Housing Bubble Economics?
Yesterday I fretted that the government may be abandoning ‘rebalancing’ and instead aiming for an old fashioned property price bubble to help reflate the economy.
Judging by comment pieces over the last two days, I’m not alone:
This is good politics and horrendous economics… The government is encouraging people to leverage themselves up to the hilt in order to buy what is already likely to be overpriced property and, as a result of this policy, is likely to become still more so.
The UK Government is now in the business of winning over voters by tinkering with mortgage costs and putting a floor under house prices. However reckless this is, if it proves popular there might be more to come.
This is politically savvy: it should boost lending without emptying the Treasury’s coffers (the government only pays out if the loans go bad). But the economics are dubious. It may have no impact on supply, and merely inflate house prices.
A slow decline, or stable rents and prices, is preferable. But the question is whether we can afford to continue to think of property as a magic money tree – and more importantly, what will happen to our society and economy if the Government does so as well.
Combined with financial engineering by the banks, and the financialisation of the economy, the UK economy was made very vulnerable to an international shock. Once again, a big gamble is to be made based on pumping up the housing market.
Surely the objective ought to be to try to raise average incomes rather than mechanically reducing the requirements of mortgage companies when lending out cash. That in turn comes back to the fundamental problem: that Britain’s GDP levels (the aggregated total of incomes across Britain) are still well below the pre-crisis peak, which leaves everyone – first-time buyers included – poorer as a result. Help to Buy won’t in and of itself do anything to help that.
In other words, the housing bubble remains inflated, and subsidising mortgages based on the presumption of rising prices simply props it up further. The reason first-time buyers and so-called ‘second steppers’ are struggling to afford housing is that prices are so high because rates of new building are so low. The chancellor’s announcement simply perpetuates this cycle, rather than breaking it.
George Osborne’s preference for punting on the housing market rather than on small companies may be the prudent course of action to take, based on the country’s economic history since the Second World War.
Or it may reflect a set of cultural and financial prejudices – houses deemed to be a better investment than proper wealth-creating entrepreneurs – that has been the UK’s curse.
The trouble is, while this makes it easier to get a deposit, you’d be borrowing 95% of already very high house prices, which are way out of kilter with what ordinary people earn. Our calculations – again based on local house prices and local double income households – suggests that the Help to Buy mortgage guarantee would bring the average local home within reach of the average double income household in only 16% of the country.
No major increase in supply and no incentive for private developers to build will only lead to higher prices. The Government will combat these high prices with, essentially, easier credit which means people on stagnant wages take on debt and the Government takes on some risk.