Stop the housing Ponzi scheme

The government's new housing policy will collapse sooner or later like a fraudulent investment strat

Yesterday the government unveiled its housing strategy to "get the housing market moving again". The centrepiece was a mortgage indemnity scheme to help first-time buyers to get on the property ladder. But this policy is a disastrous waste of taxpayers' money that will satisfy nobody.

The mortgage indemnity scheme is set to make it possible for first-time buyers to borrow if they can find a deposit of just 5 per cent of the property value. Lenders, meanwhile, will offer the remaining 95 per cent, safe in the knowledge that the first 14 per cent of losses on a house that later sells for less than its initial price will be taken by either the buyer's deposit, or the taxpayer and house-builder's guarantees that cover the other 9 per cent. Whatever happened, you might ask, to the Government's mantra that "you can't get out of a debt crisis by taking on more debt"?

This is a bad deal for taxpayers. There are good reasons why lenders are currently unwilling to offer 95 per cent mortgages on the open market, and 90 per cent loans are rare. Mortgage providers are signalling that they expect prices to fall, and don't want to lose their money when they do. The current housing market very closely resembles a Ponzi scheme where new investors to the scheme (in this case first-time buyers) pay for the returns to existing members (higher house-prices for owners). As with all Ponzi schemes, this scam can't go on forever -- sooner or later you run out of unsuspecting new investors and the whole thing collapses. It's unfortunate, then, that the Government feels that it's wise to devote taxpayers' cash to one final round of pumping up the property bubble.

For similar reasons, the scheme is a false friend for first-time buyers. The current scarcity of highly leveraged loans for first-time buyers is a helpful signal to them to stay away from the precarious housing market. By meddling with those signals, the indemnity plan risks tempting hard-up young people into a falling housing market -- fodder for the last round of the Ponzi scheme.

Even business is likely to be disadvantaged by the scheme. With government offering attractive guarantees for residential mortgage lending, it would be unsurprising to see banks diverting funds away from vital lending to UK businesses in favour of unproductive property. This is the last thing we need in the current business lending drought.

Meanwhile, the real beneficiaries of the policy will be house-builders, who will be able to continue to sell over-priced property. But then there's always someone who benefits from a Ponzi scheme.

So at best, by buttressing house prices with taxpayer cash, this policy will be a simple transfer of wealth from young people without assets to older citizens with lots of housing wealth. At worst it will tempt vulnerable young buyers with little money into a falling market, wiping out their nest-eggs, and making the rest of us pay for it through our taxes.

Instead of this we need a real solution to the problem of unaffordable housing. House prices are high right now for two reasons: the emergency measures in place to deal with the credit crunch, and excessively restrictive planning laws. Rock-bottom interest rates are allowing existing home-owners to sustain huge mortgage debts -- for now. But this support for prices is temporary, simply postponing the day of reckoning when some owners will have to crystalise the losses on their over-priced properties. When that happens first-time buyers will find property much more affordable.

In the medium term, if we want our citizens to live in civilised conditions, the answer is to liberalise planning laws to allow house-builders to create homes where people actually want them. How often do you appreciate, say, the fallow scrub land of the green belt just south of Junction 26 on the M25? And now contrast this with how often you lament the absurd sums needed to afford that bigger house that would better suit your family's needs.

Until we recognise that these things are connected and have a level-headed discussion about the trade-offs, we will never be able to give our citizens the "dream of home-ownership" the Prime Minister aspires to, at a reasonable cost. But whatever your view on the long-term trade-off, one thing we should all agree on is that politicians should stay out of housing finance. It's time the government stopped trying to prop up the absurd UK property Ponzi scheme.

Ian Mulheirn is Director of the Social Market Foundation.

Ian Mulheirn is the director of the Social Market Foundation.

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Commons Confidential: Fearing the Wigan warrior

An electoral clash, select committee elections as speed dating, and Ed Miliband’s political convalescence.

Members of Labour’s disconsolate majority, sitting in tight knots in the tearoom as the MP with the best maths skills calculates who will survive and who will die, based on the latest bad poll, observe that Jeremy Corbyn has never been so loyal to the party leadership. The past 13 months, one told me, have been the Islington rebel’s longest spell without voting against Labour. The MP was contradicted by a colleague who argued that, in voting against Trident renewal, Corbyn had defied party policy. There is Labour chatter that an early general election would be a mercy killing if it put the party out of its misery and removed Corbyn next year. In 2020, it is judged, defeat will be inevitable.

The next London mayoral contest is scheduled for the same date as a 2020 election: 7 May. Sadiq Khan’s people whisper that when they mentioned the clash to ministers, they were assured it won’t happen. They are uncertain whether this indicates that the mayoral contest will be moved, or that there will be an early general election. Intriguing.

An unguarded retort from the peer Jim O’Neill seems to confirm that a dispute over the so-called Northern Powerhouse triggered his walkout from the Treasury last month. O’Neill, a fanboy of George Osborne and a former Goldman Sachs chief economist, gave no reason when he quit Theresa May’s government and resigned the Tory whip in the Lords. He joined the dots publicly when the Resolution Foundation’s director, Torsten Bell, queried the northern project. “Are you related to the PM?” shot back the Mancunian O’Neill. It’s the way he tells ’em.

Talk has quietened in Westminster Labour ranks of a formal challenge to Corbyn since this year’s attempt backfired, but the Tories fear Lisa Nandy, should the leader fall under a solar-powered ecotruck selling recycled organic knitwear.

The Wigan warrior is enjoying favourable reviews for her forensic examination of the troubled inquiry into historic child sex abuse. After Nandy put May on the spot, the Tory three-piece suit Alec Shelbrooke was overheard muttering: “I hope she never runs for leader.” Anna Soubry and Nicky Morgan, the Thelma and Louise of Tory opposition to Mayhem, were observed nodding in agreement.

Select committee elections are like speed dating. “Who are you?” inquired Labour’s Kevan Jones (Granite Central)of a stranger seeking his vote. She explained that she was Victoria Borwick, the Tory MP for Kensington, but that didn’t help. “This is the first time you’ve spoken to me,” Jones continued, “so the answer’s no.” The aloof Borwick lost, by the way.

Ed Miliband is joining Labour’s relaunched Tribune Group of MPs to continue his political convalescence. Next stop: the shadow cabinet?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage