Home—Blog—Why Nick Clegg's housing scheme won't work
Sep 24, 2012, 04:18
Posted byMerryn Somerset Webb
Comments (24)
John Stepek wrote a humdinger of a Money Morning this morning: This crackpot scheme proves that British houses are too expensive. One tweet even called it “his best essay yet”. So what kicked off this particular bit of brilliance?
You can read it here but it was of course the idiotic suggestion from the Lib Dems that those with pension savings should use them to secure mortgages for their offspring in order that those offspring are better able to participate in the Ponzi scheme that is the UK property market.
John covers most of the problems with the idea in his piece, but it is so very stupid that more keep popping up. To help you keep track, here is a short and no doubt far from complete list.
• Even if those with pension pots wanted to help their children out this way there is no need for this change. In the UK, investors can already take their 25% tax-free lump sum at 55. It is hard to imagine that too many of them have children who want to buy houses before their parents hit this age. The fact that the Lib Dem spokesman floating the arguments claims a mere 12,500 people would take part shows just how very pointless it is.
• At the moment, it is specifically prohibited in UK law for a charge to be put against a pension. So as Tom McPhail at Hargreaves Lansdown points out, this would need a change in legislation. And of course, once the door is opened to third parties having charges over pensions it is hard to see how it would be closed.
• Note too that new legislation means more rules and more interference from HMRC. I can’t imagine anyone is really up for that.
• Another from Hargreaves – most people are already horribly exposed to the housing market via their own house and mortgage. Suggesting they double up via their kids is not good financial planning. Indeed, as one reader notes under John’s piece, if an independent financial advisor (IFA) suggested anything similar, we’d all be absolutely horrified.
• How will the money used to guarantee the loan be dealt with? Presumably, if it is guaranteeing a mortgage, most lenders won’t tolerate it being used to take any capital risks. Will it therefore have to be held in cash with all the corresponding impact on long-term investment returns?
• It solves the wrong problem. The problem is not so much that young people don’t have enough money (that’s another issue), but that, thanks to the asset-price inflation Western governments have encouraged for decades, house prices are too high.
• It assumes that house prices will rise. They probably won’t. People coming up to retirement are short of pensions savings already. If they do this, they could end up even shorter. A spokesperson from the National Association of Pension Funds (NAPF) points out that "the Government has already looked at letting people have early access to their pensions and decided against it. People need to keep their pension for their retirement, especially with rising longevity and the costs of long-term care". Quite.
• Most people have more than one child. Think of the family rows.
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(24 September 2012, 09:28PM) Complain about this comment
MW has gone all uber political? Cheap shots at the rather silly Liberals maybe merited, but John's article is embarassing while Merryn calling them stupid is stooping nearly as low.If only 12,000 people will use the scheme or benefit,why does it so irritate the toffs? A bit of extra choice for a few of the middling sort is not a bad thing.To say (house prices) "probably won't rise" is patently ludicruous.House Prices have risen in 72 of the last 80 years and are up by 34,000%. Even if they only rise at one twentieth of the rate since 1932 they will still rise 1,700% in a single lifetime. Do you seriously contend that HP's will not rise again? Or is your short termism literally as long as the end of your nose? oh, and you forgot to say buy Gold.
(24 September 2012, 10:32PM) Complain about this comment
Boris, are you a lawyer by any chance? You are, deliberately I'm sure, confusing nominal price growth with real price growth, and a short term statement-of-the-bleedingly-obvious with a long term fact of life.Even you, surely, have to admit that property prices are not going to rise in real terms in the next 5 years or so? If not, what mechanism do you propose this happening by? Only a reduction in supply or an serious loosening of credit strings will fulfil and even the BoE putting the presses on full and the government mandating extra lending has only managed to slow the rate of fall. Short of someone importing some kind of brick eating termite the supply is not going to reduce.As the adverts used to say, "past performance is not indicative of future results".PS I doubt Clegg dreamt this one up on his own. Near-pensioners and existing homeowners seem more like a Tory demograph to me.
(24 September 2012, 10:38PM) Complain about this comment
I watched Stephanie Flanders in Masters of Money, a good series. She was talking about Friedrich Hayek's theory on why the economy should be totally free of state control even allowing companies, organisations or individuals, not government or central bank, print their own money. The rubbish would be weeded out by the market. ITs well worth watching. She did stress at the end, that she didn't think any politician was capable of standing back to allow things take its own course and far from liberating its citizens - put them on "The Road to Serfdom", that title of one of his books. Even Nick Clegg, despite his recent display of humility, thinks he can manipulate the market.
