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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Leader: History is not written in stone

Statues have not been politicised by protest; they were always political.

When a mishmash of neo-Nazis, white supremacists, Trump supporters and private militias gathered in Charlottesville, Virginia on 12 August – a rally that ended in the death of a counter-protester – the ostensible reason was the city’s proposal to remove a statue of a man named Robert E Lee.

Lee was a Confederate general who surrendered to Ulysses S Grant at the Appomattox Court House in 1865, in one of the last battles of the American Civil War – a war fought to ensure that Southern whites could continue to benefit from the forced, unpaid labour of black bodies. He died five years later. It might therefore seem surprising that the contested statue of him in Virginia was not commissioned until 1917.

That knowledge, however, is vital to understanding the current debate over such statues. When the “alt-right” – many of whom have been revealed as merely old-fashioned white supremacists – talk about rewriting history, they speak as if history were an objective record arising from an organic process. However, as the American journalist Vann R Newkirk II wrote on 22 August, “obelisks don’t grow from the soil, and stone men and iron horses are never built without purpose”. The Southern Poverty Law Center found that few Confederate statues were commissioned immediately after the end of the war; instead, they arose in reaction to advances such as the foundation of the NAACP in 1909 and the desegregation of schools in the 1950s and 1960s. These monuments represent not history but backlash.

That means these statues have not been politicised by protest; they were always political. They were designed to promote the “Lost Cause” version of the Civil War, in which the conflict was driven by states’ rights rather than slavery. A similar rhetorical sleight of hand can be seen in the modern desire to keep them in place. The alt-right is unwilling to say that it wishes to retain monuments to white supremacy; instead, it claims to object to “history being rewritten”.

It seems trite to say: that is inevitable. Our understanding of the past is perpetually evolving and the hero of one era becomes a pariah in the next. Feminism, anti-colonialism, “people’s history” – all of these movements have questioned who we celebrate and whose stories we tell.

Across the world, statues have become the focus for this debate because they are visible, accessible and shape our experience of public space. There are currently 11 statues in Parliament Square – all of them male. (The suffragist Millicent Fawcett will join them soon, after a campaign led by Caroline Criado-Perez.) When a carving of a disabled artist, Alison Lapper, appeared on the fourth plinth in Trafalgar Square, its sculptor, Marc Quinn, acknowledged its significance. “This square celebrates the courage of men in battle,” he said. “Alison’s life is a struggle to overcome much greater difficulties than many of the men we celebrate and commemorate here.”

There are valid reasons to keep statues to figures we would now rather forget. But we should acknowledge this is not a neutral choice. Tearing down our history, looking it in the face, trying to ignore it or render it unexceptional – all of these are political acts. 

The Brexit delusion

After the UK triggered Article 50 in March, the Brexiteers liked to boast that leaving the European Union would prove a simple task. The International Trade Secretary, Liam Fox, claimed that a new trade deal with the EU would be “one of the easiest in human history” to negotiate and could be agreed before the UK’s scheduled departure on 29 March 2019.

However, after the opening of the negotiations, and the loss of the Conservatives’ parliamentary majority, reality has reasserted itself. All cabinet ministers, including Mr Fox, now acknowledge that it will be impossible to achieve a new trade deal before Brexit. As such, we are told that a “transitional period” is essential.

Yet the government has merely replaced one delusion with another. As its recent position papers show, it hopes to leave institutions such as the customs union in 2019 but to preserve their benefits. An increasingly exasperated EU, unsurprisingly, retorts that is not an option. For Britain, “taking back control” will come at a cost. Only when the Brexiteers acknowledge this truth will the UK have the debate it so desperately needs. 

This article first appeared in the 24 August 2017 issue of the New Statesman, Sunni vs Shia