How Help To Buy becomes Help To Sell and finally Help for Banks

Today is the day that part or phase two of the UK Coalition government’s Help To Buy scheme for the housing sector begins. It has attracted plenty of attention from the media as the moment I switched on the radio today the newsreader declared that it was expected to lead to a “surge” in the housing market. Adding to the sense of a building frenzy was the next announcement that some banks will be opening branches for longer hours for today to cope with the expected rush! Actually RBS will be doing this for a fortnight.

What is Help To Buy Part Two?

This has been nicely illustrated by the graphic below released by the UK Treasury today.


I like the way that the buyer is apparently waving in a friendly fashion. Perhaps they should have drawn a wide smile on his or her face too.

The gain for the buyer

This is where they can now get a 95% loan to value mortgage which were in very short supply if available at all before this scheme commenced. Also in spite of the fact that the government intends to charge a fee to the mortgage lender for the guarantee it provides, such mortgages already look as if they will be cheaper too in terms of having a lower interest rate. Here are the initial signs of what they will cost from Mortgage Solutions.

Today, RBS (Royal Bank of Scotland) has also launched two products, a two-year fixed rate product at 4.99% and a five-year fixed rate mortgage at 5.49%. Both are available fee-free up to 95% LTV and will be offered on all properties up to £600,000.

So the two-year rate is around 1% lower than that available before (for example 5.95% from the Newcastle) although the additional zing factor is also the increased availability as they were hard to get before. We can expect rates for less sub-prime lending to be lower. By the way when did sub-prime lending become a good idea again?

It is strange is it not that the taxpayer supported RBS can suddenly bend to politician’s wishes after us being told for so long that they have no influence over it? As the taxpayer supported banks have such a large share of the market this will force other banks to join the scheme over time.

What about the banks?

One more time we see that they are receiving a subsidy from the UK taxpayer. Indeed such subsidies seem to be never ending. If they increase their lending via Help To Buy for example then they will be eligible for cheap funding from the Funding for Lending Scheme of the Bank of England. They can then lend it out at an interest-rate of around 5% per annum with 15% of the risk as measured by the size of the mortgage guaranteed by the UK taxpayer.

There is a scenario here where banks can borrow FLS funds at 0.75% and then lend them out at 5% which provides quite a margin to pay any fee the UK government may charge! Also as the scheme will increase their volume of lending it makes it more likely that they will pay the lower FLS rate. This soon becomes a scenario of bankers dreams..

The UK government

The coalition government has just awarded itself a boost too as we wonder how the world can turn out to be a lyric from Hot Chocolate.

Everyone’s a winner, baby, that’s the truth (That’s the truth)

It pockets the fees charged on this scheme (up to 0.9% of the mortgage amount) and immediately books them as revenue. The exact amount is not yet clear but there will be other gains from the government in terms of extra stamp duty as well.

Existing homeowners

These are also likely to see a windfall as house prices push higher. Indeed it is likely that this is already in play as we see a transfer of wealth to existing home owners and we look to see where it has come from.


The UK Taxpayer

Of course not everybody can win and the UK taxpayer finds him and herself financing all this in another example of the type of financing round-tripping that I have described in the Euro area. As described above the home buyers, banks and indeed the government are all in the process of making gains at the expense of increased liabilities for taxpayers. They bankroll the cheap funding for the banks which they are already either explicitly supporting or providing an implicit guarantee. The banks make a wide margin on these funds and have even managed to get the taxpayer to guarantee the riskiest part of the mortgages! It would be much simpler to give the banks an annual tribute.

Even the government is taking a share of the money rather in the manner of a pimp taking his/her cut.

Underlying this round-tripping ponzi scheme is the poor beleaguered UK taxpayer most of whom probably feel that the phrase “contingent liability” is not that important. At some point in the future they are likely to find it represented in an episode of this ITV programme.

Surprise Surprise

First Time Buyers

It may seem strange that the apparent winners are the most likely losers. However we know from what happened in Spain and Ireland that apparent gains can turn into substantial capital losses very quickly. Paying ever higher prices is exactly the road that led to the problems experienced by first time buyers there.

Will it be made safer by rising house prices?

This is something of an illusion as whilst it will appear safer as house prices rise there is a catch. Remember what happened in Ireland and Spain where higher prices turned to bust? As I shall discuss below if house prices are already out of reach for many raising the price is exactly the wrong choice for everyone except the banks. So higher prices now are in fact a riskier strategy and pose the question can we ever get off this treadmill without a bust? Or will it be Help To Buy be as Buzz Lightyear opined.

