Help to Buy = Moral Hazard. What on earth could go wrong?

On Monevator, there’s a good and spirited discussion has 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 – favouring the first time buyer, and compounding the mess.

The housing market in the UK is deeply and fundamentally f*cked up. There really is no other way to describe it. It is a world of hurt for an awful lot of people, and there is no excuse for the Government criminally acting on behalf of a small proportion of the population that seems to hold sway over policy.

Let’s look at some of the facts. Only half of owner-occupied houses in the UK are owned with a mortgage ¹. Assuming that tenure applies to adult occupiers, there are about a third of occupiers who rent in some way and another third who own outright. These latter two groups are taking the shaft from a high house price policy.

The renters are taking the shaft because a significant proportion wants to buy, and the ones who own outright are taking some of the shaft indirectly because they are old gits whose savings will be destroyed by the inflation being unleashed by the money printing used to drive interest rates down, so that damned fools can be persuaded to overpay for houses.

And now the Government now wants  to assist those fools in paying even more for houses. And I am hopping mad. Because I don’t want to go through the next depression when the music stops and our money is worth jack shit. At the very least it is rude or the Government to push the stick forward into the next housing-related financial crisis before we’ve done with the current one!

I hold too much cash as it is. I am starting to consider taking some of the Governments blasted money and mortgaging my own house. But then what do I do with the cash? What on earth holds value in this stupid world of make-believe? Where do you put it? In Euros thieving barstewards want to have at 10% of it, or more if they please, I don’t believe the US debt will do foreigners any favours when the chips are down. It is like we are living in end times, everything shimmers and nothing represents real value or a true claim on future human work.

60% of people living in houses don’t benefit from high house prices. We don’t need a crash, but we don’t need tosspots trying to inflate prices, leave ‘em be and let the invisible hand do its stuff. Oh and if you are thinking goody goody the government has made it easier for me to own my own home, then perhaps you should read this cautionary tale. I walked away from half the price of my first house and all of my 20% deposit, more in real terms, ten years after the Lawson boom of 1989. House prices do not always go up. And the longer they have been inflating, the bigger the bust.

The tale won’t do any good. I didn’t believe people in 1989 when I stupidly overpaid for a house. You won’t believe me. But what really, really, pisses me off is having to pay for your stupidity in the years to come when we have the strings and violins playing for jerks like this, who will then claim benefits for their unsustainable lifestyle. I had to pay for my mistake myself, one sodding pound at a time.

Oh and one other thing. Pay your damn capital down, either via a bog-standard repayment mortgage, or via parallel investment systems like a S&S ISA or wizard wheezes like Monevator’s better way to buy a house, though in the latter case have the damn self-discipline to make it work – no splurging on having too many kids or foreign holidays.

Look ahead of you. The power balance in Britain is shifting away from labour to capital. Do you really want to commit so much of your future earnings to buying an illiquid asset at a spectacularly high price? There are better things to do with the fruits of your labour than to sink it into ten thousand bricks and a postage-stamp plot. It’s not impossible to imagine a Spain like property scenario here. As the Germans say, the good Lord sees to it that the trees do not grow into the sky. If house prices get inflated then the value of the money will be destroyed. The rest of us, that’s the 66% who either want to hold on to wealth to live on in our old age or build it to be able to pay our rent passively, will have to invest – in stuff, anything that pays some return and is reasonably nailed down in reality for when the results of this arrant stupidity come home to roost. There aren’t enough real assets in the world to compensate for the make-believe of house price inflation.

The tragedy is that if you need Help to Buy, you can’t afford a house. Look at the graphic in Monevator’s post. You are trying to buy a £200k house, so you save 10K and the Government loans you 40k interest free. You go whoopee-do because you can now pay 40k more than you could before. So you go to the estate agent and offer 20% over  the odds, because you now can, and because your brains fall out when you are British and buying your first house. Just like mine did. You have just increased your capacity to overpay by 400%, so you will lever up by 20%.

