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 Images
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Responding to George Osborne's tax credit U-turn should have been Labour's victory lap

He changed the forecast, we changed the weather. But still it rains.

The Labour Party should have rested on its laurels in the Autumn Statement. While Gideon name checked his Tory colleagues for their successful lobbying, he should have been reading out the names of Labour members who changed his position.  I'll let the Tories have the potholes, (even though it was in Labour manifesto) but everything else was us. 

He stopped his assault on tax credits. Not because he woke up in his mansion in a cold sweat, the ghost of Christmas Future at the foot of his bed, ringing out the names of the thousands and thousands of children he would plunge into poverty. Nah, it's not that. It's as my sons might say "no way George, you got told!" The constant pressure of the Labour Party and a variety of Lords in a range of shades, supported by that media we are all meant to hate, did for him. It's the thousands of brilliant people who kept the pressure up by emailing politicians constantly that did it. Bravo us, boo nasty George!

As Baron Osborne thanked the Tory male MP for his brilliant idea, to spend the Tampax tax on women's services, I wanted to launch a tampon at his head. Not a used one you understand, I have some boundaries. He should have credited Paula Sheriff, the Labour MP for making this change. He should have credited all the brilliant women's groups, Yvette Cooper, Stella Creasy, Caroline Lucas and even little old me, for our constant, regular and persistent pestering on the subject of funding for refuges and women's services. 

On police cuts, his side should not have cheered him at all. We are now in a position when loud cheers are heard when nothing changes. So happy was his side that he was not cutting it, one can only conclude they really hate all the cutting they do. He should not have taken a ridiculous side swipe at Andy Burnham, but instead he should have credited the years and years of constant campaigning by Jack Dromey. 

I tell you what Georgie boy can take credit for, the many tax increases he chalked up. Increases in council tax to pay for huge deficit in care costs left by his cuts. Increases in the bit of council tax that pays for Police. Even though nothing changed remember. When he says levy or precept it's like when people say I'm curvy when they mean fat. It's a tax. 

He can take credit for making student nurses pay to work for free in the NHS. That's got his little privileged fingers all over it. My babies were both delivered by student midwives. The first time my sons life was saved, and on the second occasion my life was saved. The women who saved us were on placement hours as part of their training, working towards their qualifications. Now those same women, will be paying for the pleasure of working for free and saving lives. Paying to work for free! On reflection throwing a tampon at him is too good, this change makes me want to lob my son's placenta in his face.

Elsewhere in Parliament on Autumn Statement day Jeremy Hunt, capitulated and agreed to negotiate with Student Doctors. Thanks to the brilliant pressure built by junior doctors and in no small part Heidi Alexander. Another disaster averted, thanks to Labour.

I could go on and on with thanks to charities, think tanks, individual constituents and other opposition MPs who should have got the autumn cheers. We did it, we were a great and powerful opposition, we balanced the pain with reality. We made Lord sorry the first Lord of the Treasury and his stormtroopers move from the dark side. We should have got the cheers, but all we got was a black eye, when a little red book smacked us right in the face.