(24 September 2012, 11:35PM) Complain about this comment
#2 Nick. Merryn said prices probably won't rise. She said nothing about in "real terms". Even if they don't rise at all, why is this such a terrible way to buy a house? It has to beat renting. In the 18 ears since Nick Ross bought his Notting Hill pied a terre it has risen 3,500%. The rest of us had to put up with 350%. I'm sure many would still see 50% in the next 18 years as a decent return,especially with rates so low.
(24 September 2012, 11:54PM) Complain about this comment
3 - Ellen. You will learn more from watching 3 Men In A Boat than tosh like Masters Of Money. Why not abolish The State? Or Money? Or the NHS? Let nature take its course. Isn't it funny how all and sundry can use fancy theories to explain the past with such certainty whilst having no clue as to what might happen in the future? The wonders of hindsight. As for house prices rising over a period of 80 years or so, how meaningful was the concept of a housing market pre-Mrs T. Before then, didn't most people just buy a house and quaintly call it home? Isn't your logic a tad flawed Boris McD? ''Its 'always' done it (80 years), so why will it change?'' The earth is circa 4.5 billion years old, mate. Go figure.
(25 September 2012, 08:57AM) Complain about this comment
Why is it considered acceptable to call people 'toffs' but unacceptable to call them 'plebs'?
(25 September 2012, 11:02AM) Complain about this comment
@ 5. Neutron. The problem with any state interference in the economy is that they create winner and losers, not by market forces, but by decree. While I agree with you that safeguards should be put in place to protect the young, old and infirm, the level of dependency huge swaths of the population have on state backing is crazy. And I am not just talking about state benefits. Bankers, homeowners, debtors, the green agenda, charities, etc. The bill for this culture of dependency and entitlement is just being passed down a generation or two.As for the state and the NHS - while I would stop short of abolishing them, they are both too big and too hungry and could easily be pulled back.
(25 September 2012, 11:55AM) Complain about this comment
"Why Clegg's housing scheme won't work"Merry, I guess you needed to come up with a blog entry more detailed than "because it is stupid". All good points and as you say there are many more! Slightly worried that this will have political appeal, not happy about the thought of a door opened into attacking pensions in any way....
(25 September 2012, 11:58AM) Complain about this comment
lets assume two people buy a house funded in part 'funded' /secured by say one to 4 parents pensions.....A few years down the line they get divorced......................
(25 September 2012, 12:24PM) Complain about this comment
It clear (to most) you cannot ignore 'real returns' when figures for gains can be pretty much meaningless without something to compare it to.There are many good reasons to rent - you may not be able to afford a deposit, if you expected to be living in an area for just a relatively short time or if you believe house prices may go down. If you bought a house 4-5 years ago on a 100% interest only mortgage and sold it now you would almost certainly have found renting would have been the cheaper option.And unless you were confident we have hit the bottom and prices will now start to rise there is less reason to 'buy' now.
(25 September 2012, 12:32PM) Complain about this comment
Boris - you said "I'm sure many would still see 50% in the next 18 years as a decent return,especially with rates so low."Although that is actually only about 2.3% per year (compounded) - better hope inflation is not too high! In the current climate it seems less likely we would have any (or even negative) REAL returns for the next 5+ years so I'm not sure how many people would genuinely expect their houses to be worth 50% more (certainly in real terms) over the next 18 years?
(25 September 2012, 03:41PM) Complain about this comment
More.. Surely this means that when the pensioner to be hits 55 they won't be allowed access to their money in the normal way - if it is acting as a guarantee it will have to stay locked up until the loan is repaid?
(25 September 2012, 04:12PM) Complain about this comment
Well, its a good job the Lib Dems aren't actually in power.
(25 September 2012, 05:20PM) Complain about this comment
I came across a useful phrase recently - "that's not even wrong." It's surprising how often it comes in useful - Clegg's suggestion seems like yet another occasion.
(25 September 2012, 06:52PM) Complain about this comment
#12 Merryn. But when the young beneficiary reaches 60+ they will own a house outright. They will also have a life expectancy approaching 95. That amounts to 35 years of free housing, whereas those who thought renting was a short term gain face 420 months of rental payments.#6 jerseylil. Pleb is a derogatory term from the Roman word for common or vulgar. Toff derives from the gold braided insignia worn by aristocrats at Oxbridge 500 years ago A subtle way to let ordinaries know they were important/superior. They wore a Toft.
