inflation. What's not to like when soaring house prices create apparent growth? Property values fill the gap in good pensions, pay for nursing home care of the old, let parents borrow to subsidise university fees or for a deposit to get the next generation on the ladder to the magic kingdom of ever-rising prices. It's a bit late now for Sir Mervyn to talk of taking away the punch bowl, just as perky ministers boast of green shoots, turning corners and Danny Alexander's "increasing momentum".
What growth do they spy? Not Osborne's "march of the makers" or Cameron's "Tory housing revolution" – but asset bubbles. See how share prices skyrocket, underpinned by no more than tulips. But above all, take the racing pulse of average house prices, which have shot past £250,000 – past £500,000 in insane London, where they rose by £16,000 in a month – earning £530 a day.What growth do they spy? Not Osborne's "march of the makers" or Cameron's "Tory housing revolution" – but asset bubbles. See how share prices skyrocket, underpinned by no more than tulips. But above all, take the racing pulse of average house prices, which have shot past £250,000 – past £500,000 in insane London, where they rose by £16,000 in a month – earning £530 a day.
Can this be stopped? Economically, of course, with land value tax or capital gains tax on rises above inflation. Chill the market by warning that a house will no longer be a wealth creator, just a stable home at a stable price, secure, comforting but not a money tree. The problem is political: though home ownership is falling for the first time since 1918 and is expected to keep falling, the 64% who do own vastly outvote the rest – and they want never-ending rises to pay off frighteningly high mortgages and provide everything else a family needs. Escaping the nation's psychological and financial addiction is harder than tearing a gambler from a one-armed bandit.Can this be stopped? Economically, of course, with land value tax or capital gains tax on rises above inflation. Chill the market by warning that a house will no longer be a wealth creator, just a stable home at a stable price, secure, comforting but not a money tree. The problem is political: though home ownership is falling for the first time since 1918 and is expected to keep falling, the 64% who do own vastly outvote the rest – and they want never-ending rises to pay off frighteningly high mortgages and provide everything else a family needs. Escaping the nation's psychological and financial addiction is harder than tearing a gambler from a one-armed bandit.
What gave the governor such a sudden jolt? The government's colossal Help to Buy scheme offers £130bn of mortgage guarantee to anyone – young or old, speculator or second-home owner – who buys a house worth up to £600,000, offering 95% mortgages. The risk in previous schemes was shared 50:50 with developers, but this time the taxpayer pays it all. Former schemes were tiny but this one is mammoth, the debt kept cunningly off the public borrowing books (which the Office for National Statistics allowed; it's said the Treasury was amazed). As many as one in four mortgages may become permanently government-backed after next January, with this price-inflator already "boosting confidence" and mortgage availability in lock-step with house prices. King warns this is "too close for comfort" to US state-backed Fannie Mae mortgages, whose collapse helped trigger the financial crisis.What gave the governor such a sudden jolt? The government's colossal Help to Buy scheme offers £130bn of mortgage guarantee to anyone – young or old, speculator or second-home owner – who buys a house worth up to £600,000, offering 95% mortgages. The risk in previous schemes was shared 50:50 with developers, but this time the taxpayer pays it all. Former schemes were tiny but this one is mammoth, the debt kept cunningly off the public borrowing books (which the Office for National Statistics allowed; it's said the Treasury was amazed). As many as one in four mortgages may become permanently government-backed after next January, with this price-inflator already "boosting confidence" and mortgage availability in lock-step with house prices. King warns this is "too close for comfort" to US state-backed Fannie Mae mortgages, whose collapse helped trigger the financial crisis.
The National Housing Federation says previous much smaller schemes artificially supported higher prices, so buyers who were helped ended up paying more than if the market had been left to itself. King warns the scheme should not become a long-standing feature, out of fear that abolishing it would cause prices to fall – and that's too politically dangerous for any government. Buyers who were tempted in by a scheme that had kept prices artificially high would find themselves in negative equity.The National Housing Federation says previous much smaller schemes artificially supported higher prices, so buyers who were helped ended up paying more than if the market had been left to itself. King warns the scheme should not become a long-standing feature, out of fear that abolishing it would cause prices to fall – and that's too politically dangerous for any government. Buyers who were tempted in by a scheme that had kept prices artificially high would find themselves in negative equity.