To Infinity……and Beyond!

What about mortgage affordability?

This is mostly only debated around the level of mortgage rates which are right now at low levels compared to much of the past. The new offers at 5% are relatively low when one considers that they are at what was until, say yesterday, considered to be rather sub-prime. But what happens after the end of the two-year term for that particular mortgage as we face the prospect that not only could mortgage rates rises but that they are likely too? Suddenly it does not look so affordable.

What about wages?

Her Majesty’s Treasury helpfully tells us this today.

Compared with earnings UK average house prices across the UK  are the same price they were in 2003.

Immediately we note the rather vague concept of “earnings” used as opposed to the precision of “average house prices across the UK”. Also we note that even if this is true the current slow rate of wage growth is already being way outstripped by rising house prices. From the Office for National Statistics.

The average weekly wage, including bonus payments, rose by 1.1% comparing May to July 2013 with the same period a year earlier.

There is one immediate difference with 2003 where wages were rising at an annual rate of around 4%. But the fundamental problem here is that wages have fallen substantially behind inflation in the credit crunch era meaning that real wages have fallen by around 9%. Indeed as many of the price rises have been in essentials such as food and energy (bizarrely labelled non-core by central banks) there is a strong case for arguing that we are worse off than then.

Also there are issues with choosing 2003 as a benchmark. After all what happened next? A sequence of events which we seem to be doing our best to repeat! Even the long-term average for affordability calculated by the Nationwide, which is itself inflated by the boom, is below the levels of 2003.


If we consider the overall picture which is one of recovery in the UK economy it is quite reasonable to wonder why any further economic stimulus was needed at all. After all we already appear to be in a sharp mini-boom meaning that the timing looks to fit with the next General Election rather than economic need. The danger is that it lights the blue touch-paper and the UK heads into yet another inflationary boom which if it happens will appear to be a cycle from which we cannot escape.

On the upside it may well stimulate a little more house building but the major economic effect turns out to be yet another stimulus for our banking sector. Is that on the path to infinity too? As we continue ever further down the sugar dependency road it will become ever harder to stop.

As to first-time buyers they may think that they are being helped but who will help them once interest-rates rises and house prices fall? More help to them would have been provided by letting prices drift lower as we note that everything seems to prioritise the banks once the public relations fascia is removed.

Number Crunching

The upper Help To Buy limit is £600,000 which is some 24.3 times the current average wage (July 2013). So even if a couple both on average wages  buys such a house it is over twelve times their gross income. Extraordinary numbers but I guess a lower limit would have excluded London.


This entry was posted in Bank of England, Banks, Debt, General Economics, House Prices, Quantitative Easing and Extraordinary Monetary Measures, UK economy and tagged , , , , , . Bookmark the permalink.
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  • Max

    yes amazing stuff.
    Who could have predicted such madness and selfishness from our ‘leaders’?

    It is hard to predict anything anymore as they are capable of all kinds of mad interventions. Presumably Osborne and Cameron will blame Labour for this bit of madness also!!!!!! I know that Labour got us into this mess but the Tories are doing their best to make the mess even more intractable.

    It is hard to see any outcome for the global economy other than complete annihilation with all the madness being propagated by central banks in every part of the world.

  • Andy Zarse

    Hi Shaun, IMO the whole thing is almost the biggest perversion of a market since the CDS scandal, And it is particularly strange for the policy to be implemented by a supposedly free-market Gov’t. Nobody has ever adequately explained to me why continually rising house prices are a “good thing”. You have thought the best way to solve the problem of housing affordability would be to see that prices fell to a level of reasonable affordability.
    One has only to wait until interest rates rise, as rise they eventually must, due to “unexpected shocks” or whatever before the same old sob stories about first time buyers trapped by their mortgages appear in the Daily Mail. The whole thing wouldn’t have been out of place from a 1970′s Heath/Wilson gov’t. And look where all those crazy prices and incomes policies lead…
    As you say, we never learn.

  • Drf

    Hi Shaun,

    “After all we already appear to be in a sharp mini-boom meaning that the
    timing looks to fit with the next General Election rather than economic
    need.” It is good to see that you are (almost) ultimately coming to the view that you cannot separate politics and economics in the present form of supposed “democracy”! The present gambit as you observe is totally political, because there is an election on the horizon. The effect of debauchery has been of course for the real cost of building new houses to rise, and thus new builds can go only UP in price if they are to generate any profit for the developers. That is what these foolish poiticians do not have any understanding of; debasement gets them out of their instantaneous difficulties, but increases the costs of their own public spending and everything else!

