Is ramping the UK housing market really the way to kick-start economic growth?

23rd July 2013 by The Harried House Hunter

UK economic policy seems ever more set on ramping house prices to try to provide an economic boost to the economy. Unfortunately such policies were one of the contributors to how we got into the credit crunch mess as banks lent irresponsibly and house prices surged. Do we forget so quickly? Apparently our political class does especially when an election is looming up on the horizon. Whilst this policy has plenty of economic critics there is a notable silence in this area from the opposition parties.

What has been the effect of Help to Buy part one?

The Financial Times has been crunching some numbers.

Nearly 7,000 new-build homes have been reserved through the scheme since its launch in April ……..At an average purchase price of £187,543, this equates to £1.3bn-worth of house purchases and commits the government to an estimated £260m in lending,

This is equivalent to more than a third of sales of such property over this period, according to estimates by industry insiders.

At this point the policy is only impacting on the first time buyer section of the market, where it seems to be having a considerable impact already considering it only started in April. The reason for this is that a 20% contribution is being provided by the government on the UK taxpayer’s behalf to the purchase in return for a 5% deposit from the buyer. Remember all the cries that in future we needed higher deposits for a more stable mortgage and housing market? Only a few years later that looks like rhetoric soon to be forgotten.

Help to Buy part deux

Today the government is meeting with the major UK mortgage lenders about its plan to extend the scheme to existing as well as new buyers next January. As long as a property is worth less than £600,000 then the government will guarantee some 15% of the loan as long as a 5% deposit is provided by the buyer or remortgagor. So as of then the UK taxpayer will find him or herself underwriting much of the new mortgage market. As they do so by inflating house prices their lending will become riskier and riskier.

Indeed this mechanism will look ever more like Freddie Mac and Fannie Mae in the United States who were government support agencies for mortgage lending who both collapsed as the credit crunch hit.

Also if we look at the £600,000 limit and compare it to the average earnings level of a full-time employee of £26,664 then it is just over 22 times it!

Is it working?

According to the Bank of England in its latest credit conditions report yes.

Demand for secured lending for house purchase was reported to have risen significantly in 2013 Q2, and was expected to increase significantly further in Q3. Lenders also reported a significant increase in demand for secured lending for remortgaging in Q2.

The availability of secured credit to households was reported to have increased in the three months to end-May 2013, with a further increase expected by lenders over the next three months.

Of course the Bank of England has a vested interest here as its “independent” policy called Funding for Lending has the same objective. Mind you even it could not avoid a type of critique to be found tucked away in the report.

Consistent with this, average credit quality on new secured lending was expected to deteriorate slightly in Q3.

Er weren’t banks supposed to be lending more responsibly these days? Oh that’s okay because the UK taxpayer is guaranteeing it…………?!

Today’s data

According to the British Bankers Association then the various policy innovations (using the definition used in the Irish banking crisis) are having an impact.

 The numbers of approvals for house purchase and remortgaging continued the upward trend seen since the turn of the year and were both some 33% higher than last year.

Quite a surge and I note that the prices implied in the approvals look like they are surging too.

 The average house purchase approval rose to £160,100

This is because the average for the preceding six months was £153,000 so the inflation in this area looks as though it is now 9% as a minimum. Of course approvals are not mortgages yet and there may have been other changes (spring/summer bounce?) but price pressure looks as though it may be building. If one looks back prices were falling in late 2012 and early 2013 leading to thoughts that they may have been a driver for this policy.

However the spinning of the gross mortgage numbers shown below does not give the full picture.

Gross mortgage borrowing of £8.9bn in June was higher than in May and the average over the previous six months.

The other side of that coin is that capital repayments have been rising since June 2010 when they were £7 billion per month and were £9.1 billion this June.

If you look at the net mortgage figures then apparently subtracting £9.137 billion from £8.911 billion leaves you with zero! Anyway even with all the policy measures net lending is very weak and has mostly been negative since last summer.

Have we changed?

One of the themes of the credit crunch I have established in this blog is that we as people have changed and that our responses to financial and economic movements are now different to what they were.This is a major reason in the failure of many economic models and indeed economists. An example of this is found in the mortgage numbers in 2013. Gross lending has risen in response to the policy moves but capital repayments have risen just as fast! If this is a representation of a new human nature then these policy initiatives will be in many respects like pushing on a piece of string.

