The government’s housing policy crashes

Today I heard on the radio that mortgage advances have fallen 44% compared with the same period last year. Its a fitting epitaph to this governments woeful misunderstanding of the housing market, and the folly of their current policy which will not succeed in tackling the problem of providing more people with better homes that they own.

The government have made access to home ownership in this country much more expensive by combining two policies:

1. Allowing a credit boom until last autumn, which drove house prices to new heights as banks and building societies took advantage of the low interest rates and easy money to lend more and more against individual properties. They also lent more and more as a proportion of peoples income.
2. Introducing Home Information Packs, which has deterred people from putting their homes on the market, reducing supply and delaying the price adjustment which would otherwise take place in response to the credit crunch.

The main reason for the current high property prices is the first one. The lurch from boom to bust conditions in UK money markets will put downward pressure on prices, as we are beginning to see, but the other two policies are delaying and reducing this adjustment.

The governments own analysis has been pathetic. They have said house prices are too high for first time buyers because too little housing is being built. They have steadfastly refused to answer my simple question,?? How far do they want house prices to fall so they are affordable again??? They have decided the answer to high house prices is to build more. They also allowed many more people to come to the Uk who need homes, seeing the problem as solely one of inadequate supply and not looking at either demand or the terms of finance for house purchase.

In the meantime they are presiding over a house-building industry in difficulties, now cutting back on the number of homes they will build even where they have land with planning permissions available.

The truth is the government will not be able to build itself out of high house prices, as the supply of new homes is a tiny fraction of the number of homes that come onto the market each year. The government should recognise that the main determinant of house prices and therefore of affordability is the supply of mortgage finance, and the terms of that finance. We have just seen a long period of rapidly rising house prices driven by boom credit, yet the government refused to understand that it was primarily a monetary phenomenon.

The government may also find out that falling house prices are even more unpopular than denying access to younger first time buyers by allowing ever higher prices.

In housing policy there is no substitute for a government managing conditions in money and credit markets competently, so that house prices are relatively stable. This government made the problem of housing affordability far worse by the boom credit conditions of the last few years, and is now going to do the opposite for a bit with the credit crunch. Falling house prices put people off becoming first time buyers, and credit crunches drive out of the market the people who most need credit to be able to buy a house.

The government not only needs to stabilise credit conditions, but also should abolish Home Information Packs. It was a stupid time to introduce them, when the market is going through such convulsions, as the Northern Rock crisis unfolds.

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  1. Ian Evans
    Posted December 31, 2007 at 11:24 am | Permalink

    Hard to question your analysis – except for one thing: I dont believe the government ever wanted to tackle the problem of affordability and supply. What they wanted was to keep house prices rising by every means they could think of – and thus (sad but true) keep enough voters onside. Is it a coincidence that their spectacular fall from grace in the last few months has occurred at the same time as virtually all the monthly houseprice indices have gone negative?

    As for HIPs – well, a stupid idea executed stupidly: sums up the ZaNuLabour party!

  2. Neil Craig
    Posted December 31, 2007 at 1:46 pm | Permalink

    For the government to give a figure of by how much house prices should fall would obviously be great fun for the opposition. I will make an estimate anyway.

    Ultimately the only way to reduce house prices is by building more. Supply & demand does work. Indeed much of the pricing of houses now is beyond supply/demand & is because, house prices having risen faster than inflation or even than share prices, they are seen as an “investment”. This is typical behaviour in a market where supply is not affected by demand (eg old paintings).

    Some years ago it was said in the US that 40% of a house’s cost was regulatory but that was the US, it was a while ago & it made little allowance for new production methods. A century ago a house & car cost the same. I have no doubt that new houses in Britain could be produced & sold at 40% & probably under 20% of current prices.

    “The truth is the government will not be able to build itself out of high house prices, as the supply of new homes is a tiny fraction of the number of homes that come onto the market each year.”

    The truth is that that supply could be massively increased if regulations allowed it & that that would indeed make housing affordable. It would mean negative equity for many but that is a paper, rather than actual, change in value.

    Where Brown is at fault is suggesting that most of this house building should be done by government & will need subsidy. Only government could need subsidy to break even in a monoploy market. That is where the Tories should be fighting.

