Don’t fight the tape, Dave, the NewBuy Mortgage Guarantee will cause untold pain

The trouble sometimes with Government, is that it often gets itself into areas it shouldn’t touch. Such as meddling with the market, offering to guarantee home loans of half a million pounds to buy new houses. What on earth could go wrong?

So let’s take a step back and see what’s going on here. A putative homebuyer is looking to buy a house that they can’t afford. So Dave waves his magic wand to make lenders accept the risk by guaranteeing the money with taxpayers’ money. Now I would then suggest to the homebuyer they look for good value for money. With houses, like with many other durables, the best value is in the second-hand market. But no. Conflating the desire to help people buy stuff they can’t afford with some dirigiste industrial policy to support housebuilders, Dave makes them buy unnecessarily expensive houses – ie new-build.

Face the facts, Dave. You can’t make enough on the average income in the UK to buy a house in a lifetime. A middle class man on the average wage used to be able to buy a house on his own, my Dad did it on a blue collar wage. Then it took two people to do it when Thatcher sold off the council houses, meaning people who were too poor to buy a house themselves were robbed of the opportunity to have social housing, though a lucky bunch of 1980s tenants got their houses at knock-down prices to buy their votes.

I managed to buy a house on a single white-collar wage, but I lived somewhat below my means to do it. Nowadays if I were starting over I wouldn’t be able to afford even the interest on my current house on what my starting wage was in real terms.

And now another Tory government is going to dive into this frenetic marketplace with its hob-nailed boots and dance all over the face of the price mechanism in a capitalist society. Dave, the reason your middle class voters can’t buy a house these days is because we don’t make anything of significant value in Britain any more, and our standard of living is going to fall accordingly. You’re going to provide mortgage guarantees for houses priced at up to £500,000!!! I couldn’t even dream of buying a house for that much now, at the peak of my earning power and with a fully paid up house to defray some of the capital! What right do you have to buy your votes with the dreams of some daft young couple that is going to put themselves in hock for far more than they can afford in the long run?

Imagine a couple both with good jobs earning the average household post-tax income of £25,000 ish. Even if they paid no interest it would take them 20 years of their entire household income to pay that off. That’s assuming in those 20 years they eat nothing, have no kids, never go on holiday. It’s barmy. It is just so wrong, on so many fronts.

Dave, the price of houses is telling your middle class voters they cant afford a house. There is an old stock market adage from the 1930′s, ‘don’t fight the tape’. It means listen what the price signal is telling you. And for God’s sake, don’t fight that signal, because it will crush you.

Oh and to those putative homeowners – don’t do it to yourselves. Buying new-build is expensive, you’ll get more house for your money buying second-hand. I didn’t have enough money for the deposit on my house in the late 1980s. So I borrowed an interest-free from my MBNA credit card, and used a low-start mortgage to focus repayments to the credit card in the first year. It worked for me, I got my mortgage cheaper because I had a lower LTV and didn’t pay a bean for the loan. In those days you didn’t have the sneaky 3% handling charge on 0% cash advances. There are other ways of raising the deposit than having the government railroad you into buying an overpriced new-build house when you can least afford it.

 

Oh, I’m sure this will yield its full potential of unicorns and fluffy bunnies in the dreamland that is today’s housing market…. after all what could *possibly* go wrong….

Erm, let’s see: overstretched buyers; raising house prices further instead of letting the market correct itself; ensuring ‘too large’ homes will be built instead of starter homes; subsidising part of the building industry…. nope, this will not be pretty. WHY, for instance, is this scheme extended to existing homeowners? If they can’t afford to ‘trade up’ they can’t afford to, and need to recognise that and adjust accordingly. Yet another bail-out for industry and the reckless if not feckless.

Add to this they are also trying to ‘revitalise’ the right-to-buy with up to £75,000 discounts. Now this is supposed to raise cash to build fresh social housing, but I can’t see that myself when they need cash to prop up this New Deal or whatever they call it. And, to be brutally honest, if council tenants can afford to buy they should be kicked out into the private market.

Let’s all sing along to the new national anthem: “We’re forever blowing bubbles…..”

Unicorns, by God and St George, give me Unicorns :)

You’ve hit on two conundrums. One is that the first house I bought was 2-up-2 down house built in 1840. And still just right for a single fella or a child-free couple in the early days. And yet housebuilders are either building pokey little flats or four-bedroom plus ‘executive homes’. Why the heck is that? Don’t real people need homes too?

