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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Jeremy Corbyn challenged by Labour MPs to sack Ken Livingstone from defence review

Former mayor of London criticised at PLP meeting over comments on 7 July bombings. 

After Jeremy Corbyn's decision to give Labour MPs a free vote over air strikes in Syria, tonight's Parliamentary Labour Party (PLP) meeting was less fractious than it could have been. But one grandee was still moved to declare that the "ferocity" of the attacks on the leader made it the most "uplifting" he had attended.

Margaret Beckett, the former foreign secretary, told the meeting: "We cannot unite the party if the leader's office is determined to divide us." Several MPs said afterwards that many of those who shared Corbyn's opposition to air strikes believed he had mishandled the process by appealing to MPs over the heads of the shadow cabinet and then to members. David Winnick declared that those who favoured military action faced a "shakedown" and deselection by Momentum activists. "It is completely unacceptable. They are a party within a party," he said of the Corbyn-aligned group. The "huge applause" for Hilary Benn, who favours intervention, far outweighed that for the leader, I'm told. 

There was also loud agreement when Jack Dromey condemned Ken Livingstone for blaming Tony Blair's invasion of Iraq for the 7 July 2005 bombings. Along with Angela Smith MP, Dromey demanded that Livingstone be sacked as the co-chair of Labour's defence review. Significantly, Benn said aftewards that he agreed with every word Dromey had said. Corbyn's office has previously said that it is up to the NEC, not the leader, whether the former London mayor holds the position. In reference to 7 July, an aide repeated Corbyn's statement that he preferred to "remember the brilliant words Ken used after 7/7". 

As on previous occasions, MPs complained that the leader failed to answer the questions that were put to him. A shadow minister told me that he "dodged" one on whether he believed the UK should end air strikes against Isis in Iraq. In reference to Syria, a Corbyn aide said afterwards that "There was significant support for the leader. There was a wide debate, with people speaking on both sides of the arguments." After David Cameron's decision to call a vote on air strikes for Wednesday, leaving only a day for debate, the number of Labour MPs backing intervention is likely to fall. One shadow minister told me that as few as 40-50 may back the government, though most expect the total to be closer to the original figure of 99. 

At the end of another remarkable day in Labour's history, a Corbyn aide concluded: "It was always going to be a bumpy ride when you have a leader who was elected by a large number outside parliament but whose support in the PLP is quite limited. There are a small number who find it hard to come to terms with that result."

George Eaton is political editor of the New Statesman.