    These schemes as you rightly observe are a scam of electioneering, and those poor youngsters who become entrapped will be in negative equity or insolvent when interest rates are forced upwards eventually by the markets. I have just decided that the best way to assist my own children is to give them mortgages myself, since the interest I can now get on my own capital is so low. They will have to pay me the market rates for savings if those change, but it is a much safer and less expensive option for them than with these mortgages with which they will be held to ransom. I suggest that any parents who are in a position to do so consider the same option rather than these diabolical government supposedly safe mortgages, which are in reality further “weapons of financial destruction”!

  • forbin

    Hello Shaun,

    makes perfect sense when you realize that the Banks run the country for their own good .

    Democracy is as good as dead

    Governance of the people by the Banks for the Banks


    PS: Popcorn – because its affordable , unlike a house in London!

  • Max

    It’s total madness. Asking prices in London have gone ballistic!!!! And what do you get for a cool million these days?? nothing !!!! How can average salary people afford this or are we expecting suddenly uk wages to rocket due to huge global demand for uk labour?

  • Andy Zarse

    Hi DRF, it’s a great idea to do this for your kids. However, do make sure you speak to your professional advisers as if you get the legal structure of the loan/agreement wrong there could be nasty potential Inheritance tax consequences.

  • Mike from Enfield

    Hi Shaun,

    Once again it looks like you are on your own. Having just done a quick trawl of the usual outlets, I am struggling to find analysis, let alone criticism of this policy. BBC, Sky and the broadsheets cut and paste Cameron and Osbourne’s idiotic comments without comment of their own. NuLab seems scared to oppose it and even organisations you’d hope would know better such as RICS seem to welcome it with open arms. The only glimmer of common sense I found came from The Treasury Select Committee who cautiously expressed “reservations”, but not about the main thrust of the policy.

    With such stifling group-think, both here and in many other areas of policy, bad government is guaranteed. When you look at failed states and wonder how on earth they ever managed to go so far down the wrong road without anybody asking if it was a good idea, this is surely the answer – not bad policy but unquestioning acceptance of it.

  • forbin

    wait until they tax you on your ” imputed ” rent gains…..


  • forbin

    stifling group-think doesn’t just happen with the media/ Gov. it also happens in major corporations

    the cure is that the CEO or main manager /leader need to have one A-hole on his comittee / meetings .

    I have seen this actually happen the “A-hole” , being one , points out the flaws in any plan , then gradually the rest start thinking and get the courage to talk out about it . If not they just keep quite in case they upset the boss…..

    So a good leader will have the contrarian A-holes around.

    See the problem ? ;-)


  • Mike from Enfield

    I’m not a Trekky but wasn’t Spock charged with disagreeing with Kirk as a contrarian voice?

  • Justathought

    Hi Shaun,

    Perfectly in line with Basel 3 requirements, by creating a mini boom within the housing sector, bad assets held by banks are reduced.
    Luckily UK has her own currency… UK is the leading test case for the rest of
    the Eurozone. I wonder how the Eurozone is going to coordinate their policies due to the EZ countries’ “convergence”. The “whatever it takes” is only for the banking/financial sector but looking at the real economy more pain to come…

    “We know when a society or a system is finished when it blatantly manipulates in order to survive”- Unknown Author

  • Joe

    It seems a bit of a prisoner’s choice to me, similar to where if only you confess, then you’re better off, but if everyone confesses you’re worse off.
    In this case, you can get a mortgage rather than effectively throwing money away on rent, but once everyone else joins in, house prices are pushed up, putting FTBs back in the same position, but now even worse off as prices are now unaffordable even with government assistance.

    I’m not actually worried about the potential liability to taxpayers though. That’s only an issue if rates rise, owners default, repossessions occur and prices fall. All parties seem to take the position that house prices have to be propped up nomatter the cost, so the risk is quite small!

  • Anonymous

    I don’t agree. BoE rates are short term lending. They do not decide mortgage rates. Mortgage rates have already detached from the BoE rate as they are decided by the true cost of money. The cost of borrowing has been pushed up driven by rates in the US.

    When the US is ready to push rates up the UK is going to be toast. We are not the reserve currency, we do not set the beat, we dance to the beat.