What about the debt?

Exactly! As it is a (carefully worded) guarantee rather than actual spending then it will not appear in our national accounts and will be yet another off balance sheet burden on the UK economy. It is also yet another implicit subsidy for our banking sector.

It was only on Friday that I discussed the UK’s debt situation and this is one more item to add to the list except that it will only be officially counted if it goes wrong.

Comment

The most obvious criticism of this policy is encapsulated in the Elvis Presley hit “Return to Sender” as the methods which got us into this crisis are tried one more time. Maybe this is linked to the Bank of England’s forward guidance about low interest rates going on and on and possibly on as a rise in interest-rates would be a catastrophe for such policies. One possibility which I always feared was that we would enter a junkie like culture where more responsible policies would be discussed – an addict will promise anything – but in fact become less and less possible.

Back on the 31st of May I pointed out that according to the OECD UK house prices were substantially overvalued if long-term averages are any guide.

They calculate that if we measure by rental values prices are 31% higher than their long-term average or if we use incomes they are 22% higher.

Added to that we know that real wages are falling so a policy designed to drive house prices higher will not only make the mortgages riskier but also make them more unaffordable.

Also I am reminded of my article of the 14th of June when I discussed the dangers of a type of economic war between the young and the old. Whilst there are always dangers in generalisations this policy will benefit the old much more often than the young as they are more likely to be house owners and therefore sellers. Whereas the young are more likely to be house buyers at what are ever more inflated prices with stagnant nominal and falling real wages. For them it will seem like another form of financial repression.

Putting this into musical terms I am reminded of this song.

What’s that coming over the hill?Is it a monster? Is it a monster?

What’s that coming over the hill?Is it a monster? Is it a monster?

And to answer the question in my title it may look like it for a while but before long it will fade away and then reverse.

 

 

28 thoughts on “Is ramping the UK housing market really the way to kick-start economic growth?”

  1. forbin says:

    Hello Shaun,

    The market fundamental speak – there’s not enough housing to satisfy demand

    Our dumb leaders only see themselves and the next election – all parties are involved

    I could go on but its so depressing , even if we tarmac’ed the entire green belt there still wouldn’t be enough for all those 70-80 millions or more that political growth demands…

    so we subsidised the banks and now houses

    but we cant subsidize industry because thats “socialist”

    gotta laff

    Forbin

    1. Anonymous says:

      Subsidized industry = crap products no one wants to buy (Eg BL cars)
      Subsidized houses = undersized, under-insulated ugly boxes

      I think I get poor service from my subsidized bank

  2. Drf says:

    Hi Shaun,

    “Is ramping the UK housing market really the way to kick-start economic growth?” Clearly not, even based on just relatively recent experience! irresponsible lending and derivatives based on it, but rated supposedly as AAA, as you argue, is what got us into the present mess in the first place. But of course our infantile politicians cannot remember anything which happened more than 6 months ago; it seems they are suffering from Asperger’ syndrome s or something similar! (Asperger’s syndrome is mostly a ‘hidden disability’. This means that observers
    cannot determine that someone has the condition from the sufferer’s outward appearance.
    That is how those with it can become politicians when they cannot succeed in the real world.) To them synthesis is the same as real wealth generation; they cannot see or understand the difference.

    There is a good item on http://www.snouts-in-the-trough.com/, covering this inadequacy of modern infantile politicians: “Sometimes it can be difficult to prove that politicians are lying (even when we know they are)”. Amen to that?

    1. Anonymous says:

      Hi Drf

      Whilst it is a cliche I still smile at “How do you tell that a politician is lying? His (Her) lips are moving…”

  3. james says:

    Hi Shaun,
    Look on the bright side! Here you have a mixture of:
    1. Banks
    2. Property
    3. Politicians
    What on earth could go wrong?

  4. ernie says:

    Hi Shaun

    I have in fact written to my MP more than once about this very subject, and have even got a reply from some unknown fellow at the Treasury as to why this is a good idea.

    The real reasons for the policy are obvious of course.

    1. It helps the banks – again

    2. The building industry has contributed millions to the Conservative party. There had to be an invoice presented for this.

