David Cameron is mad to spend £400m on the housing market
Housing has been the downfall of the US and UK economies. Trying to stop prices reverting to the mean only makes things worse: it swaps slump for moral hazard and a rebalanced future for a new version of our ropey past. So why do we keep coming up with hairbrained schemes to 'fix' the market?
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 backstopnine 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 acrucial cornerstone of a healthy 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.