    All bubbles are a collective delusion until they are not. That’s what makes them so fragile. You simply describe this in your first paragraph and then jump into the delusion with both feet in your second paragraph.

  • Anonymous

    Land registry is up 1.3% in a *year*. Let them ask – I’ll wait for the figures. Even then I want to see if volume goes up considerably. My bet is it won’t budge that much. This is about preventing house price deflation not a new boom (on the existing bubble).

  • Max

    He might be right about not being worried about the liability. But he should be worried about the morality of making people pay ever more for a smaller and smaller box. or perhaps joe is a multiple home owner?

  • Max

    you are right that democracy is dead. We need a new system in which perhaps a small council of let’s say 25 wise patriots run the nation for the benefit of the nation and it’s people of all creeds and ages. This council could be dissolved every 5 years and nobody can join twice. Then they have their financial affairs heavily scrutinised for the next 25 years to prevent corruption.

  • Anonymous

    I’m not so sure. Why won’t prices fall leaving the taxpayer exposed? The increasing show of determination from the govt to maintain house prices is a sign of weakness. They are trying ever more desperate policies precisely *because* prices are pulling down.

    We should see each policy shot for what it is: acknowledgement of the failure of the last policy to stem the fall of house prices.

    Help2Buy will also join the long list of failures and there will be only one winner: reality.

  • Max

    But when the proverbial hits the fan they will all be out saying why couldn’t they see this would happen….

  • Anonymous

    Democracy is alive and well. What is dead is the conscience of the majority. LibLabCon buy older voters every four years. They are trying to do it again this year.

    This is typified in the reaction on DT to the Royal Mail flotation. Loads of people speaking of “fill your boots”, “instant profit” etc.

    The British love nothing more than an unearned quick buck. From the betting shops up through BTL and then to the City as we slice through the social layers, all classes see speculation as the way to get rich.

    Democracy is broken if your population is broken. But it’s not the root cause of the problem.

  • Anonymous

    Is NuLabour scared to oppose it? I think that’s generous. They pumped housing like mad when in office. I’d suggest based on recent form that they wish they’d thought of it. After all Balls wanted more govt spending to “kick start” the economy. Remember his VAT off DIY “pledge”?

    Agree on the group-think. We’ve had two generations now who simply cannot see the wood for the trees. Critical thinking is just totally absent. The ability to think through several steps is alien to most in the UK, sadly. Not because our youth are inferior, rather the education system lets them down.

  • Anonymous

    Have you read the FT article on Merv at the BoE? Can’t find the URL right now but it was said he didn’t like people disagreeing with him. At one meeting a new guy disagreed with him, not knowing “the rules”. The other meeting attendee said “it was like watching his whole career go down the plughole”.

    So Merv did kind of practice your policy – he was the A-hole at every meeting.

  • Justathought

    “The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in human societies.
    Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested or imposed, largely by men we have never heard of. This is a logical result of the way in which our human society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. …In almost
    every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our moral thinking, we are dominated by the relatively
    small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.” – Propaganda Edward Bernays”

  • Anonymous

    I think this is not some “dark matter”, an unseen force. People are voting for their own benefit and sod the rest. It’s an open transaction, not a mystery. Raise it with most older people and they will be open about it. They vote for their team, you vote for yours, you lose, tough luck.

    Only the young are mystified. Lacking experience and only knowing eternal debt they cannot understand why the system isn’t working for them as it did their parents. They can’t understand how they won’t get the same pension and don’t care (who does at 25). They think that if they just “keep working” it will come good for them. They are the ones who are not culpable.

  • Justathought

    I do not disagree with your statement… I also tinktat most people aren’t voting for proposed policies but rather on “historical belonging” pasts and influences..

  • Anonymous

    Yes, I’d agree that the less educated vote along these lines. The way I see it is that the failure of the UK organism to allocate resources productively due to sub-standard human beings will simply result in more energy allocated to other countries.

    A rebalancing not from finance to industry as our population refuse to do this so instead the wider rebalancing form the UK occurs.

    It’s coming: reality.

  • Drf

    But I shall not be in the UK then Forbin, nor in the EU. My strategy now is to get out of the EU ASAP in desperation! I shall then be a Non-Dom.

  • Max

    Our CURRENT DEMOCRATIC SYSTEM is most definitely broken. If you waited for the population to become intelligent and wise you would be waiting millennia. Even then, if they only had a hobsons choice of 3 broken and inept parties then what difference would it make?