As it says on the tin

The Government will lend you up to up to 20% of the value of your property through an equity loan, which can be repaid at any time or on the sale of your property.

Where’s the small print, then? You are going to buy this when money is tight, kids may be on the way, oh and we seem to be stuck in a never-ending depression where everybody ends up working part-time. In three years the scheme will end, and all of a sudden people won’t be able to overpay for your house when you have another babe on the way and need to step up. What’s going to happen to house prices then, eh? If you’re lucky interest rates will still be on the floor, though if there really is a recovery then they won’t be, which will reduce what people can pay for a house. You’re going to have a barrel of laughs if you have to move for work, and discover that people don’t want to pay you as much as you paid. All of a sudden you find you’ve geared up your losses, from 10k to 40k. Of course, the Germans might be wrong and house prices will go up, and up, and up like Jack in the Beanstalk. You have to ask yousrelf, though, where will your buyer get the money from? If they don’t inherit it, they have to pay their mortgage from net income, and the IFS indicates taxes will have to rise in the UK to reduce the deficit (that’s right, the deficit. The debt is a lost cause). If taxes rise they will find that harder to do.

If prices don’t rise, you will find out what I did – it’s damn difficult to repay a mortgage if the asset you bought with that loan sells for less than the loan, because unlike in America, mortgages come with recourse in the UK – they chase you for the money you owe. How do you repay that? You take your salary, and throw some of it into a black hole for which you get nothing in return. I’ve been there, done that, and believe me, it was no fun.

Help to Buy would have totally shafted me. Instead of paying down about 50% of the addle-headed price I overpaid for my first house, I’d have ended up paying down about 65% of it. Wow. What a fantastic deal!

And you know what the worst thing about this is? If you are unlucky enough to be in your early thirties and looking to buy a house, you’re going to have no choice but take the Government up on this deal. Because every other stupid twit is going to, so even if you know this is a mad thing, you’ll either have to pay over the odds using the Government’s money or stick your life on hold for a few years as far as buying a house is concerned. That’s easy if you’re young, free and single, but not so good if you have a pressing need for more space now.

So I have one question to ask Dave.

Why are 60% of adults paying taxes to shaft themselves in favour of the 30%, who will find out they also took the shaft when the scheme ends?

What the hell is up with that? If the Government wants to spend money on housing, build council houses. And employ a Keeper Of the Commons, so that when a politician like Thatcher comes along and wants to sell commonly paid for assets to buy herself some votes, the Keeper of the Commons pulls out a silver revolver and holds it to their head with a wizened skull in their left hand as a memento mori. And asks them if they really, really, want to do that. If the answer is yes, then pull the trigger and invoke an immediate General Election. Reloading the revolver before the next cynical vote-buyer has a chance to get elected. There needs to be real and serious penalites for politicians buying votes now with the common good of the future. Thatcher did the British housing market a world of hurt by flogging off the housing assets that had been built with the common effort of the post-war generation so people would vote for her again.

It really is high time the British government butted out of the housing market. Every time they touch it, something about it gets worse for more people than benefit. Is that really the job of government in a democracy, to favour a minority at the expense of a majority? There are better ways to improve housing in Britain. There’s no God-given reason why so many people should aspire to owner occupation. We do in Britain because decades of Government policy, starting with Thatcher, have either destroyed perfectly decent alternatives (council housing) or made them so horrible, like renting from amateur BTL landlords who bodge repairs – my London landlord fitted the electric shower to the lighting circuit, for chrissake. Renting in general on shorthold tenacies with no long-term security of tenure is no fun. At least if you rent from the bank, as any of you with interest-only mortgage are doing ,then at least you get a few years security of tenure If the Government can’t make it better, then at least they ought to observe the Hippocratic oath, and do no harm.

Too many people borrow too much money in this country to overpay for crap to live above their means. Higher house prices are part of the problem, not part of the solution.