Home—Blog—David Cameron is mad to spend £400m on the housing market
Nov 21, 2011, 05:03
Posted byMerryn Somerset Webb
Comments (41)
I’m doing a recording for Newsnight this afternoon on David Cameron’s new housing initiative. Its centrepiece – and the bit that is getting all the attention – is a mortgage indemnity scheme. Right now the first-time buyer is a relatively endangered species thanks to the fact that the banks are demanding an average deposit of around 20% from them. That’s something not many people can come up with. So, even if they have the income to make their monthly payments, they can’t get a loan. The coalition’s big idea is to underwrite a portion of the loan, so shifting the loan-to-value ratio so that buyers need a smaller deposit. They put down their 5% on a new build house. The bank lends the remaining 95%, but the government and housebuilders backstop nine of those percentage points. The housebuilders take on the risk of 3.5% by putting the equivalent in cash in an indemnity account, and the government guarantees another 5.5%. The result? A bank can offer a 95% mortgage but only be on the hook for an 86% loan. Magic.
Is it a good idea? To most people it appears to look like one. According to Zoopla, the housing market has been “teetering on the edge of a precipice for the last few months”, so it was “vital” that the government did something.
The Sunday Times’ David Smith was also impressed. He figured that the package, which also intends to allow social tenants a 50% discount on market values via the Right to Buy scheme and offers various supports to homebuilders, “ticks most of the right boxes”, although he would have preferred it to go further - perhaps opening up mortgage securitisation again. Finally, Marsh & Parsons summed up the general estate agent/builder view. According to them, “any new move to help unlock the first-time-buyer market is a move to be welcomed”. That’s because “a healthy housing market is a crucial cornerstone of a healthy economy”.
Lead indicators for Britain's economy
But there’s a problem here. Is a subsidised and manipulated housing market a “healthy market?” Or is it a market riddled with conflict and moral hazard? One in which would-be first-time-buyers are being lured by a desperate government surrounded by housebuilding lobbyists into taking on loans the market has already told them they can’t afford? Strip this indemnity scheme back to its basics and you will see that it is no more than a form of the securitisation that got us into all this trouble in the first place. The buyer holds the worst strip – the first 5% of losses via their deposit. But we the taxpayers hold the second most toxic strip – the 5.5% we are guaranteeing for the banks. The government will be working its numbers based on the idea that defaults will knock around the long-term average of 1-2%.
But if interest rates go from 0.5% to even 2% (let alone the 8 or 9% they would be in any normal times with inflation at 5%), unemployment keeps rising, and recession returns, that won’t happen. The buyers - if any can be found - will end up in negative equity. The taxpayer will be hit up for millions (this is no different to the subprime securitisation). We are stuck in a no-growth environment caused in part by too much money being lent too cheaply to too many people. I am utterly bemused as to why David Cameron – who doesn’t seem particularly dim – wants us to set off down that road yet again. It seems to me that if he has suddenly found £400m he can use to help get the economy going, there must be something he can spend it on that looks to our future rather than to our rather ropey past.
Published in Blog More articles by Merryn Somerset Webb
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(21 November 2011, 05:23PM) Complain about this comment
This is truly scary. We need radical thinking and instead we're going right back to square one... This is WRONG. We have already proven this point once (and been fairly lucky so far) please let's not prove it again. Rates can only go up via the Bank of England or via the bond markets and when they do we will be consigning an extra generation of people to the scrap-heap. If the government wants affordable housing then they should put the interest rates up to 5% where they should be - we'd soon see a few cheapies getting offloaded from the over-leveraged BTL market.
(21 November 2011, 05:32PM) Complain about this comment
I remember paying a mortgage indemnity premium back in 1991; didn't quite understand what it was for initially; then I realised it was an insurance policy I paid, but the protection I bough went to the lender. Hmmm. Prices continued to drop and FTBs ended up in negative equity. This time around they will demand compensation for their losses, so the taxpayer will lose twice. I sometimes think I've just come out of a coma after a few decades - the bad news and desperate schemes are all back! I've a feeling this time things might not end so well. What is staggering, even from the conservatives, is they still don't understand what went wrong, let alone how to fix it. Gulp.
