This crackpot scheme proves that British houses are too expensive
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MoneyWeek Editor
John Stepek Sep 24, 2012
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I’ve always felt mildly sorry for the Liberal Democrats.
It must have been awful for them. To be dragged kicking and screaming from the responsibility-free moral high ground of the backbenches and forced to contend with the mucky compromises of being in government.
Imagine – going from being able to carp from the sidelines without a care in the world, to having to defend and sell actual policies to an electorate who by and large, didn’t even vote for you.
No wonder they hate Nick Clegg, the man who did this to them.
But their latest crackpot scheme just highlights why it’s a good thing they very rarely get their hands near the gears of power…
The stupidest idea to come out of the coalition yet
The Liberal Democrats have a cunning plan to solve Britain’s housing problems.
What’s that? No, they’re not going to build more houses. And no, they’re not going to try to improve tenants’ rights. Nor have they suggested that it might be a good idea if house prices were lower.
Instead, the big idea is that parents and grandparents should be able to put their pensions at risk in the name of helping their offspring to buy a house.
We haven’t got the exact details yet. But we’ve heard more than enough to realise that it is possibly the single most stupid idea to have come out of the coalition government so far. Which is quite an achievement, all things considered.
Nick Clegg, talking to the BBC’s Andrew Marr, described it as a “pensions for property scheme”. Here’s what Nick said: “We have thousands of young people who are desperate to get their feet on the first rung of the property ladder, but deposits have doubled and the number of young people asking for help from family members has doubled.”
What seems to be worrying Nick is not that houses are so expensive that young people are asset-stripping their parents in order to buy one. Nor is he questioning exactly why it is that ‘deposits have doubled’.
What he really seems exercised about is that it’s only ‘rich’ people who can help their kids onto the property ladder. He wants to extend this wonderful opportunity to the less well-off as well.
Gamble your pension on the property market, says Nick Clegg
One feature of a pension is that when you cash it in, you can take 25% of your pot as a tax-free lump sum. What the LibDems propose is that parents or grandparents will be able to put this future 25% pay-out up as security for their children’s mortgages.
The idea is that the bank – knowing it can grab a quarter of granny’s pension pot if the grandkids end up stiffing it for the mortgage – will be happy to write home loans at a lower loan-to-value. So the kids will need a less chunky deposit to secure their mortgage. (If you need a refresher on the basics of mortgages, check out my colleague Tim Bennett’s beginner’s guide to mortgages).
Here’s how Nick puts it. “We’re getting people who don’t have a great deal of disposable income, but do have a pension pot, to use that for the good purpose of helping their children and grandchildren buy a home that they can call their own.”
I could fill a week’s worth of Money Mornings telling you all of the reasons why this idea is so wrong. But we’d both get bored. So here’s the short version.
We’re always being told that people in Britain aren’t saving enough for their retirement. We also know that houses in Britain are too expensive.
Getting people who already can’t afford to retire to risk some of their meagre pension pots on a scheme that will help to continue to prop house prices up will make both of those problems worse.
Worse still, too many people in this country already think of ‘bricks and mortar’ as being their ‘pension’. Now the government is trying to drag even those who have had the sense to make some alternative provision for their retirement, back into the housing market as well.
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What’s at the heart of this nonsense?
The BBC complains that “the size of deposits has risen in recent years, as banks have become less willing to issue mortgages.” It’s as though the banks – the rotten brutes - are deliberately spoiling everyone’s chances of getting on the great British property ladder.
Yet five years ago, almost to the day, people were queuing up outside Northern Rock, concerned they might never see their savings again. Northern Rock was also the champion of the 125% home loan. Those two facts are not unrelated.
The financial crisis was caused largely by banks in various parts of the world being too lax with lending standards. They have now reined things in for several reasons.
Firstly, regulators are telling them to. Secondly, they still have lots of bad loans and potential bad loans on their balance sheets, so the last thing they want is even more. And thirdly, they recognise that right now, British property is a risky, poor-value investment. So they want the potential homeowner to take on a big chunk of that risk – in the form of a healthy deposit - before they’ll get involved.
Normally this would have already resulted in a correction. And in many areas it has. The main reason that prices remain so expensive in some areas, and haven’t fallen further in others, is that the Bank of England is doing all it can to prop the housing market up. It knows the banks would be insolvent if it crashed.
So now we’re left in the ridiculous situation where the government would rather find some convoluted way to get the older generation to pay for the younger to ‘get on the ladder’, than allow a healthy correction to bring prices back to reasonable levels.
It’s a ponzi scheme on a national scale. Granny takes her pension and uses it to pay her grandkid’s deposit. After all, she’s already ‘made’ money on her house. But what happens when we all run out of liquid assets, and each of us is sitting in an expensive house with no disposable income in our pockets?
This pathetic obsession with property has to end. Until it does, Britain will continue to lag behind in the recovery stakes. Loopy schemes like this are often the sorts of things you see at the top of the market. Let’s hope this is the last we hear of it.
You can find out more about why we’re pessimistic on property prospects in this report. And you can read more about the asset classes we do like (including some countries where property looks more reasonable) in the current issue of MoneyWeek magazine. If you're not already a subscriber, get your first three copies free here.
• This article is taken from the free investment email Money Morning.
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