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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How can the left make the case for immigration?

All too often, we drift into telling people we want to convince that they just don't get it.

We don’t give the public enough credit. You’ll often hear their views dismissed with sighs in intellectual circles. In fact on most issues the public are broadly sensible, most are these days supportive of cutting the deficit and dubious about political giveaways, but in favor of protecting spending on the NHS and education. Yet there is one issue where most, “knowledgeable” folks will tell you the public are well out of step: immigration. 

With [today’s] net migration figures showing yet another record high, it is an ever more salient issue. On a lot of measures ‘too much immigration’ ranks highest as the number one concern (see Ipossmori). The ongoing rise of right wing political parties across Europe demonstrates that simply enough. But concerns about immigration don’t just sit with those with more extreme views, they’re also shared across the mainstream of public opinion. Yet unlike thinking on cutting the deficit or funding the NHS the public consensus that immigration is bad for Britain, flies flat in the face of the intellectual consensus, and by that I mean the economics. 

Given the intense public debate many a study has tried to spell out the economic impact of immigration, most find that it is positive. Immigration boosts the nation’s GDP. As the theory goes this is because immigrants bring with them entrepreneurialism and new ideas to the economy. This means firstly that they help start new ventures that in turn create more wealth and jobs for natives. They also help the supply chains to keep ticking. A example being British agriculture, where seasonal workers are are needed, for example, to pick the strawberries which help keeps the farms, the truckers and the sellers in business. 

Most studies also find little evidence of British jobs being lost (or displaced) due to immigrants, certainly when the economy is growing. Indeed economists refer to such “ “they’re” taking our jobs” arguments as the “lump of labour fallacy’. On top of all that the average migrant is younger than the native population and less likely to rely on welfare, so their net contribution to the state coffers are more likely to be positive than natives as they don’t draw as much state spending from pensions or the NHS. 

So why haven't the public cottoned on? Many progressive types dismiss such views as racist or xenophobic. But it turns out this is to misunderstand the public just as much as the public ‘misunderstand’ immigration. When you study people’s views on immigration more closely it becomes clear why. Far from being racist most people asked by focus groups cite practical concerns with immigration. Indeed if you go by the British Social Attitudes Survey a much smaller number of people express racist view than say they are concerned about migration.  

The think tank British Future broadly set out that while a quarter of people are opposed to immigration in principle and another quarter are positive about it the majority are concerned for practical reasons - concerns about whether the NHS can cope, whether there are enough social houses, whether our border controls are up to scratch and whether we know how many people are coming here in the first place (we don’t since exit checks were scrapped, they only came back a few months ago). But more than anything else they also have very little confidence that government can or wants to do anything about it. 

This truth, which is to often ignored, begets two things. Firstly, we go about making the argument in the wrong way. Telling someone “you don’t understand immigration is good for our economy etc etc” is going to get a reaction which says “this person just doesn't get my concerns”. Despite the moans of progressives, this is precisely why you won't hear left leaning politicians with any nous ‘preaching’ the the unconditional benefits of immigration.

More importantly, the economic arguments miss the central issue that those concerned with immigration have, that the benefits and effects of it are not shared fairly. Firstly migrants don’t settle homogeneously across the country, some areas have heavy influxes other have very little. So while the net effect of immigration may be positive on the national tax take that doesn't mean that public services in certain areas don’t loose out. Now there isn't clear evidence of this being the case, but that could just as well be because we don’t record the usage of public services by citizenship status. 

The effects are also not equal on the income scale, because while those of us with higher incomes scale tend to benefit from cheep labour in construction, care or agriculture (where many lower skilled migrants go) the lower paid British minority who work in those sectors do see small downward pressure on their wages. 

It’s these senses of unfairness of how migration has been managed (or not) that leads to the sense of concern and resentment. And any arguments about the benefit to the UK economy fail to answer the question of what about my local economy or my bit of the labour market. 

Its worth saying that most of these concerns are over-egged and misused by opponents of immigration. Its only a small factor in stagnating wages, and few local areas are really overrun. But the narrative is all important, if you want to win this argument you have to understand the concerns of the people you are trying to convince. That means the right way to make the argument about immigration is to start by acknowledging your opponents concerns - we do need better border controls and to manage demands on public services. Then persuade them that if we did pull up the drawbridge there is much we’d loose in smart entrepreneurs and in cultural diversity. 

Just whatever you do, don’t call them racist, they’re probably not.

Steve O'Neill was deputy head of policy for the Liberal Democrats until the election.