(21 November 2011, 05:34PM) Complain about this comment
Also, if all the first time buyers are going to be buying new builds thanks to this new incentive, what is going to happen to the second hand market?There are already a small number of first time buyers which kick off the bottom of the chains. If they're all buying new builds, absolutely nothing on the property market is going to sell, putting the property market in a situation 10 times worse than it was before.Why do people only ever focus on new builds. Search on rightmove in any area in the UK and there will be 1000's of properties for sale. How is there a shortage of housing?
(21 November 2011, 06:32PM) Complain about this comment
We're being taken for a ride; I can draw an analogy with 9/11.The airliners are represented by economies; the hijackers by Banksters et al; the passengers repesent the citizens; and the Twin Towers represent the wealth of the citizens.This latest hair-brained scheme represents extra fuel in the airliners' tanks.We may just as well be on a mission of financial suicide.Don't you think its time we took control from the hijackers?
(21 November 2011, 07:36PM) Complain about this comment
can't agree more. and why are we giving away council homes at 50% only to create more at further cost probably in the wrong area?defies logic but its politics. time to move country?
I am a Lib-Con voter but for me this policy shows that the Government doesn't have a depth of understanding as to what has gone awry with capitalism.This is moral hazard. The American's have surely learnt a lesson with Freddie and Fannie that we seem not to have done.It's a road paved with good intentions to help people own their own homes but Governments need to stop faking wealth. The way to get people into their own homes is to grow the real wealth of the economy. A correction in house prices is starting to occur, there is no thrift paradox here, confidence will return to the market when houses are priced realistically relative to incomes.The housing ladder needs to be lowered, first time buyers should not be lifted on a pile of sand underwritten by taxpayers.The irony is that people know this and this initiative in my view will flounder on that fact regardless.
(21 November 2011, 11:11PM) Complain about this comment
The house builders in these kind of schemes normally increase the asking price to cover the 3.5% they have to indemnify. It will be interesting to see if they can get away with that this time around or whether the mortgage valuation won't go along with their charade and instead value to market, which will surely be less than the asking price that the poor fall guy off the street is willing to pay.
(22 November 2011, 12:12AM) Complain about this comment
So the banks are more protected - they are further indemnified against the reckless lending and lovely big bonuses that got us into this mess. Magic indeed. Hoorah.
(22 November 2011, 01:23AM) Complain about this comment
This is dangerous nonsense as it will continue committing people to mortgages they cannot afford especially when interest rates rise.When I first bought a house you could really only get a mortgage from a building society and the rules were1. max of 80% (ie. 20% deposit) (you could get more but this is when the indemnity policy was required)2. max amount 2.5 x salaryIf similar rules were applied today people would not get into trouble with their mortgage debt and house prices would not go up so fast and thus be a lot more affordable for first time buyers.
(22 November 2011, 07:43AM) Complain about this comment
@Ben: "Why do people only ever focus on new builds."Because the housebuilding companies have effective lobbyists!
(22 November 2011, 11:10AM) Complain about this comment
As house prices have further to fall before being affordable, all this scheme will do, apart from ripping off the taxpayer, will be to encourage builders to add the discount onto the price.This always happens when government subsidises industrial build, the price goes up to absorb the subsidy.Growth, jobs, more houses (and cheaper ones), not stupid subsidies.
(22 November 2011, 11:20AM) Complain about this comment
Lower prices and adding supply should help stimulate the housing market into greater volumes. There remains very little for sale at this stage. I am hugely in favour of a tax on non-primary residences. All homes that are not the owner occupied primary residence are taxed based on their rental value (this would include foreign owners). This could add much needed supply to the market from those owning empty properties or tax revenues from those that borrowed and probably benefited most from the lending boom. We are a small nation with limited housing supply and we should not be afraid to put in laws to prevent that issue being exploited. Perhpas this could replace the 50% tax rate, allowing entrepreneurs to be incentivised again.
(22 November 2011, 12:52PM) Complain about this comment
The market should be allowed to do its work and lower prices. I think this article is spot on, as are most of the comments. Nothing to add, except to ask if the Government is losing its marbles.
(22 November 2011, 12:54PM) Complain about this comment
As a mortgage adviser I feel that Ben’s comment is spot on. Yes we need to help first time buyers, but by only helping them to buy new build this skews the demand for established property and makes it harder for existing owners to move up the chain.Is it any co-incidence that the big Government backed banks have huge exposure to the big developers and would much prefer to dilute that exposure by artificially moving much of their overpriced property into the ownership of private individuals with no other realistic option? As for selling existing social housing – aren’t the current discounts generous enough? Feels like a rehash of Thatcher’s right-to-buy initiative which was great in that it gave council tenants the chance to own their own home, but didn’t include provisions necessary to maintain the council housing stock required by society as a whole.
