The Chancellor’s wish to revive housebuilding and promote more home ownership is an understandable one. His critics now allege that he is seeking to invent US sub prime style lending, allowing people who can scarcely afford it to borrow more than they should to meet current levels of home prices.
This need not be the case. Indeed, I hope that is wrong, and that the new scheme will protect against any such danger. Any government intevrention in the mortgage market, on top of owning one of the UK’s biggest banks, should ensure proper checks on the credit w0rthiness of anyone they help, with a view to minimising taxpayer losses. Interfering in the market too much or offering guarantees against a loan prospect that a commercial organisation wouldn’t make is not a good idea. What we do know is the construction industry is operating well below past levels of output. Very few new homes are being built. Meanwhile even after the reductions in net migration achieved so far, the population is growing through substantial inward movement of people.
There are all too many people born here or legally settled here who have not been able to buy their own home. Young people have to wait many more years on average before being able to take on their first home with a mortgage, than the generation that went before them. The two main constraints today on them buying are the high level of deposit required, and in some areas the high level of house prices in relation to incomes.
The issue of home prices creates a problem for the government. Following a policy designed to get them to fall further, as we experienced during the intense phases of the Credit Crunch, would put people off buying and make the position worse in the short term. It could also add to taxpayer losses incurred at RBS and HBOS, where we own big stakes in the existing mortgage books.
The price of homes is heavily influenced by the price of second hand homes, which in turn is influenced by mortgage availability and multiples of earnings lent. The government’s solution is to seek to cap home price rises by supplying more new homes, without doing more to withdraw credit and undermine prices further. Indeed they now think they need to boost credit a bit with some taxpayer guarantees to help banks lend a bit more. Prices did, after all, experience a substantial fall towards the end of the past decade outside central London.
To make a success of the new policy of guarantees of the extra borrowing needed to reduce the deposit, the government will have to ensure sensible credit analysis. It would not help to end up with a load of sub prime mortgage guarantees on the state books.
The reason the government has been driven to this policy is the banks have not been mended sufficiently to sustain normal commercial lending at a sufficient volume . The regulators have lurched from being far too loose to being too tough, leaving the mortgage market starved of funds. The government needs to move on from these special schemes, to sorting out the rest of the state banking problem, in ways we have often discussed here. What we need is a set of competitive working banks with enough cash and capital to allow sensible levels of lending. Then we will not need special measures like this. I still favour dealing with the problems of RBS as described, rather than new special measures to get round the problems of the banks.
I hear there is also a political spat about second homes. I trust the government will design the detail of the scheme in a way which does not use state support to help buyers of second homes.