  • Rods

    Hi Shaun,

    Another excellent blog and it is good to see you are showing again the shortcomings of the MSM. But then you have to remember they are not in the business of giving the latest news, but selling it, so they are going to tell their audience or readership what they want hear!

    “More help to them would have been provided by letting prices drift lower”

    I got a question for you, why would deflation in the housing market help, when everybody just puts off buying hoping they will be even cheaper next year? This would also slow down or stop the recovery that is finally happening in the construction industry. You regularly highlight this as not good for an economy and something to be avoided, where the Japanese have suffered decades of it and some Eurozone countries are dropping into this territory. Now I can understand if prices were rising but at a rate lower than inflation or wage rises, as this would still be perceived as rising prices, but improve the affordability index. Which I would think would be the Goldilocks scenario, where as UK governments seem to consistently set the too hot scenario, followed by the too cold! IMHO with the current chronic shortage of houses, there is scope before they become unaffordable for couples for the ratio to go up to x7 of average earnings, for a starter home. Not good for the amount of capital tied up in the UK which may well be better utilised in funding private sector business expansion.

    In a recovering global economy and rising UK housing market, what could possibly go wrong with the UK Government guaranteeing the risky 20% and helping to blow the next housing bubble? It is not as if there is a major global economic problem on the horizon, which could hit global asset prices like the US hitting its debt ceiling and technically defaulting in November or this happening when they hit a following debt ceiling…. Oh Errrrrrrr….

  • Anonymous

    RICS members want more house sales because it’s good for business …..

  • Anonymous

    Of course Labour want to pump housing. Sarah Beeny’s wanabe developers reduce unemployment numbers (in theory they shouldn’t be simultaneously claiming the dole) and ramp up property transactions -> this increases the stamp duty receipts.

  • Anonymous

    Yes, if you’ve never read economics 101 which tells you that money has to come from somewhere and it results in reduced discretionary spending and ultimately reduced productivity as capital is mis-allocated.

    I’m pretty sure few Labour MPs ready *any* books, especially economics 101.

  • Noo 2 Economics

    “This is about preventing house price deflation not a new boom (on the existing bubble).” – yes absoloutely agree, I don’t believe it is their intention to create another boom which is why Help to buy will be reviewed every October.

    Trouble is civil servants and politicians aren’t good at instinct, they need to see mountains of incontravertible undeniable evidence before they accept that something is beginning to happen. Of course, by that time it’s way too late and something has already happened and is morphing into something else like boom – bust. Then they’ll start squeezing mortgage liquidity as we go into another bust following their Help to buy created boom.

  • Noo 2 Economics

    Hi Joe,
    The reality is that every one will never take a mortgage. There are some who are just too risky even in these sub prime times through reason of poor employment record or simply not enough salary, personally I don’t believe hom wownership will ever exceed 75% of the population,

  • forbin

    hi Rods,

    This is a very interesting question ,

    “why would deflation in the housing market help, when everybody just puts off buying hoping they will be even cheaper next year? ”

    Japan is supposed to be in this situation for about everything except housing ! They seem to function ok so I guess deflation is not proven to stop spending ( any how we’ve spent too much anyway)

    Its not proven it would be the same here as we have a chronic HOME shortage and chronic lack of choice of which home you can buy ( too little land , too many people , cartels , )

    but I think we’ve gone past the point of a house being a home and now our Banks are on the line.

    If , with current situation in banking, housing actually fell like Northern Ireland prices , then the Banks would be bust


  • forbin

    yes I can believe that

    but what to do with the other 25%?

    Rent – too expensive according to DC

    Council ? be sold off next time , like last time
    park bench? clutters up the scenery , ruins house prices

    nothing then – oh yes , thats the plan already …

    and so the show goes on…


  • Justathought

    Hi forbin,
    Keep in mind that Banks must reimburse 660 Billions to the LTRO within 14 months. Did not hear about LTRO extension or a second LTRO round…UK banks part of the 660 Billions, I do not know…

  • pavlaki

    Not quite the subject under discussion but it is interesting to note that even the IMF thought that the bail out of Greece was a bad idea and that it was being done to bail out European banks. Heads they win tails you lose!

  • Noo 2 Economics

    Hi Shaun,

    I freely admit that sometimes I am left somewhat cofused when I have read one of your posts but today I am confused, bamboozled and mystified. Here’s why:

    I had already done a little reading around Help to Buy and thought I understood it as an expensive way to buy a house but then you said Help to buy mortgages would be cheaper in terms of lower interest rates appearing on them and quoted Mortgage Solutions numbers of 2 year fixed rate of 4.99% and 5.49% up to 95% LTV, pointing out the 2 year rate was lower than before citing the 2 year fixed rate available from the Newcastle as 5.95%.