  3. Bazman
    Posted December 31, 2007 at 4:51 pm | Permalink

    Whatever the credit conditions are there is no escaping the laws of supply and demand. The fact is that most of the council houses have been sold off. I live in one bought from a property speculator who himself only ever saw photographs of the property. Very spacious and comfortable it is too, with full size rooms, garage and garden. You would have to spend a lot more to get more than these ex-council houses. Don’t sniff!
    The Tory idea of selling them all off was very good, though I have to say at the time I was dead against it. Where would all these estates be now if they had not been sold? The social benefit has now become clear.
    Any government needs to get back to building houses like this and selling them to fund more house building instead of the expensive Noddy flats/houses built by private developers. I did have a choice at the time and there was no contest. This high density housing are the slums of the future.
    In some parts of Scotland the councils have stooped selling council houses and are building more.
    The political arguments must sound weak when you have nowhere to live of have to live in cramped conditions.

  4. mikestallard
    Posted December 31, 2007 at 10:17 pm | Permalink

    In our local House Agent’s there is a childish poster punning on the word “Hip”. It is sad.
    Weren’t the Hips introduced by order of the EU? I thought they were just nodded through by our own housing ministry?

    A further challenge, of course, is to move people up North. I don’t know how to get them back into Manchester, Liverpool and Leeds.
    But if that could happen, the strain would be off the South.

    If the market is derestricted too much, won’t we get the Spanish effect with little unwanted houses everywhere? If too much – as at the moment, house prices go through the roof. It must be a case of balance. Couldn’t that be more local, though?

    My personal savings are all in our house. So are my children’s. Their children are going to be the ones who suffer. Again, it must be a question of balance.

    But is this a central government problem? Cannot the market/local government cope much better? What about a few incentives for people to move North too?

  5. Alan Douglas
    Posted January 1, 2008 at 9:55 am | Permalink

    John, HIPs are definitely an EU-ordered item, although I understand that the UK bureaucrats have as usual gold-plated their requirements.

    Even if any UK government wanted to cancel HIPs they would not be allowed to.

    Alan Douglas

  6. Bazman
    Posted January 1, 2008 at 2:09 pm | Permalink

    People do have an incentive to move up north. It's called being homeless! In the early 1990's the incentive to move south was called being unemployed and not being able to afford a house in the south. This time you cannot afford a house as you will have no job in the north. So everything changes and stays the same. "Get on your bike". I think was the sound advice I received when facing the first situation. The north is calling anyone without a house. No job? No house! No house? No job! I am as sympathetic as the next guy to unemployed northerners and homeless southerners.

  7. Ian Evans
    Posted January 1, 2008 at 2:55 pm | Permalink

    Several people seem to think that HIPs were the result of EU dictat. This is not so! Only the energy-performance certificate (which was not even included in the original idea for HIPs) arises due to EU orders. The rest of the HIP could easily be dropped at any time (indeed I think Cameron has said he will do so)!

    reply: Yes, Conservatives voted against HIPs and are pledged to drop them, but the Energy cert is an EU requirement. I myself think that too should be voluntary, not mandatory for the vendor.

  8. Tony Harvey
    Posted January 7, 2008 at 1:08 pm | Permalink

    An essential part of this financially-dominated economy is the way money is created. Despite, the central role that money plays in all our lives, there is an appalling ignorance about it.

    This ignorance is caused by the mystique which has been fostered by bankers and financiers that money matters are far too difficult for ordinary people to understand. They have spread the idea, aided and abetted by economists, that understanding and controlling money should, therefore, be left to the experts.

    The truth is that the essential facts about money are simple. When they are known by the general public they will start asking questions and demanding that the government should do something about reforming the injustices which bankers are allowed to perpetrate. There will be a demand for governments to right the wrongs which banker control of money is causing.

    FACT — Only 3% of money is in the form of notes and coins created by the government.

    FACT — The money one borrows from a bank is not depositors’ money at all. It is new money created by the simple process of writing the amount of the loan on the credit side of the borrower’s account. Ninety seven percent of all money in circulation originates in this way. If banks actually lent their depositors’ money it would not be available when they wanted it. If someone wanted to draw out money and was told, “Sorry, we’ve lent it to Joe Blow,” he would be justifiably annoyed.

