Tuesday, September 02, 2008

What's the problem?

So we have yet another Government plan to distort the housing market in the hope that some miracle will occur and the laws of unintended consequences and market will be suspended and Gordon et al will be seen as some sort of miracle workers. Fat chance.

The government is to promise first-time buyers in England "free" loans of up to 30% of their home's value, in an effort to reinvigorate the housing market.

Households earning less than £60,000 will be offered loans free of charge for five years on new properties, co-funded by the state and developers.

This comes on top of speculation about suspending stamp duty and local authorities buying up repossessed homes. Better people than I can comment on the detail of how these measures will just add to the problem (see Mark Wadsworth on the house price crash as a good starting point). What I want to look at is the (lack of) thinking behind all these proposals.

Assuming that Government's trying to provide short term fixes for an economic problem is a good idea then wouldn't it be better to decide what the problem is in the first place? At least we might get a coherent strategy and here lies their problem, there are numerous problems which require different fixes:

1. Fist time buyers. We have been told for years that rising house prices are freezing out FTB's. This partly led to increases in lending of ever increasing multiples of salaries in what have become dodgy loans. To fix this problem we need lower prices, but..

2. Falling prices mean that a number of people who took out mortgages in the past couple of years will face negative equity. In itself this isn't a problem if the owner can repay the mortgage, the problem comes if unemployment rises or people need to move to new areas to change jobs.

3. The Royal Institute of Chartered Surveyors (Estate agents to you and me) had a spokesman on the radio yesterday claiming that the real problem was the lack of transactions and not the absolute price, well they would say that, wouldn't they? Their argument is the the churn in housing generates jobs in other sectors of the economy IE furniture, DIY. Leaving aside the self interest he did have a point in that a mobile workforce is good for the economy and for that to happen we need people to be able to move house relatively easily.

Although not necessarily part of the problem the Government is looking to fix in this round, banks and building societies are reported as being prepared to lend only 70% of a mortgage because they really don't know what the true value of a property is anymore, it certainly implies house prices should be lower.

So looking at points 1 & 3 would you say we need lower prices to get the housing market moving and to bring loans to value down? I would. It would also be helpful if people had more money in their pockets once they had a mortgage so they could spend in other parts of the economy.

Therefore, on this quick analysis, shouldn't any aid be aimed to helping those stuck in 2, but not be aimed at keeping prices artificially high? Indeed, anything that doesn't help to get the economy moving and that leads to rising unemployment is a disaster for those in negative equity. Harsh as it seems, an economy that is working is better for those in negative equity than one that has the illusion of wealth through artificially high prices.

We already have plenty of mechanisms to protect people, especially families, who go through the pain of repossession if it comes to that so it is hard to see what else Government should and could do.

It doesn't look good for politicians but the best option appears to be to let the market sort itself out and the sooner the better. Sadly this requires politicians to "butt out" so that won't happen. Prepare for a long drawn out rerun of the 70's and 80's.

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