(22 November 2011, 04:42PM) Complain about this comment
The money involved is a pittance and betrays the Tories instinct to limit supply and increase demand. Cameron has pressure to look like he is doing something for the little people, especially as he let Branson have the N Rock at a £650 million discount. However how does £400 million compare ? Man City spent this sum on 9 players. Bob Diamond got half this sum for 7 years work at Barclays. There are 5 apartments in the Hyde park (Candy) building for £75 million each. Phillip Green managed not to pay the £700 million on the dividend to his wife in Monaco. It is contempt, not help.
(23 November 2011, 12:13PM) Complain about this comment
Boris Mc Hunt puts this silly gesture into context, the £400m would be better off in a fund to pay winners of a best idea of the month competition (hmm, but that COULD backfire) ;-) ?
(23 November 2011, 12:20PM) Complain about this comment
There seems to be a consensus here for lower prices. What we could do with is a bit of state competition in the housing market to drive rents and prices lower. Why not a massive council house building program with the houses let out under the Landlord & Tenants Act and not given to tenant at ridiculous prices. THis would be a far better use of council land suitable for development rather than give to developers on favourable terms who only want to build and sell at present values.
(23 November 2011, 12:48PM) Complain about this comment
To some degree, house price nuttiness is an unintended consequence of feminism - ie, the overall price level has been bid up by the preponderance of two-wage households. Still more sinisterly, the nuttiness is down to banks over-lending to people they know will never be able to pay off their loans. So the banks hold onto the majority of equity in the property and in effect collect rent. (While the government scoops a staggering backhander from moving tax, or 'estate duty'.) The whole rotten edifice will collapse when interest rates go up and wages don't.
(23 November 2011, 01:15PM) Complain about this comment
Ironically, and fortuitously, both the indemnity scheme and the council house discount will serve to reduce house prices overall.The indemnity scheme is only for new-builds. Hence house supply increases more than it otherwise would, and first-time buyers, the so-caller "motors" of the housing market, are lured away from the regular housing market causing an even greater shortage of buyers than there already is.Meanwhile, selling council houses at a 50% discount will eventually pass through into the regular market with the first buyer pocketing some of the discount and passing some on to get a buyer.
(23 November 2011, 01:19PM) Complain about this comment
blah blah blah......When a tide is going out there may be the odd ripple back but it will keep going out and make all the ships on it (even cheap one,s) go even lower. If there is a "shortage of properties" in the UK why are there a million of them empty. The North East is just one example of thousands of empty and in negative equity btl landlords and private owners. Letting agents have become HOSPITALS nursing sick property investments for owners who have in a cyclical market bought at the wrong time in the cycle. The governments idea of creating increasing SUPPLYAND THE ABILITY TO PURCHASE IT is likely to help to depress the second hand market values even quicker.
(23 November 2011, 01:46PM) Complain about this comment
As a first time buyer I would not buy into this scheme, why should we have to put up with rubbish overpriced new build properties with rooms that are the size of a shoebox, why should we be priced out of the market because there are way too many BTL properties .If the government really wants to help us get on to the housing ladder they need to limit the amount of investment properties that a landlord can have and give a chance to those people who don't have a property or 2 or 10 to have ownership.forcing landlords to sell these investment homes will bring down prices. and especially in London where half the city is BTLThe UK is already the largest socialist state in the western world, lets not try to make it look like we actually it is a country built on capitalism, free housing for people on benefits and for those who actually make a contribution and pay our taxes we get shafted.
(23 November 2011, 02:54PM) Complain about this comment
How about using the £400m to raise the personal allowance and people and the market can decide what's best to spend money on? Mothers priced out of work by childcare costing more than after tax income could also be brought into the economy again.#21 MB BTW have you seen what's happening to rents? Destroying the supply of rental properties by further tilting the tax system towards owner occupation will drive rents up. Sure, some people might become owner occupiers but this is not a suitable form of tenure for anyone who is young and might have to forgo moving to get a better job or end up squashing unplanned children into a 1 bed flat.