    In other words, 97% of money is not “real” money at all but credit, just figures in a bank’s ledger or computer. It is created out of nothing. Yet is used and accepted as real money. To all intents and purposes it is money. Borrowers buy houses with it, pay wages and buy raw materials with it, and spend it in many ways. Yet it is just figures in a ledger transferred from one account to another. It is called various things — credit, bank-money, number-money, cheque-money, debt-money, electronic money. Whatever it is called, it is used and trusted because people know they can obtain real money, notes and coins, if they want.

    FACT — The belief that there are strict controls over what banks and building societies can and cannot do is also false. There are no statutory deposits which banks at one time had to lodge with the Bank of England. There are no fractional reserves of currency to be held by a bank as security for loans. All that has gone in the deregulation so beloved by financiers and, now, politicians. The only stipulation now is that banks must deposit with the Bank of England, 0.35% of their assets, which consist mainly of the loans they have made. This paltry percentage shows that borrowers have no real security, no proper regulations to protect them. The banks, however, have the property of borrowers, pledged as collateral, as security.

    FACT — Interest is considered to be a recompense for lenders giving up the use of their money, for the sacrifice they make by not spending it on satisfying immediate needs or pleasures.

    This may be so for depositors but it is not so for banks which create money out of thin air when they make a loan. They are charging a tribute — interest — for money which did not exist before the loan was made. So they are getting money, in the form of interest, for nothing. It would be legitimate for them to charge a fee for administering the loan but that would be far smaller than the interest they charge.

    FACT — The borrower owes a debt which has to be paid, in regular installments, plus the interest, or legal penalties come into force. If the borrower defaults — cannot pay — then his property which he put up as security for the loan is legally confiscated and used to reimburse the bank, no matter what distress and hardship is suffered by the borrower, be it the loss of a home or a business. Whatever the reason, debts must be paid, and on time.

    Remember, though, this money was created out of thin air. It was debt-money.

    Most people, however, are in debt. The total amount owed is greater than the total money supply. Sixty per cent of debt is for mortgages. Business debt is increasing as more is borrowed to keep enterprises afloat with the intensification of competition caused by the global market.

    There is a chronic shortage of ready money, which means there is not sufficient purchasing power to buy all the goods and services on offer. This endemic shortage of spending money is brought about because of the debt burden that most people have.

    If they want to keep their homes and businesses they must make regular payments to service their debts.

    This is the basic reason that governments are loath to raise direct taxes. It reduces still further people’s spending money and the total demand for goods and services. As a result not enough government revenue is raised from taxation to meet essential services.

    The amount of the taxation shortfall is called the budget deficit and is compensated for by government borrowing from the private sector, mainly from banks.

    The total of this debt is called the national debt. It has to be paid back, eventually, by the taxpayers. In practice, when the Treasury Bonds, which the government sells as a means of borrowing money from the private sector, are due to be paid, the government issues new bonds — borrows new money — to pay back the old ones plus interest.

    Let us consider the money which the government obtains from banks buying Treasury Bonds. Where does it come from? You’ve guessed it. It is created out of thin air, in the same way as the money for your mortgage was. It isn’t real money. It’s credit, debt-money. When financial enterprises such as pension funds or insurance companies buy Treasury Bonds, also called gilts, the money used is the savings of their customers so it is money already in existence being recycled, used again.

    The money banks use to buy gilts is not. It’s created on the spot, out of nothing. So the government is in hock to the banks for money which did not exist until it was borrowed.

    At this point you are most likely asking the same question which many people are now asking. If the banks can create money out of nothing to lend to the government as debt, with all the burdens that places on the taxpayer, why on earth doesn’t the government create money for itself, at least for public services, and remove the burden of having to borrow money?

    Comment: This is not quite the way the economics textbooks see money. Of course money includes bank deposits and current accounts as well as cash in circulation, and of course the banking system and money markets enable more money to be created by lending which in turn creates new deposits. This does not mean it is wrong, or in some way different money. The issue for the authorities is to regulate the banks and money markets in such a way that they create enough credit to allow reasonable growth, but not so much that we have rapid inflation.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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