Cut Help to Buy to burst housing bubble, OECD urges Bank of England

Courtesy of Ben Chu @ The Independent:

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The Bank of England has been urged by the OECD to dampen the booming UK property market by watering down the Government’s mortgage subsidies.

In its latest report, the multilateral organisation noted yesterday that British house prices look overvalued relative to average earnings and rents and said the time has come for the regulator to take corrective action.

“Monetary policy tightening should be accompanied by timely prudential measures to address the risks of excessive house price inflation,” it said.

The OECD added that this action might include “tighter access” to the Help to Buy scheme, which offers state guarantees for mortgages worth up to £600,000, alongside higher capital requirements for lenders and maximum loan-to-value ratios for mortgages.

Many have called for the £600,000 cap on Help to Buy mortgage eligibility to be significantly reduced.

Last week, the Bank’s deputy Governor, Sir Jon Cunliffe, said house prices, which are rising at an annual rate of more than 10 per cent, are “the brightest light” on the regulator’s dashboard and said the Bank was “ready to act” if necessary to head off the danger of another damaging property bubble.

Stricter rules on mortgage lending were introduced last month and the Bank’s Financial Policy Committee could take further action to curb the availability of credit at its meeting next month. George Osborne and other ministers have sought to play down suggestions of a housing bubble and also the impact of the Help to Buy scheme on prices. Continue reading

“The Biggest Redistribution Of Wealth From The Middle Class And Poor To The Rich Ever” Explained…

Courtesy of  The Hedge:

While the growth of inequality in America has been heavily discussed here, it was Stan Druckenmiller’s outbursts (and warnings that “from beginning to end – once markets adjust from these subsidized prices – that the wealth effect of QE will have been negative not positive”) that brought it more broadly into the average American’s mind. QE, taxes, income disparity, and entitlements are four major means by which wealth is transferred from the poor and the middle class to the rich. The following simple chart explains it all…

Via Shane Obata-Marusic ( @sobata416)

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A – “the rich hold assets, the poor have debt” is how Citi’s Matt King described the distribution of wealth in the US.

B – QE has resulted in a loss of purchasing power for the US dollar. Faced with this problem, consumers in the middle class are taking on more non-housing debt in order to maintain the same standard of living. In addition, the US government – which continues to run a deficit year after year – continues to accumulate debt. Due to these facts, total debt outstanding – aka credit market instruments for all sectors – is at all time highs. More debt means more interest payments and lower savings rates. These trends do not bode well for the middle class consumer. Continue reading

Mark Spitznagel Asks “Wouldn’t We Be Better Off Without Central Banks?”

Courtesy of Institutional Investor:

Happy 100th Birthday, Federal Reserve – Now, Please Go Away

Nearly 100 years ago, on December 23, 1913, the Federal Reserve Act was signed into law, giving the U.S. exactly what it didn’t need: a central bank. Many people simply assume that modern nations must have a central bank, just as they must have international airports and high-speed Internet. Yet Americans had gone without one since the 1836 expiration of the charter of the Second Bank of the United States, which Andrew Jackson famously refused to renew. Not to be a party pooper, but as this dubious anniversary is observed, we should ask ourselves, Has the Fed been friend or foe to growth and prosperity?

According to the standard historical narrative, America learned a painful lesson in the Panic of 1907, that a “lender of last resort” was necessary, lest the financial sector be in thrall to the mercies of private capitalists like J.P. Morgan. A central bank — the Federal Reserve — was supposed to provide an elastic currency that would expand and contract with the needs of trade and that could rescue solvent but illiquid firms by providing liquidity when other institutions couldn’t or wouldn’t. If that’s the case, then the Fed has obviously failed in its mission of preventing crippling financial panics. The early years of the Great Depression — commencing with a stock market crash that arrived 15 years after the Fed opened its doors — saw far more turmoil than anything in the pre-Fed days, with some 4,000 commercial banks failing in 1933 alone.

