Over the last twelve months the average UK property has seen its value increase by 11%. In London that figure is 18%; the average London property is making more money than the person living in it. Even by the unhinged logics of 21st-century capitalism that is pretty weird. It was hardly unsurprising then when the OECD recently stated that the UK should deal with what it claims is an emerging, and dangerous, housing bubble. Their advice? To scale back ‘Help to Buy’ and increase interest rates. Given the economy’s return to growth requires precisely that – a housing bubble – I don’t imagine the Chancellor will be listening. Below are seven things you need to know about his flagship policy and the foundation of the ‘Osborne boom’: ‘Help to Buy’. Right now it’s flying, but for how long?
1. It’s actually two policies…
The first part of Help to Buy is aimed at first-time buyers and involves the government offering a mortgage loan of up to 20% of the value of the property if the buyers can cough up a 5% deposit themselves. The government is offering these loans for properties that can cost as much as £600,000 (£300,000 in Wales), what is more they are interest-free for the first five years and only available for the purchase of new builds.
The second policy involves 5% deposit mortgages being available from any one of ten providers (originally five) with the taxpayer guaranteeing the remaining 95%. That means the taxpayer is now guaranteeing mortgages of up to 95%. The logic is similar to that of banking bailouts in a way, gains are privatised, losses will be socialised.
2. ‘Help to Buy’ emerged in late 2012 out of the belief, held by both Osborne and Cameron, that the lack of 95% mortgages was impeding ‘the recovery’…
That’s right, the same double-act that says it wants to move to a culture of saving identified the same kamikaze mortgage products that precipitated the last financial crash as necessary for a ‘recovery’.
3. Osborne took advice on it from Mark Carney, probably before he became Governor of the Bank of England.
There has been a similar policy in Canada for a some time now and while the Bank of England nabbed Carney from the Bank of Canada in the Summer of 2013 it’s alleged that he was approached before then regarding his thoughts on how a similar system might work here in the UK. I guess I don’t need to mention the fact that when Carney (ex-Goldman Sachs, naturally) left his position in Canada the domestic housing market was in the middle of a major bubble. Carney won’t care too much since he’ll be leaving the BoE in 2018. My guess is somewhere his next stop will be the IMF, or better yet…back at Goldman.
4. Help to Buy (ii) has led to a quadrupling of the kinds of mortgage products that were en vogue before the 2008 crisis. In less than a year.
Banks withdrew 95% and 90% mortgages immediately after the 2008 Global Financial Crisis. But that is changing and recent figures show that while there were only 44 products offering 95% mortgages last September that figure had jumped to 177 by last month. Such products include ones that are interest free for the first three or sixth months so as to entice first-time buyers. Except this isn’t a sofa being bought in a Boxing Day sale, these are the most expensive things that people will ever buy in their lives.
5. Meanwhile homebuilders have been laughing all the way to the bank, often without building very much.
When it was announced earlier this year that Help to Buy would be extended until the end of the decade, the share value of some of Britain’s biggest housebuilding firms shot up quicker than a helium balloon carrying a syringe of Viagra. Within a day the UK’s five biggest housebuilders had added almost £1billion to their aggregate market capitalisation. Astonishingly the four biggest housebuilders in the UK have seen their market value increase by 81%, or £7.2bn since the scheme was first announced. It is hard not to imagine them lobbying government when just the declared extension of a single policy can mean those kinds of gains, right? Given both Persimmon and Barratt were donors to the Conservative Party before 2010: I’d imagine ‘their people’ are very much in the ear of not only the Prime Minister and the Chancellor – but specifically the advisers behind the policy, Paul Kirby and Rupert Harrison (see point 2).
6. Many of the people getting these mortgages are pretty screwed if interest rates go up, even a little. That is going to happen, soon.
Mark Carney had previously said that interest rates would likely go up when growth was sufficient for ‘exit velocity’. Now that the UK economy is growing at more than 3%, he is instead saying that it has to be ‘sustained momentum’. This week the pound hit a five year high and on a trade-weighted basis it has risen more than 10% in the past year. That is because on many indicators the economy is ‘booming’, leading many to question just how much ‘slack’ is left in the economy, especially with productivity still going down. As one interviewee in the FT put it recently: “No matter what the BoE says, at the end of the day they will tighten quicker than the guidance they’ve given“.
Right now interest rate increases early next year are the prevailing wisdom but if some of the current trends continue it will probably be sooner, and any rate rise not accompanied by an increase in real wages will cause serious problems. If mortgage rates went up even 2.5% the number of households ‘most at risk of financial distress’ would double to nearly one in six. Osborne’s bet is that the housing boom will last until then, that wages will go up slightly and that interest rate increases will be marginal. If he is wrong on any of these points let alone all of them it means a lot of suffering. The jubilation of today’s 95% mortgages could well be the misery of negative equity before the end of the decade.
7. This whole palaver is part of a wider story of how the most ‘advanced’ economies are seeing massive levels of state intervention in the mortgage market.
As the superb Gillian Tett recently wrote in the FT:
“A decade ago about 40 per cent of new US mortgages carried implicit government backing, since these loans were guaranteed by entities such as Fannie Mae and Freddie Mac. Even then this pattern looked odd, given that Washington and Wall Street espouse a free market creed. But today it is surreal. Private banks have become so reluctant to make loans that more than 90 per cent of new US mortgages now carry government guarantees. which between them own or guarantee about $5tn worth of mortgages – remain trapped in a quasi-nationalised state after being rescued by the Treasury in September 2008.”
The state is now having to repeatedly resuscitate the economy through stimulating demand for housing with the guarantee of easy credit. It’s not ‘balanced’, its not going to last very long and, most probably, it is going to end pretty badly.