    3. They can’t figure out how else to win an election.

    What will happen is that the UK taxpayer (unknowingly, since no-one takes any notice of economic events) will be on the hook for very significant amounts of dosh. The mortgage providers will be excused from any due diligence about their borrowers, since we will pay the defaults. New buyers will merrily assume large and increasing loans. And finally, as the policy requires some payments and repayments to be made after the initial interest-free period, most buyers will assume (a la IO saga) that they won’t need to bother worrying over that as prices will go up to bail them out.

    By the way, there isn’t a housing shortage – there has been a gross misallocation of credit over more than 15 years. That’s the problem.

    One last thing – once the government gets into this, they and their successors will never be able to stop. It’s like the Ben Bernanke syndrome.

    1. Anonymous says:

      3 is the main one. If Osborne knew it would mean losing power he’d tell the donors to get lost.

      If a population votes repeatedly for higher house prices as the old stamp on the young, should we lament it’s decline? Wouldn’t the failure of the UK be a good thing?

      The earth is a closed system. Resources that presently go to the credit pumping UK could be going to people who want to make the world a better place. IMHO the removal of the UK from the world scene would be net positive, given all the banking and arms deals.

      1. Mike from Enfield says:

        It’s a depressing thought that we’d perhaps be better governed if our politicians simply bribed a few thousand voters in the key marginals to swing the election rather than tolerate the damage caused by their scattergun approach of rigging the house market!

        1. Anonymous says:

          Yes, and it would actually have more honesty. I’d far rather meet the man I’m handing a massive bung to because he didn’t want to fund his pension rather than have to go through the song and dance of planning permission fees.

          Seriously – at this point – why bother saving the UK? It’s not technically bankrupt but morally? The recent NSA/GHCQ debacle shows that much of the tax we hand over at gunpoint is worse than wasted – it’s used to curtail our freedoms.

          If it was a computer I’d yank the cable out the back and install linux.

        2. Anonymous says:

          I’ve got a counter-example, where Stanishev got in with 98% of the vote in the gypsy ghettos, reportedly at between 12 and 20 quid per vote. Having lived in both countries I’d say that Britain is better governed.

        3. James says:

          Sounds great and I may then move to a marginal seat!

    2. forbin says:

      “3. They can’t figure out how else to win an election. ”

      I think this is actually true reason………

      sad , so sad ……

      Forbin

      1. Anonymous says:

        They have sent the bill for this crazy policy well down the road. We will be paying it (and for the associated frauds) for a decade.

        1. John Murray says:

          More to the point: the next government will get the blame, or the one after that!

    3. Anonymous says:

      Hi Ernie

      I (and I am sure many readers) would be fascinated to see the reply and the reasons it contains.

      As to not being able to stop these junkie like policies this is something that I feared from the beginning of the credit crunch. It is like trying to endgame yourself at chess rather than your opponent. It will not end well

      1. ernie says:

        Hi Shaun,
        I will attempt to give you a precis as it’s two pages long.
        The Help to Buy scheme will apparently “encourage lenders to offer a greater number of mortgages to borrowers with small deposits. By making more high LTV mortgages available this will support potential home owners who can afford interest repayments but are unable to save up for large deposits still required in the wake of the crisis”.
        It will definitely not be available for buy-to-let.
        As to effects on prices – “housing transactions remain close to half their long run avg. Deposit requirements have also increased, now taking 79% of a first-time buyer’s income compared to only 36% in the early 2000s. The measures look to support an increase in activity and a better functioning market”. Of course, “the scheme is a temporary scheme that responds to specific challenges of the current environment and will run for three years”.
        I have provided the essential snippets although there is more verbiage.
        For a piece of economic illiteracy it would be difficult to beat. And it’s from the Economic Secretary to the Treasury.

  5. Anonymous says:

    Hi Shaun,

    Yes, precisely. Stoking a boom when British houses are already overpriced is very poor policy.

    Real estate booms in Spain, Japan and the US have all ended badly. I would like to ask the British politicians why they think Britain should be different this time.

    The only way I know to stop the business cycle of boom and bust is a Centrally Planned Economy. I’d say the USSR never boomed but it sure did bust.

    1. Anonymous says:

      And yet Andalucia has just been given permission to build 140k houses, down 40k from the initial request. Given that it is said that there are 2m unsold houses in Spain, what exactly is going on down in the south?

      1. Anonymous says:

        The burning question is – where is the money to build 140K houses coming from ?

      2. Anonymous says:

        Hi Barncactus

        I did not know that and it does seem extraordinary in a region where the last property census (INE April 2013) told us this.

