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…………?!
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.
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.