Clegg's policy to take money from pensions to pay for mortgages is madness

It's housing market madness, writes the IEA's Philip Booth

It is difficult to think of a policy that is as ill-conceived on so many levels as the coalition's announcement on Sunday to allow parents to guarantee their children's mortgages.

Housing is unaffordable today not because buyers are unable to secure yet more credit against the value of their house but because supply is constrained. Not long ago, the average house would have changed hands for three-to-four times average earnings; today, the vast majority of buyers have to pay five-to-seven times average earnings. If you pump more finance into a supply-constrained system, there can be only one result - yet higher prices.

Views differ on the causes of the financial crash and how to deal with the problems that the economy faces today, but one reaction of the government has been to bind banks up in ever-more regulation. Whether that is right or wrong, it is a deliberate policy decision in order to ensure that banks do not fail at the expense of the taxpayer in the future. This has made banks more risk averse. The response by the government has then been to directly take on the risks that the banks have refused, through schemes such as funding for lending or the proposed business bank. This is a bizarre policy. Banks are constrained in their own business models in order to prevent them failing at the expense of the taxpayer and, instead, the taxpayer is now taking on the risks directly.

Clegg's proposal to guarantee mortgages with pensions is another such instance of incoherent policy. In addition to the regulation of bank's capital discouraging banks from risky lending, the FSA is increasingly trying to rein in the provision of mortgage finance at high earnings multiples or high loan-to-value ratios. The government's new proposal seems to work precisely in the opposite direction. Clegg seems to be reasoning that, if everybody can secure their debts on everybody else's assets, then everything will be okay. Is that not the logic that gave us the financial crash in the first place?

Even in terms of the practical details, Clegg's plan seems crazy. Any pensioner who has already reached the age at which they can take their pension is entitled to secure their children's lending on any lump sum they choose to keep as an asset. As such, this proposal is only relevant to future pensioners. If a potential pensioner secures their child's mortgage on a lump sum which legislation prevents them from accessing until at least age 55 what will happen if the child defaults on the mortgage?

Presumably, either the lump sum will have to be taken early - which will cause havoc in terms of the relationship between the lump sum and the rest of the fund which is strictly controlled to prevent tax avoidance - or some complicated contingent loan arrangement will have to be set up. This will all require reams of legislation.

Clegg might also want to ask how many prospective pensioners are so well pensioned that they would be happy to put their pension pot at risk in this way. And, in turn, how many of those prospective pensioners would not, in any case, have a house against which they (or their children) could secure an additional loan for their children if they were so minded?

This is a completely crazy policy which actually works against many of the other things that the government is doing (in some cases probably wrongly) to try to create a more stable financial sector. Parents with assets should have no trouble securing loans for their children if they wish to do so. If banks and parents wish to freely enter an arrangement whereby a pension lump sum is taken into account when negotiating a loan, then so be it - but let's not have the government specially encourage it. The fact that policy proposals in the housing finance area are becoming more and more bizarre ought to focus people's attention on the real problem - the affordability of housing. We cannot make housing more affordable unless supply can respond to demand. Some readers may object to the policy consequences of liberalising development restrictions. However, we should be clear about the housing affordability consequences of not doing so.

Mortgages are advertised in a Halifax window. Photograph: Getty Images

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

 

Photo: Getty
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Theresa May could live to regret not putting Article 50 to a vote sooner

Today's Morning Call.

Theresa May will reveal her plan to Parliament, Downing Street has confirmed. They will seek to amend Labour's motion on Article 50 adding a note of support for the principle of triggering Article 50 by March 2017, in a bid to flush out the diehard Remainers.

Has the PM retreated under heavy fire or pulled off a clever gambit to take the wind out of Labour's sails while keeping her Brexit deal close to her chest? 

Well, as ever, you pays your money and you makes your choice. "May forced to reveal Brexit plan to head off Tory revolt" is the Guardian's splash. "PM caves in on plans for Brexit" is the i's take. "May goes into battle for Brexit" is the Telegraph's, while Ukip's Pravda aka the Express goes for "MPs to vote on EU exit today".

Who's right? Well, it's a bit of both. That the government has only conceded to reveal "a plan" might mean further banalities on a par with the PM's one-liner yesterday that she was seeking a "red white and blue Brexit" ie a special British deal. And they've been aided by a rare error by Labour's new star signing Keir Starmer. Hindsight is 20:20, but if he'd demanded a full-blown white paper the government would be in a trickier spot now. 

But make no mistake: the PM didn't want to be here. It's worth noting that if she had submitted Article 50 to a parliamentary vote at the start of the parliamentary year, when Labour's frontbench was still cobbled together from scotch-tape and Paul Flynn and the only opposition MP seemed to be Nicky Morgan, she'd have passed it by now - or, better still for the Tory party, she'd be in possession of a perfect excuse to reestablish the Conservative majority in the House of Lords. May's caution made her PM while her more reckless colleagues detonated - but she may have cause to regret her caution over the coming months and years.

PANNICK! AT THE SUPREME COURT

David Pannick, Gina Miller's barrister, has told the Supreme Court that it would be "quite extraordinary" if the government's case were upheld, as it would mean ministers could use prerogative powers to reduce a swathe of rights without parliamentary appeal. The case hinges on the question of whether or not triggering Article 50 represents a loss of rights, something only the legislature can do.  Jane Croft has the details in the FT 

SOMETHING OF A GAMBLE

Ministers are contemplating doing a deal with Nicola Sturgeon that would allow her to hold a second independence referendum, but only after Brexit is completed, Lindsay McIntosh reports in the Times. The right to hold a referendum is a reserved power. 

A BURKISH MOVE

Angela Merkel told a cheering crowd at the CDU conference that, where possible, the full-face veil should be banned in Germany. Although the remarks are being widely reported in the British press as a "U-Turn", Merkel has previously said the face veil is incompatible with integration and has called from them to be banned "where possible". In a boost for the Chancellor, Merkel was re-elected as party chairman with 89.5 per cent of the vote. Stefan Wagstyl has the story in the FT.

SOMEWHERE A CLOCK IS TICKING

Michael Barnier, the EU's chief Brexit negotiator, has reminded the United Kingdom that they will have just 15 to 18 months to negotiate the terms of exit when Article 50 is triggered, as the remaining time will be needed for the deal to secure legislative appeal.

LEN'S LAST STAND?

Len McCluskey has quit as general secretary of Unite in order to run for a third term, triggering a power struggle with big consequences for the Labour party. Though he starts as the frontrunner, he is more vulnerable now than he was in 2013. I write on his chances and possible opposition here.

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Emad asks if One Night Stand provides the most compelling account of sex and relationships in video games yet.

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Theresa May risks becoming an accidental Europe wrecker, says Rafael Behr

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Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.