        Between 2001 and 2011 there were an extra 822,022 dwellings built in Andalucia which raised the total to 4,353,146. So quite a surge as you would expect in a housing boom.It also exceeded the increase in households (670,043) by a considerable margin, and already the concept of a housing shortage now seems somewhat bizarre.

        The empty dwellings category rose from 548,669 to 637,221.

        Since 2011 I would have expected there to have been even more empty homes. If it was me in charge I would be looking to fill them first!

  6. Jimbob says:

    At the risk of being abused……I am a partner of a building firm, and the industry has been decimated by the credit crunch. I by no means advocate house inflation, but if more houses are built, then there is more employment and more money in the system. The building industry has traditionally been one of the drivers out of recession.
    This policy seems like it may improve my companies position, and many other companies nationwide too. I completely agree that lending 100% or more is wrong, but 95% mortgages have always been available. Why is that so wrong now?

    1. Mike says:

      No, 95% mortgages aren’t new, and they aren’t inherently wrong. What they are is risky; it takes very little to push the borrower underwater so that the lender takes a loss if they default. Hence the higher interest rate; higher risk needs a higher return to justify it.

      What Help To Sell does is sweep that risk under the carpet by pushing it onto the taxpayer. The bank wins because they can lend at no risk. The borrower thinks they win because they get a lower interest rate, overlooking the fact that increased credit always – ALWAYS – translates to higher prices. The taxpayer loses because they get nothing but stand to pay out when prices drop – the usual privatised profit and socialised risk.

      Lastly, responsible borrowers lose because they now have no advantage compared to irresponsible borrowers. If you have a large deposit and budget against a return to normal interest rates, you’re going to be outbid every time by somebody with a 5% deposit who assumes that ZIRP will last forever. Normally the gigantic risk in that assumption would scare lenders off, but when the taxpayer is guaranteeing everything in sight there’s no incentive for the lender to care about risk any more than the irresponsible borrower does. Bad credit drives out good.

    2. ernie says:

      Mike (below) has answered comprehensively so I would just add one thing – it has only been “traditionally one of the drivers” since the mad house-price boom really got going. You are asking to have taxpayers stand behind your industry in order to “get more money into the economy”. That’s actually purely credit money and relies entirely on ever-increasing house prices for it to “work”. The result must inevitably be destruction of large parts of the whole economy (and thereby peoples’ lives) by excessive debt while chasing shelter which continually goes further out of their price reach. How about trying a new idea – cut prices to levels which buyers can actually afford without subsidy? Seems the building industry and its related hangers-on (estate agents etc) cannot function in that reality.

  7. Anonymous says:

    Hi Shaun,
    Now if we diverted HS2 monies (subsidy) to “social” housing wouldn’t that be a better use of funds? It would take the steam out of the existing private housing market/bubble and might go someway towards solving our current housing shortage. Obviously, that would be seen as political madness, due to the myopia of our wonderful, “please keep us in” coalition team. But to hyper-inflate an already inflated market is beyond any rational thinker.
    My thoughts on Osbourne’s performance in this arena are pre-moderated and removed.
    Thanks for your “take” on this matter.

  8. Bloo Loo says:

    the time not to put in 5% leveraged to 100% is when the market for the asset is already full of such other investors, the price MUST be at or near maximum and there is only one way to go. Joining in is inevitably going to lead to a loss for the borrower…and lets not forget, the “free” part of the loan is not free at all…not for the borrower nor for the taxpayer. That is actual money someone is not going to spend on other stuff.

  9. docholiday says:

    Hi Shaun, just a thought- in the situation of a banking collapse what would happen to those holding Mortgages with a collapsed bank? would they be faced with demands to pay up in full or lose possession of the house, or would the loan be taken on by another financial entity.

    If the loan was taken on by another financial entity would the original contract be honoured or would the mortgagee be forced into a new(less favourable ) contract.
    Just wondering how these things work
    Regards Mark

  10. any one says:

    Pumping up the housing market artificially by dropping interest rates is the worst solution and will further weaken economy by pricing the majority of people out of the market. Lowering personal tax and promoting tax incentives for small business(local owned and family run business who have an interest in the local economy). This has always been proven as the most effective method of building up an economy and keeping corrupt outside interest from exploiting and destroying local communities.

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