(23 November 2011, 05:05PM) Complain about this comment
The last thing we want is the taxpayer propping up banks . House prices should be allowed to fall but help should be extended to mortgage payment difficulties to avoid mass repossession. The sale of council houses was a huge give away representing bad value for the tax payer and has left a depleted housing stock for the vulnerable. Regarding housebuilders, it is now possible to build high tech new homes very quickly and cheaply provided the land can be made available which is where the government could help. The technology is there but the housebuilders are stuck in the Edwardian era of tiny brick boxes reminiscent of the slums. Also a complete reform of tenancy terms is required to encourage long term tenancies continental style instead of short lets that were designed for property speculation rather than a proper housing policy. The Tories will not address these issues for fear of upsetting their major donors.
(23 November 2011, 07:26PM) Complain about this comment
I imagine most smart FTB's are waiting for credit crunch part deux: Eurozone lending armeggedon to play out before they put their money down.
(24 November 2011, 03:58PM) Complain about this comment
The UK taxpayer already underwrites banks via their ownership in RBS/LLOY and the crappy mortgages of Northern Rock which Branson did not want. Today the 10yr gilt is around 2% lower then the German equivalent bund. If houses fell and people could get cheap housing this cannot be allowed to happen, The returns to the buy to let crowd are huge, in the recent osborne budget he gave discounts on stamp duty if investors bought in bulk. Go and do some buy to lets and make a fortune.
(26 November 2011, 10:31AM) Complain about this comment
The government is not interested in the first time buyer, nor in the housing market. The government is interested in tax income. New houses generate significant tax from the materials used, from the labour used and from stamp duty. From a government's point of view, the £400m may well be a good investment, that pays for itself... until the defaults start... but that may never happen, and if it does, it'll be some time down the road, and that will be tomorrow's problem.
(26 November 2011, 11:02AM) Complain about this comment
Most politicians don't have a clue.........they have dug us all into a hole and their solution is to keep digging. There has been almost no development of social housing since the 1970's. The government should be building decent social housing. let's be honest, even the post-war pre-fabs would be better than living on a run down council estate in the middle of Birmingham, Liverpool or Glasgow. With modern materials and 21st century construction techniques, the government could erect hundreds-of-thousands of 21st century pre-fabs every year (or even mobile home parks) which would provide decent living accommodation (in pleasant surroundings) for almost anyone able to afford a modest rent. Instead, Cameron will continue to throw away tax-payer's money on ill-thought-through solutions which are doomed before they start.
(26 November 2011, 11:05AM) Complain about this comment
Some people will never reach the point where home ownership is a realistic proposition - that's life ! In any case, it's not always what it's cracked up to be......it has obvious advantages, especially after retirement when, hopefully, the mortgage has eventually been repaid, but it also has disadvantages, for the individual and the economy. For instance, renters can be more mobile in the jobs market, moving to where the job is at 'the drop of a hat'. The government should concentrate its efforts on building decent social housing !
(26 November 2011, 11:59AM) Complain about this comment
Here is the long term solution if folks like me were in government.Firstly, lets all accept britain is high on crack cocaine! When you are high, we are grossly in denial. But here really is how to solve our cocaine property habit for good... simply pass legislation to "REPRICE" the entire residential property market. We used to reprice Stock Options all the time during my tenure as Stock Options Analyst in California, why not do the same for property? So, we could reprice by 50%, I'd actually go for 75% if I had my way, then give about 50% of the shaved off amount back in hard cash to property owners as a form of direct quantitive easing. Guess what happens? people will go and spend that money in the real economy. But wait! ... to prevent another bubble after repricing, cap the property market from going up for a minimum of 10 years and hold a referendum to lift the cap. If I were in govt, it would be permanent period!
(26 November 2011, 12:49PM) Complain about this comment
Utter nonsense. When a product is too expensive to buy, the seller has to reduce the price in order to sell. Housing is important but it is also just another product. The last thing for which we should be using our hard paid taxes is a sheme to lend and guarantee monies to people who can't afford a house so that they can then pay too much for one and lock themselves into a bad situation for many years. Prices need to fall. That's it. Really simple.
(26 November 2011, 02:04PM) Complain about this comment
The true question is can the UK taxpayer afford to pay for another politically motivated public relations exercise. This is like -issing on a forest fire and expecting it to go out.Why not sack 75% of politicians, house of lords and senior civil servants and use the money saved to get some proper economic planning in position. How can we the taxpayer be expected to give our hard earned money away so that some overpaid MP with no economic education fritters it away in the millions.I see the Tax Payers Alliance highlighted that £113 million of our money has been given to unions I guess so that they can afford to go on strike.
