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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Ken Livingstone says publicly what many are saying privately: tomorrow belongs to John McDonnell

The Shadow Chancellor has emerged as a frontrunner should another Labour leadership election happen. 

“It would be John.” Ken Livingstone, one of Jeremy Corbyn’s most vocal allies in the media, has said publicly what many are saying privately: if something does happen to Corbyn, or should he choose to step down, place your bets on John McDonnell. Livingstone, speaking to Russia Today, said that if Corbyn were "pushed under a bus", John McDonnell, the shadow chancellor, would be the preferred candidate to replace him.

Even among the Labour leader’s allies, speculation is rife as to if the Islington North MP will lead the party into the 2020 election. Corbyn would be 71 in 2020 – the oldest candidate for Prime Minister since Clement Attlee lost the 1955 election aged 72.

While Corbyn is said to be enjoying the role at present, he still resents the intrusion of much of the press and dislikes many of the duties of the party leader. McDonnell, however, has impressed even some critics with his increasingly polished TV performances and has wowed a few sceptical donors. One big donor, who was thinking of pulling their money, confided that a one-on-one chat with the shadow chancellor had left them feeling much happier than a similar chat with Ed Miliband.

The issue of the succession is widely discussed on the left. For many, having waited decades to achieve a position of power, pinning their hopes on the health of one man would be unforgivably foolish. One historically-minded trade union official points out that Hugh Gaitskell, at 56, and John Smith, at 55, were 10 and 11 years younger than Corbyn when they died. In 1994, the right was ready and had two natural successors in the shape of Tony Blair and Gordon Brown in place. In 1963, the right was unprepared and lost the leadership to Harold Wilson, from the party's centre. "If something happens, or he just decides to call it a day, [we have to make sure] it will be '94 not '63," they observed.

While McDonnell is just two years younger than Corbyn, his closest ally in politics and a close personal friend, he is seen by some as considerably more vigorous. His increasingly frequent outings on television have seen him emerge as one of the most adept media performers from the Labour left, and he has won internal plaudits for his recent tussles with George Osborne over the tax bill.

The left’s hopes of securing a non-Corbyn candidate on the ballot have been boosted in recent weeks. The parliamentary Labour party’s successful attempt to boot Steve Rotheram off the party’s ruling NEC, while superficially a victory for the party’s Corbynsceptics, revealed that the numbers are still there for a candidate of the left to make the ballot. 30 MPs voted to keep Rotheram in place, with many MPs from the left of the party, including McDonnell, Corbyn, Diane Abbott and John Trickett, abstaining.

The ballot threshold has risen due to a little-noticed rule change, agreed over the summer, to give members of the European Parliament equal rights with members of the Westminster Parliament. However, Labour’s MEPs are more leftwing, on the whole, than the party in Westminster . In addition, party members vote on the order that Labour MEPs appear on the party list, increasing (or decreasing) their chances of being re-elected, making them more likely to be susceptible to an organised campaign to secure a place for a leftwinger on the ballot.

That makes it – in the views of many key players – incredibly likely that the necessary 51 nominations to secure a place on the ballot are well within reach for the left, particularly if by-election selections in Ogmore, where the sitting MP, is standing down to run for the Welsh Assembly, and Sheffield Brightside, where Harry Harpham has died, return candidates from the party’s left.

McDonnell’s rivals on the left of the party are believed to have fallen short for one reason or another. Clive Lewis, who many party activists believe could provide Corbynism without the historical baggage of the man himself, is unlikely to be able to secure the nominations necessary to make the ballot.

Any left candidate’s route to the ballot paper runs through the 2015 intake, who are on the whole more leftwing than their predecessors. But Lewis has alienated many of his potential allies, with his antics in the 2015 intake’s WhatsApp group a sore point for many. “He has brought too much politics into it,” complained one MP who is also on the left of the party. (The group is usually used for blowing off steam and arranging social events.)

Lisa Nandy, who is from the soft left rather than the left of the party, is widely believed to be in the running also, despite her ruling out any leadership ambitions in a recent interview with the New Statesman.However, she would represent a break from the Corbynite approach, albeit a more leftwing one than Dan Jarvis or Hilary Benn.

Local party chairs in no doubt that the shadow chancellor is profiling should another leadership election arise. One constituency chair noted to the New Statesman that: “you could tell who was going for it [last time], because they were desperate to speak [at events]”. Tom Watson, Caroline Flint, Chuka Umunna, Yvette Cooper, Andy Burnham and Liz Kendall all visited local parties across the country in preparation for their election bids in 2015.

Now, speaking to local party activists, four names are mentioned more than any other: Dan Jarvis, currently on the backbenches, but in whom the hopes – and the donations – of many who are disillusioned by the current leadership are invested, Gloria De Piero, who is touring the country as part of the party’s voter registration drive, her close ally Jon Ashworth, and John McDonnell.

Another close ally of Corbyn and McDonnell, who worked closely on the leadership election, is in no doubt that the shadow chancellor is gearing up for a run should the need arise.  “You remember when that nice Mr Watson went touring the country? Well, pay attention to John’s movements.”

As for his chances of success, McDonnell may well be even more popular among members than Corbyn himself. He is regularly at or near the top of LabourList's shadow cabinet rankings, and is frequently praised by members. Should he be able to secure the nominations to get on the ballot, an even bigger victory than that secured by Corbyn in September is not out of the question.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.