    I looked at the Clydesdale bank deals – 3 year low start fixed rate on 80% LTV @ 3.69% rising to 4.95% thereafter –

    A one off I thought so I looked at a big boy – the Halifax and found this:

    2 year fixed rate on 75 -80% LTV @ 2.99% (offer for today – normally 3.99%) with overall cost including fees @ 4% –

    I checked a few more and came up with similar numbrers so I don’t see how these rates of 4.99% etc are cheaper. It looks to me like the rates quoted include the approximate 0.9% insurance fee charged by the Government to cover the extra 15% LTV.

    What have I missed?

    Outside of this I think Help to buy is a very bad idea – why would inviting potential sub prime mortgagees back into the market plavce for few yaers (I understand the Government guarantee only lasts a few years but I can’t remember how many) in the middle of a financial crisis caused by inviting sub prime mortgagees into the market place last time be a good idea this time around?

  • Anonymous

    Hi Progrock

    That’s an interesting point as originally QE was badged as preventing disinflation in consumers prices. Is that the modern excuse for everything? After all we ended up with a burst of consumer inflation that time around….

    More subtly is any price allowed to fall in the modern era? And in such case what happens to Greece now?

  • Anonymous

    Hi Max

    It was the current government who adopted the soundbite that you cannot get out of a debt problem with more debt was it not?

  • Anonymous

    Hi Drf

    That is certainly innovative. Andy Z’s advice is wise to which I might add that there might be a reasonable market for it if you produced a product/template for how it could be done….

  • Anonymous

    Hi Mike

    I am afraid that such matters are one of the features of these times and are a reason why quite predictable events are publicised as “surprises”. It is also a short road from group-think to outright bullying.

  • Anonymous

    Hi Progrock

    Ex-MPC member David (Danny) Blanchflower made similar claims about the culture at the Bank of England and Mervyn King’s behaviour. As he does read at least some of my blogs he may even reply….

  • Anonymous

    Sad but most people at the top of such institutions seem to be deeply flawed individuals. I’d guess it comes with the territory. It’s a shame that the only ones sacked go for sexual indiscretions, the one thing that wouldn’t bother me one bit. Yet they stay in power when everyone knows they are nuts (Gordon Brown springs to mind).

  • Anonymous

    In a system with too much debt disinflation is a disaster. The assumptions of 6% year on year growth are coming home to roost.

    I don’t know about you but I think the UK really is heading down a slippery slope in the past few weeks. Feels as though institutional panic has set in. The band are playing slightly faster and deckchairs are moving around a bit quicker. Some of the staff are starting to sweat and bump into one another. The conductor, red faced, screams “keep playing!”.

    On we go!

  • Anonymous

    Hi Rods

    I will take up the baton so to speak by pointing out that houses are a type of asset and buyers would benefit by buying them more cheaply. This matters at a time when finances are so tight as just using mortgage rates as a guide to affordability at a time of ZIRP has its own dangers. On the other side of the coin many owners have had plenty of years of overall gains. So as ever the answer is not perfect but pushing house prices higher (or as Progrock argues stopping them from falling) with wage growth so weak will cause yet more problems.

    As to delaying buying maybe people would if they expected large falls but there is also pressure to buy as none of us have forever….

  • Anonymous

    Hi Pavlaki

    I remember arguing at the time that there must be people at the IMF arguing that particular case as opposed to the “shock and awe” quotes ironically made by Euro area finance ministers such as one Madame Lagarde. Whatever happened to her?

    Still I guess she can be relied upon to keep “the bodies” buried for as long as possible! What is shameful is the way that Dominique Strauss-Khan was able to pervert the nature of the IMF and yet is never called to account for what has taken place.

  • Anonymous

    I’d go further and say that house prices falls are unequivocally a good thing at all times.

    The rampers always point out people who bought recently will be in negative equity. My response: so what!

    We either save a very small number of people from themselves (a few tens of thousands of FTB since 2002 ?) and have all people born in the UK paying over the odds for housing for *the rest of time*, or…

    let this small number take the hit, or better yet let the banks take the hit, then everyone forever more benefits. For examples see Germany.

    Any incorrect system can be defended based on the inertia of change, but the bigger picture shows huge gains await us.

