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.

 

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An Irish Sea border – and 3 other tricky options for Northern Ireland after Brexit

There is no easy option for Northern Ireland after Brexit. 

Deciding on post-Brexit border arrangements between Northern Ireland and the Irish Republic is becoming an issue for which the phrase "the devil is in the detail" could have been coined. Finding a satisfactory solution that delivers a border flexible enough not to damage international trade and commerce and doesn’t undermine the spirit, or the letter, of the Good Friday Agreement settlement is foxing Whitehall’s brightest.

The dial seemed to have settled on David Davis’s suggestion that there could be a "digital border" with security cameras and pre-registered cargo as a preferred alternative to a "hard border" replete with checkpoints and watchtowers.

However the Brexit secretary’s suggestion has been scotched by the new Irish foreign minister, Simon Coveney, who says electronic solutions are "not going to work". Today’s Times quotes him saying that "any barrier or border on the island of Ireland in my view risks undermining a very hard-won peace process" and that there is a need to ensure the "free movement of people and goods and services and livelihoods".

The EU’s chief Brexit negotiator, Michel Barnier, has made dealing with the Irish border question one of his top three priorities before discussions on trade deals can begin. British ministers are going to have to make-up their minds which one of four unpalatable options they are going to choose:

1. Hard border

The first is to ignore Dublin (and just about everybody in Northern Ireland for that matter) and institute a hard border along the 310-mile demarcation between Northern Ireland and the Irish Republic. Given it takes in fields, rivers and forests it’s pretty unenforceable without a Trump-style wall. More practically, it would devastate trade and free movement. Metaphorically, it would be a powerful symbol of division and entirely contrary to the spirit of the Good Friday Agreement. The Police Federation in Northern Ireland has also warned it would make police officers "sitting ducks for terrorists". Moreover, the Irish government will never agree to this course. With the EU in their corner, there is effectively zero chance of this happening.

2. Northern EU-land

The second option is to actually keep Northern Ireland inside the EU: offering it so-called "special status". This would avoid the difficulty of enforcing the border and even accord with the wishes of 56 per cent of the Northern Irish electorate who voted to Remain in the EU. Crucially, it would see Northern Ireland able to retain the £600m a year it currently receives from the EU. This is pushed by Sinn Fein and does have a powerful logic, but it would be a massive embarrassment for the British Government and lead to Scotland (and possibly London?) demanding similar treatment.

3. Natural assets

The third option is that suggested by the Irish government in the Times story today, namely a soft border with customs and passport controls at embarkation points on the island of Ireland, using the Irish Sea as a hard border (or certainly a wet one). This option is in play, if for no other reason than the Irish government is suggesting it. Again, unionists will be unhappy as it requires Britain to treat the island of Ireland as a single entity with border and possibly customs checks at ports and airports. There is a neat administrate logic to it, but it means people travelling from Northern Ireland to "mainland" Britain would need to show their passports, which will enrage unionists as it effectively makes them foreigners.

4. Irish reunification

Unpalatable as that would be for unionists, the fourth option is simply to recognise that Northern Ireland is now utterly anomalous and start a proper conversation about Irish reunification as a means to address the border issue once and for all. This would see both governments acting as persuaders to try and build consent and accelerate trends to reunify the island constitutionally. This would involve twin referendums in both Northern Ireland and the Republic (a measure allowed for in the Good Friday Agreement). Given Philip Hammond is warning that transitional arrangements could last three years, this might occur after Brexit in 2019, perhaps as late as the early 2020s, with interim arrangements in the meantime. Demographic trends pointing to a Catholic-nationalist majority in Northern Ireland would, in all likelihood require a referendum by then anyway. The opportunity here is to make necessity the mother of invention, using Brexit to bring Northern Ireland’s constitutional status to a head and deal decisively with the matter once and for all.

In short, ministers have no easy options, however time is now a factor and they will soon have to draw the line on, well, drawing the line.

Kevin Meagher is a former special adviser at the Northern Ireland Office and author of "A United Ireland: Why unification is inevitable and how it will come about"

Kevin Meagher is associate editor of Labour Uncut and a former special adviser at the Northern Ireland office.