(26 November 2011, 02:22PM) Complain about this comment
It is now possible with good credit history and a sizable deposit to obtain a mortgage at historically low levels. The question that should be asked to anyone buying a house with a mortgage is “could you still afford to pay the mortgage if the mortgage payments increased by 100%?If the answer is no which in 99% of FTB’s cases it would be then I would expect them to default on their mortgage within the next 10 years. If this scheme is to be introduced then it should be offered along with bespoke long term (10 year) fixed rate mortgages.
(26 November 2011, 02:32PM) Complain about this comment
#32 David. For the monthly payments on a typical FTB mortgage of £120 k to double, would require interest rates to hit well over 10%. There is an icicle's chance in hell of that happening
(26 November 2011, 03:35PM) Complain about this comment
Boris It is possible to obtain mortgage rates as low as 2% to 3% with a good deposit and there are tens of thousands of people on lenders variable rates of 2.5%. For these people the rate would only need increase to 5% for their interest payments to double. I would expect that the longer the low rates last the harder the shock will be.
(26 November 2011, 06:50PM) Complain about this comment
I am amazed that a Conservative government is discussing meddling in the market in this way but they are absolutely determined to keep the house buying fantasy going at any cost. Grant Schapps the Housing Minister is himself a "home owner " and would like others to be able to join him. The only real solution to the housing crisis is to spend money on building large amounts of affordable homes and the supply and demand balance will eventually shift as more houses will become available. No-one thinks this plan is a good idea so as much noise that can be made to stop it the better. Please government spend the money on building houses not on underwriting risky mortgages in order to prop up prices for those already in the market.
(26 November 2011, 08:42PM) Complain about this comment
I have a much better idea. The housing and mortgage markets are just not working. So let the Old Lady of Threadneedle Street come to the rescue.The Bank of England should issue a new type of 100% mortgage, one that does not require any payment of interest or capital until the house is sold or the borrower dies. Only then would the capital and accrued interest be repayable, from the proceeds of sale.If the Bank of England hasn't enough money, she can always print more, which she has already done to repurchase overpriced gilts from the banks.No-one would have any worries about housing costs. Even first time buyers and the permanently unemployed could buy houses. In fact there would be so much demand that rising house prices would give a boost to everyone's domestic balance sheets, and we could all start spending again.Why has no-one thought of it before?
(27 November 2011, 11:28AM) Complain about this comment
@ 36. 4casterSounds like the ultimate Ponzi scheme to me ... self-perpetuating self-destruction on a scale even greater than the aggregate of the others currently running.
@ 29. Robert H-TYour suggestion would be unsustainable in the longer term; it would give a temporary (false) boost.The main reason why HPs are not crashing right now is because they are being propped-up by robbing the prudent. Nor is this sustainable in the longer term.You are right about Britain (as a whole) being in denial. It, like other Western countrys, is in denial that it (as a whole) has been living way beyond its means for a very long time. The long term solution is for feckless individuals within countrys to adapt to live within their means, nobody requires more than the esentials; the World does not owe Britain a living, nor are the prudent deserving of subsidising the feckless nor, I may add, are they deserving of feeding the parasites (rich, poor and intermediate).Unfortunately, humanity as a whole does not think into the longer term, just for the here and now.
(29 November 2011, 12:36PM) Complain about this comment
#34 David. You can only access rates of 2 or 3% with a very large deposit. Those with smaller deposits get 5% or more. If interest rates double on a typical FTB mortggae of £120 k from 2.5% to 5% , monthly repayments of interest would only rise £250. Most FTBs now have to go on repayment mortgages . IO are hard to obtain. So for total mortgage payment to double would require 12% interest to be charged.
(30 November 2011, 11:11PM) Complain about this comment
I'm totally agreed with Roland and Nightraider comment. Only one word for this housing disaster: ''THE HOUSE PRICE IS OVER INFLATED'', so the only way to help young generation to get on the property ladder is :''THE HOUSE PRICE NEED TO COME DOWN AT LEAST 50% TO MAKE IT AFFORDABLE.'' Also, people who own more than one property which include all the landlord, they should pay more tax on their 2nd property not less. I don't that is going to happen, as most of the MP own more than one property.
(01 December 2011, 02:57AM) Complain about this comment
if it is so clear as to the downside of this course of action, why on earth does somebody with an ounce of intelligence make DC aware? or maybe he is and chooses to ignore it.....
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