  • Anonymous

    Hi Noo2

    It is the difference in the size of the deposits that you have missed. My example was for ones with a 5% deposit but yours are for ones with 20% deposit and 20/25% which have a different risk profile even after Help To Buy.

  • Paul C

    Progrock, I’ve been reading the responses looking for my “hook”. You have identified a key flaw, the culpability! Who is culpable? We seem collectively sure that primarily the Govt in cahoots with the banks but like any road traffic accident it always takes two parties.

    We have a Govt driven by the power of re-election, the banks driven by greed and self-preservation AND we have a complicit bunch of first time buyers. So are the young and selfish as much to blame for this unfolding debt binge just as much as the Govt & Banks?

    Do the FTB’rs recognise that it is other peoples taxes and wages(via QE) that they are hoovering-up to get a precarious rung on the ladder?

    Further up I read that education has failed these young people but as you say the sickness is through the swathes of society with Baby-Boomers loving the wealth of bricks & mortar and inward-looking Nimbys stopping new buildings getting started.

    Perhaps there are just very few squeaky-clean folk, a handful who read and write in Shaun’s blog?

  • Paul C

    Your last comment is insightful indeed. More energy gets allocated elsewhere in the world as the UK declines into sub-optimal, sub-standard, generation-ally divided zero-sum game. You cannot argue with the trend since 2007 and perhaps since 2000, the UK is a tattered and poorly functioning nation for the majority of normal folk.

  • Anonymous

    Not sure how the young are selfish in wanting help to buy. Culpability lies with the banks and govt, but responsibility lies with the people. We all have a responsibility, when offered “free” money, to think: where has that come from?

    The answer for the housing boom would have been “the next generation”. I think those who voted in the last few governments either didn’t ask the question (bad) or did and didn’t care (very bad). Either way the kids were not born then, certainly they are not culpable and more than a man is culpable for getting in the way of a cricket bat when someone cracks him on the head with it in his sleep.

    I think the new crop of FTBers are getting a rubbish deal and will not see prices rise many fold. I’m sure most intend to repay in full therefore they enter not for profit but for shelter (well worth it given the UK rental scene).

    Finally you’ll always get selection bias in blogs. Firstly everyone on here can read to adult level in English – that cuts out quite a few people in the UK. Then those who have an interest in economics – probably we are beneath 1% now? Then those who within that subset find Shaun’s views interesting / palatable. Probably that last part doesn’t cut down the subset much further as it’s a good blog (IMHO).

    We all exist inside the system and have to play by it’s rules but IMHO one can steer clear of profiteering on moral grounds. For example owning a BTL. Or voting on naked self interest alone.

    If we simply say “it’s the system” then IMHO we are close to fatalism and might as well not get out of bed!

  • Anonymous

    Yes, and this is a good thing for humanity. Why not reroute some of that carbon energy to Africa where someone wants to start a business instead of the UK were they want to piss it up the wall? Makes sense for the system as a whole.

  • Paul C

    Justathought, I like your reference to the fringe benefits of the domestic housing boom. I was wondering myself just what is the balance of bad debt in the high-street banks: Commercial Property versus Domestic

    I also wonder if this is a flawed escape strategy for nationally owned banks, Govt and independent banks. Given that there’s been no re balancing, millions of retail and decrepit commercial premises lie “for rent or sale” just how will a first time buyer housing binge fix anything?

    I’ve read that RBS is sitting on vast land banks, I guess over time these could get recycled into new build housing and their bad asset provision could come good but only very slowly, 3-5 years at least.

    Even if we just consider the surface effects, property looks better, poor asset valuations rise and banks look say 4-11% better capitalized, then what next? Who will buy these still vacant premises, what industry will “green shoot” to rent or purchase?

    My perspective is that Financial repression and manipulation is stifling innovation, strangling entrepreneurship. The “risk-off” and de-risking nature is 5-years entrenched in the UK. How can a FTB’er mini-bubble fix anything?

    Maybe I over analyse?

  • Justathought

    Hi progrock, Does this text’ extract ring a bell?

    “What you have today is based on the giving of those who lived before. All of your technological conveniences, your art, your music, everything that has been made and produced, your freedoms and your disabilities—all are the legacy of the giving and lack of giving of those who lived before you. They made possible the life that you have today, as you must make possible the life of those who will
    live beyond you.

    What you give today will be felt tomorrow. What you contribute in this life will determine the life of the generations to come, and they will thank you or curse you depending on what you gave and how your giving was accomplished.