Ministers see a mirage of growth in house prices. Yet wages are falling, rents, prices and unemployment are rising, energy bills are up by 8.5% a year and the pound is down by 25% since 2007. Homelessness rose by a third last year, rogue landlords multiplying. The Guardian's home borough, Camden, tells a two-nation story: 40% of children are under the poverty line, but average house prices have just hit £1m.Ministers see a mirage of growth in house prices. Yet wages are falling, rents, prices and unemployment are rising, energy bills are up by 8.5% a year and the pound is down by 25% since 2007. Homelessness rose by a third last year, rogue landlords multiplying. The Guardian's home borough, Camden, tells a two-nation story: 40% of children are under the poverty line, but average house prices have just hit £1m.
The only long-term answer to bubble pricing is to build, build, build. But even if Labour won the next election and delivered a million homes in five years, that's still not keeping up with annual growth in demand of 240,000. Kate Barker's celebrated 2004 housing review showed that building your way to lower prices would take many years with demand so strong. Dysfunctional developers are part of the problem. In the US when demand rises by 10%, supply leaps up by 20%, but in the UK developers barely respond: a 10% demand increase causes just 5% extra supply. British builders hoard land to keep prices high, according to the IPPR. Taylor Wimpey has called it a strategy of promoting margin over volume.The only long-term answer to bubble pricing is to build, build, build. But even if Labour won the next election and delivered a million homes in five years, that's still not keeping up with annual growth in demand of 240,000. Kate Barker's celebrated 2004 housing review showed that building your way to lower prices would take many years with demand so strong. Dysfunctional developers are part of the problem. In the US when demand rises by 10%, supply leaps up by 20%, but in the UK developers barely respond: a 10% demand increase causes just 5% extra supply. British builders hoard land to keep prices high, according to the IPPR. Taylor Wimpey has called it a strategy of promoting margin over volume.
Worse, banks conspire with developers not to build for fear that it might reveal that property on their books is still over-valued from the height of the boom. Labour needs a "force to sell" policy, instead of "help to buy", obliging all land with planning permission to be built on or sold off to get construction moving, although it risks exposing more zombie debt than banks admit to carrying.Worse, banks conspire with developers not to build for fear that it might reveal that property on their books is still over-valued from the height of the boom. Labour needs a "force to sell" policy, instead of "help to buy", obliging all land with planning permission to be built on or sold off to get construction moving, although it risks exposing more zombie debt than banks admit to carrying.
Labour is now ashamed of how little was built in its 13 years, neither in boom nor bust. But every aspect of this government's housing policy is a disaster that began with its 63% cut in capital spending. Social home building stopped while right to buy from councils got a boost. Despite lower building standards allowing not rabbit hutch but hamster cage homes, 8% fewer have been built in the last year.Labour is now ashamed of how little was built in its 13 years, neither in boom nor bust. But every aspect of this government's housing policy is a disaster that began with its 63% cut in capital spending. Social home building stopped while right to buy from councils got a boost. Despite lower building standards allowing not rabbit hutch but hamster cage homes, 8% fewer have been built in the last year.
YouGov finds that 35% of households are so near the edge they only have savings to cover housing costs for one month, so 8 million are just one pay check from homelessness. Why worsen the housing crisis with a bedroom tax? The fraud is that promised housing benefit savings of £465m are only realised if tenants don't move out but take the £700 a year hit to their meagre living standards. If they do move, they go into the private sector where a smaller home costs the housing benefit budget more than the social housing just vacated. A survey by Lord Bassam suggests the number affected will be closer to a million than the 660,000 announced. The fallout has hardly begun.YouGov finds that 35% of households are so near the edge they only have savings to cover housing costs for one month, so 8 million are just one pay check from homelessness. Why worsen the housing crisis with a bedroom tax? The fraud is that promised housing benefit savings of £465m are only realised if tenants don't move out but take the £700 a year hit to their meagre living standards. If they do move, they go into the private sector where a smaller home costs the housing benefit budget more than the social housing just vacated. A survey by Lord Bassam suggests the number affected will be closer to a million than the 660,000 announced. The fallout has hardly begun.
Here is another shocking fact about Help to Buy. The sum used to pump up prices artificially could have built 175,000 new affordable homes.Here is another shocking fact about Help to Buy. The sum used to pump up prices artificially could have built 175,000 new affordable homes.
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