Monthly Archive for May, 2005

Brown’s moronic mortgage scheme

I’m not sure I really understand Gordon Brown. There is much talk of him becomming the next Labour leader and, accordingly, Prime Minister. However, if this is the case then now, more than ever, he should be worried about the long-term rather than the short-term (as it will be his own government, as PM, that will have to deal with the consequences. But then, on the other hand, perhaps he is so worried about becomming Prime Minister that he is happy to pursue short-termism to ensure a Labour victory at the next General Election (expected aroudn 2009) rather than worry about his eventual legacy?

There just doesn’t seem to be any other reasonable explanation for this week’s news that the government is going to subsidise (by up to 50%) the mortgages of first-time home buyers.

I do understand that many first time buyers struggle to afford their own house. I do understand that there is an economy built around rising house prices. But the fact is that if those prices are unsustainable because people can’t afford them then they are unsustainable and the market must correct itself. A short-term recession due to a collapse house prices is a necessary evil. Artificial means of keeping house prices high will only send them crashing yet further when the fall eventually comes.

Brown’s plans do not address the actual problem. Subsidisng mortgages, will make home ownership more affordable for some people. But by doing so, they will increase demand for housing. That will push up house prices even further. That ultimately means that more people will not be able to afford houses – except that now some of their taxes will be used to be subsidse the mortgages of those who can! It’s absolutely ridculous.

The real problem is multi-faceted. Firstly theire is the cultural side. The Englishman’s home is his proverbial castle. Because he is so obsessed with the concept of owning his own home, he is prepared to pay over-the-odds to get house instead of renting an apartment. Aside from hindering the economy through lack of employee mobility this also means that people are prepared to sacrifice quality of life in order to slave away to pay a cripplingly high level of mortgage debt. That enables them to be prepared to pay more for their house then people in most other developed nations.

Secondly, the money supply is ridiculously high. Because the banks are aware of the culture of reverence towards home ownership they know that mortgages are a safe investment: most people will do anything to continue paying their mortgage so that they can keep their house – and if they don’t the rising house prices mean they can make a profit anyway. This means that the amount of money they are prepared to lend (and hence the amount of credit they are generating) is absolutely ridiculous.

Thirdly, our changing life styles are increasing our needs for housing. As quality of life improves, more families want larger houses and want to move out of urban areas. More importantly people are choosing to start families later in life and there is an increased requirement for homes for single people (men especially), which means new homes need to be built. Also, because people are settling down later in life they have less of their working life in front of them to pay back a mortgage, making it difficult to persuade a bank to let you have one. Even if you kept cash savings, they are unlikely to be enough as you are unlikely to have slaved away as much as if you had to pay off a mortgage and because house price inflation is so high.

Anyway, will this encourage me to buy a house? Perhaps. If I can get the taxpayer to subsidise a new home then I may well take it up. I don’t necessarily need a house right now but it could be a good way of using ‘buy to let’ as an investment vehicle onto the property ladder. Brown’s policy may well push up the market price – but I won’t be paying it! On the other hand, if the taxpayer retains part-ownership of the new home, that will only be a ticking time bomb for both parties…