    You do not live for your generation. You live for the future. The future is determining the present.”

  • Noo 2 Economics

    Sorry to harp on but – so that means that as there are no 95% LTV mortgages available without Help to Buy, no meaningful comparison can be made between old fashioned repayment mortgages without help to buy attached to them and Help to buy mortgages?

  • Anonymous

    They shouldn’t be preventing a fall so should not have to worry about playing nursemaid to the “market”

  • Justathought

    Hi Paul,

    I think you do not over analyse, it seems for me that from a
    couple of decade a reducing part of economic, within our countries, might be primarily due to two factors… lack of diversifications of economic activities maybe generate by government over imposed procedures and rules. And a profound disdain by finance to support any risk start up
    entrepreneurship. My argument would be a brand comparative by industrial sectors. Over the last decades many national/regional brands simply vanished to the profits of “global” brand, super markets hegemony might be the prime responsible.

    While minimum wage might not be a bad idea, it results toward many factories employing “helping hands” within productive process to be entirely removed. While it is true that everyone would be able to gain any qualifications, stigma are still strongly attached.

    Like you I do not see within a medium to long future, how a FTB ers mini bubble will fix anything, it is at my opinion just a circling around but with an underlying downward direction.

    Now the question remains is UK, Europe and the Western world far too indebted and the only way to turn around might take years and decades of smooth internal and “control” implosion (trimming the fat) with a chance to
    rebuild on “healthy” ground? Or are we ready for accelerate and drastic weight loss? The PIIGS example is only a trimming fat analogy…

    Unfortunately in order to build a new building, you have to
    clean up the land first! And I am very optimistic that next and future generations will make it better that what we have done. Why I am optimistic: internet global communication, youngsters are starting to talk and visit to each other’s all over the world opening a largest view on this planet. People from my generation who lived and worked internationally already had “global” (Diversity
    and multi-cultural) approach; youngsters are gaining this “global” approach.

  • Anonymous

    Hmm. Sorry no!

  • Anonymous

    I agree about mis-allocated capital. Capping housing benefit and freeing up land for self builders would help reduce housing costs.

  • Patrick, London

    Amusingly similar to the 10th man idea referenced in World War Z.

  • Margaret Chappell

    An economist who used to work at the BoE called Tim Young posts excellent comments on Help to Buy/Sell on and is very critical of Lord King. From others’ comments they seems to have had a spat.

    BTW @ Shaun’s article “They can then lend it out at an interest-rate of around 5% per annum with 15% of the risk as measured by the size of the mortgage guaranteed by the UK taxpayer”. Guaranteeing the first 5 to 20% of a mortgage seems far more than 15% of the total risk.

  • therrawbuzzin

    If my house soars in value, I’m going to sell it and rent for a couple of years.
    There will come a point where supplicating the nation before the banksters becomes politically unsustainable, then…POP!

  • Max

    I seem to remember that. Sadly these soundbites are nothing more than that, and a chance to score a ‘point’ against their rivals. It’s a failed political system run by a bunch of clowns.

  • Max

    don’t get me wrong i would like them to fall, but now the government is also legally liable for some of the debt in addition to all the unwritten liabilities in ‘too big to fail’ nonsense.
    They will move hell and high water to keep the market up, but they are clueless so they may well fail in this also.

  • Anonymous

    IMHO demographics facilitated the fiat madness and it will also be the demise. Leverage is the cause and a drop in people using leverage will see the end of it.

    The last few years of QE and pretend and extend are a tissue thin layer over the sink hole that is deflation. And the US is going to drive a bus full of puppies and baby seals right over it. Could get messy.

  • Anonymous

    A friend of my wife worked in the civil service. Her husband was an economist at the BoE. The sort of guy who was young but would go to some significant meetings. We had them round for dinner the week Northern Rock collapsed. This guy thought the economy was fine, lending was sustainable and the problem was simply caused by the BBC “talking up a recession”. I said about lending being nuts, that it wasn’t sustainable and

    Shows the caliber of the employees.

    ps he went on to work in the private sector. I met him again a year after this. He said it was a lot more hard work and he wasn’t enjoying it and wanted back into the civil service!

  • Noo 2 Economics

    My experience on leaving the Civil Service was the exact opposite – I’ve never made so much money for so little effort, but then again I am self employed.

    Looks like it depends on which part of the civil service you worked in and which part of private industry you go to.