Yesterday the government announced “details of two ambitious schemes that will unlock the aspirations of a new generation of home buyers, and get Britain building thousands of new homes.”
Wow! A scheme that will allow more people to benefit from the spoils of ever increasing gains in the housing market, even where they would ordinarily lack the capital to get financing to buy the asset.
The press release announcing the NewBuy Guarantee proudly boasts that it is “a scheme that will enable an estimated 100,000 prospective and existing homeowners to buy their dream home with much smaller deposits than currently required”, which could easily have been part of subprime mortgage lending literature six years ago.
Obviously Housing Minister Grant Shapps has been studying at the Allen Stanford and Bernie Madoff school of Ponzi.
It’s at times like this you need a strong opposition to point out the error of the Government’s ways. And Labour opposes the scheme… for not going far enough to make home ownership affordable. Oh, crap.
Some assorted thoughts on why yesterday’s NewBuy Guarantee announcement is a terrible idea:
- Encouraging people to over-leverage themselves is not desirable* and may actually reduce consumer expenditure (to the extent mortgage repayments crowd out current spending**).
- Certainly, it’s not clear that the scheme is unambiguously a good thing for the UK economy. I don’t know if anyone has noticed, but the housing sector is an unreliable way of boosting economic output and generating tax receipts. So much for rebalancing.
- Given the lag in home building, encouraging demand for limited housing stock will tend to increase house prices making them more unaffordable.*** And can potentially push people with 95% mortgages underwater when refinancing after fixed-rate deals end. So the policy may fail on its own terms.
- Interest rates are historically low. The impact of even modest increases in interest rates could make mortgage interest payments unaffordable for many, resulting in increased defaults and repossessions. An increase in bad debts will also put the banking sector under further strain. I can’t think what the consequences of that might be.
But obviously the government is content to use tax money to subsidise subprime lending.
Thank God they’re not also giving large, unjustifiable subsidies to social housing tenants, thereby encouraging housing market speculation and selling off housing stock at below replacement value…
*As an aside, this is inconsistent with the way the government likes to talk about the national finances where debt reduction is pursued at any cost.
** Obviously there are a lot of assumptions behind this statement, for instance the mortgage payments exceed current rental payments and savings.
*** Also, previous experience of such schemes suggests that home builders set prices of houses in the schemes artificially high.