And I have to admit that spotting the offer to support existing homeowners did make a dark thought stir in my heart. BUY TO LET, howsabout I buy some hovel to rent out to students leveraged by Dave’s largesse. Fortunately I came to my senses a few seconds later as the rush of blood to the head subsided. But it’ll happen elsewhere and pricedout/housepricecrash will tell us about it ;)

It’s mad. Absolutely, totally, stark staring insane with knobs on. Let’s go for that anthem!

Another good rant (I hope you forgive that as a description, I mean it in the best possible way).

I’m not overly convinced the housing bubble ever did burst. In some parts of the country homes are beyond unaffordable when you consider incomes. If it is still a bubble then I guess this is the air pump to keep it floating.

It should never be forgotten that house prices must be pegged to income albeit within a reasonable range. If you divide your house price by 12-15 and wouldn’t consider that a fair rent its overpriced.

I seem to remember, the politicos leaning on the banks to provide mortgages to people who could not afford to buy. Then the banks trying to offset the risk of these loans that caused the sub-prime crisis, leading to the banking crisis. This in turn led to the bail out of the Banks that caused the debt crisis, which led to the credit crisis etc.

I’m not sure if our new anthem should be “I’m for ever blowing bubbles? Or I swallowed the spider to swallow the fly?”

The main problem I believe is, they say let the Market sort things out then lose their nerve and intervene. Hence the Bank bail-outs. Mrs T was happy to let our Industry go to the wall, sell of the State assets owned already by the people to the people. Then let the Blue collar Brigade sign on.

But no way was this going to happen to the Banks, Why? Guilt caused by the first para, or favours called in? Or would the failure of the Banks, lead to a failure of the Insurance and Pension Industry?

I don’t know, I just think paying out £50k per Bank customer, then let the Banks that took excessive risks fail might have been the better answer. After all not all Banks had to be bailed out, HSBC and Barclays come to mind.

What we are seeing now is the worst of all things, the people with real money have pulled their money out of the system, to protect their wealth. The only money left in the system is our Pension pots. Hence QE 1+2+3+? Governments taking over banks that are in essence Bankrupt? Bankers who still get their bonuses? Still quote the mantra of Free Market Economy and cheap money. The divisive policy of cutting the benefits, [Illusion of cuts] whilst still using subsidies for people who caused these problems.

The only answer is let those that caused the crisis suffer, and get back to a balanced budget. How?

Scrap Council Tax, but introduce a 1% property tax on both private and business property, [in use or not]. Freeze ALL Government spending at current levels, along with State Pensions, Benefits etc, abolish the ceiling on Nat Ins payments for 3-5 years. This will cut spending in real terms by % inflation, whilst increasing government income, use 50% of the income from property tax and Nat Ins to pay down the National debt.

[...] too high. So guess what? They are going to push down the price of oil. I could have titled this one don’t fight the tape but I’ve already used that for one of Dave’s previous wheezes. What has got into [...]

A good rant, but to ascend to full cynical levels (like those boasted by moi) you have to have spotted in late November that the scheme is great news for housebuilders…. ;)

http://monevator.com/2011/11/25/buy-shares-in-house-builders-not-a-new-build-house/

Morally dubious perhaps, but if the scheme blows up will probably pay for some of it as taxpayers so you may as well make a little out of it on the way up before paying for it on the way down… ;)

[...] The NewBuy mortgage guarantee will cause untold pain – S.L.I.S. [...]

@Rob it’s a fair cop, it’s classified as a rant :) I don’t think the bubble will burst until interest rates go up. Then we will see untold pain, like in the early 1990s when I recall paying 14% mortgage rates. Imagine that, paying over a tenth of the price of your house every year… It didn’t last very long, but it took down a lot of people.

@Lupulco, crikey, you’re definitely in the kill or cure camp, eh ;) Even I’d be tempted to leave the country in the face of that sort of finacial repression!

@Monevator I would have done, pretty much on the case made in that article of yours, but I’d already flattened my ISA allowance by then after a spending spree in our Summer of Discontent. Plus there’s the whole bad taste I have with anything property related, so it would have been stressful. Congratulations on calling it well, and ahead of time!

[...] taken Help To Buy apart in detail. So this is just a rant, since despite imploring Cameron not to fight the tape last year, he’s actually taken a bastardised concept that at least had some merit – [...]

 

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