(26 September 2012, 08:54AM) Complain about this comment
Apart from much said above, how many people now have private pensions? We are always being told most people are not able to afford to save for a pension and most companies have dropped out of providing them.The problem with house prices is that the banks cannot afford to take the huge potential losses out there if they repossess the properties with non-performing mortgages. There are also no council houses available for the government to put those who are unable to pay their mortgages. While this situation continues prices will not fall meaningfully
(26 September 2012, 09:24AM) Complain about this comment
As a 'toff' I feel I have superior knowledge of the situation. I've said it before and I'll say it again: Hypnotised by the media into owning houses, we borrow more and more until the bubble bursts. Don't worry, they tell us, we're not like Greece or Spain, we're not 'really' in Europe, we're so different. Well, blow me down with a map of Europe, has someone changed its shape?!
(26 September 2012, 09:43AM) Complain about this comment
@ 16 - P Lee. Worse than that, when a house is repossessed and sold at current market value, they may well have to revalue everything they have of a similiar nature on their books, whether or not there are problems with outstanding mortgage repayment.So the solvency issue is that the bank's assets, or book value, cannot meet its liabilities. From an accounting perspective, they would be insolvent, put into administration and would no longer be allowed to trade. This is the reason I believe the housing market is not being allowed to find it's equilibrium and politicians and central bank are willing to strangle the rest of the economy hoping that, as long as they don't run out of time, people will have repaid enough of the equity on their homes so they can take the hit themselves. Clegg should be ashamed of himself asking for people's pensions to be thrown at the bad banking practices of the last decade.
(26 September 2012, 05:55PM) Complain about this comment
This policy idea stinks. It's wrong on so many levels.House prices are high, because they were bid high in the lending boom that has caused the crisis (look at Greece and Spain today; there's more to come); and house prices are notoriously sticky. When booms end, people refuse to believe the value of their house has fallen, and refuse to sell. Look at volumes the past couple of years (sales have collapsed). House prices have not been maintained; people have simply stopped selling (We're getting derisory offers) - you hear it all the time. It's simple, if you can't sell at the asking price, then it is the wrong price. Prices fall when people are forced to accept the price: ie, repossessions and forced sales. It is the govt banking guarantee that has caused this zombie market.Raiding granny's pension will exacerbate the pensions crisis, and stopping the house price correction for this generation and the next. This policy is stupid, and borderline theft.
(26 September 2012, 06:10PM) Complain about this comment
Good posts 16 and 18Because of high house prices, people can't save for a pension, while they save for a deposit. And if they are to save for both, there’s no consumer spending, and a zombie economy as well as zombie housing market.Let people (Boris etal) keep on thinking they’re brick millionaires as the economy stagnates, millions remain unemployed, millions give up on home ownership, a pensions crisis looms including paying housing benefit for those without homes, and no real wealth being created. The nation gets what it deserves; people voted for NewLabour and house price inflation, as they did for Thatcher, deregulation and an end of manufacturing.Nationalise the banks for no money - they're insolvent. Ellen's concerns on balance sheets, just dump bad debts into a bad bank, and force repossessions. It will be painful. But people will afford homes again, and the economy will recover, and the banking sector eventually reformed. This madness has gone on too long.
(26 September 2012, 06:50PM) Complain about this comment
#20 R Birq'. But house prices are not high. They are at the same ratio to income as in 2002 and in 1997,) only those who bought between 2006 and 2010 are out of pocket. Would you advocate renting from 18 to 88? 70 years of dead money. Even if HP's only rose at 1% pa for the whole seven decades they would still double and you'd only pay the mortgae for 25 or 30 of those years. Johnny renter of course would shell out £700k in that time at current prices.
(26 September 2012, 08:57PM) Complain about this comment
@21 London school teacher's standard government salary in 1990 approx £17k; cost of a small terraced house in an average affordable London suburb in 1990 approx £60k. Ratio 60/17 approx 3 fold. Same scenario today-salary approx £25k; cost of same house approx £250k. Ratio 250/25 =10 fold. By my reckoning, houses are more than 3 times over valued. By all means get on the property ladder, but it's more like a property snake at the moment.
(27 September 2012, 12:04PM) Complain about this comment
#22 P Harry. You are wrong, I hope not deliberately. An equivalent London teacher that earned £17,000 in 1990 now earns £41,000. The ratio is now 6 to 1. In 1990 ( and now) 60 divded by 17 is 3.53 to 1. What you need to look at is how much is spent over 25 years acquiring a typical house on say an 80% mortgage. That ratio was 7.8 to 1 in 1990 and is 7.4 today. It is cheaper to acquire a house today than it was then .....and they had MIRAS to help them through their "crisis".
(27 September 2012, 09:55PM) Complain about this comment
Why should kids get a free ride? Their parents had to build up their own finances, let the kids live in a furnished apartment or something similar until they can stand on their own two feet financially!
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