Continue reading

UK Housing Bubble…What Bubble?

The UK housing market is in a bubble. The OECD advised that UK home values have climbed 36.6% since 2004. The Bank of England said last week that mortgage approvals have surpassed 60,000 a month, 6 months earlier than predicted. I’m sure this will all turn out lurvely with lots of fluffy kittens included but a speculative real estate bubble validated as the key driver of nominal economic growth….what could possibly go wrong? Obviously this time, it will be different.

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Lenders warn of Help to Buy mortgage ‘addiction’

Fuelling the housing boom is a key policy for the UK’s illustrious leaders, it is a misguided and dangerous policy. It is unsustainable, puts debt onto public balance sheets, it is not an indication of true wealth and eventually, the bubble will burst. The UK Ponzi scheme Keynesian economic policy requires this additional debt and demand, to add fuel to an overburdened fire, those left holding this debt will be become part of the inferno and it will be the UK public who will be burnt to a crisp. Courtesy of The Telegraph:

The chairman of the Council of Mortgage Lenders has warned that the property market will need to be gently weaned off the Government’s scheme

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Continue reading

Home ownership: How the property dream turned into a nightmare

In this exclusive extract from his book, The Default Line, the economics editor for Channel 4 News traces the origins of the housing bubble and argues that we’re condemning a whole generation to paying absurd prices for what is a basic human need – and it doesn’t have to be this way. Courtesy of the Guardian:

What is the most dangerous, toxic financial asset in the world?” This was the question put to me by the chief executive of a leading European bank. Anxious to display my superior knowledge of the darkest corners of the shadow banking system, I replied: “Credit-default swaps on super-senior tranches of asset-backed, security-collateralised debt obligations.” I thought I had come up with a pretty pithy answer.

“No,” he gently chided me. “The most dangerous financial product in the world,” he paused a moment for effect, “is the mortgage.”

The mortgage: from the Old French words mort and gage. Disputed translation: “death contract”.

In the middle of the credit-crunch crisis of 2008 I met Esther Spick, then a 34-year-old single mum with two kids living in a maisonette in Surrey. It was the first home she’d owned, bought with an entirely inappropriate mortgage in 2005. She had been living on a council estate in Kingston, Surrey, working day and night to get a deposit to get a mortgage for her £235,000 maisonette. It had been sold – or mis-sold – to her during the boom by Northern Rock, and now the mortgage payments had rocketed by £500 per month. Faced with this, but determined to keep the keys to her home, she had been forced to hand her children over to their grandparents. She’d had to give up her local job and find higher-paid employment further afield. The result? Four hours’ commuting per day.

“I don’t want to have my home repossessed or for Northern Rock to say I haven’t been making my payments,” she told me. “I will do whatever I have to do, even if it means I have to get out and get a second job. I will definitely make these payments.”

At that point, however, she was in negative equity – not surprising, given that she had been lent more than 100% of the value of her home. And her new mortgage was eating up two-thirds of her new take-home pay. “They lent me too much. It was a time when everything was wonderful. There was a great big property boom, the prices went through the roof. You were encouraged to go out and buy.”

Now she had boxed up her children’s teddy bears after a charging order arrived in the post. She had fallen behind on just three payments on the unsecured part of the loan. Northern Rock had taken her to court in Newcastle, 300 miles from her home.

A “death contract” indeed, and there was much to behold in its making.

In the decade from 1997 to 2007 house prices trebled. More than that, the home evolved into a multifaceted financial instrument, on top of its traditional role as an indicator of social prestige. Every stage of the house chain is still riven with conflicts of interest, poor data, and ultimately a tendency to fuel inflation.

Housing is the only basic human need for which rapid price rises are met with celebration rather than protest. The house trap stretches from the estate agents mediating house-selling, to the provision of mortgages to buyers, the supply of mortgage finance to the banks and building societies, the construction of house-price indices, the skewing of finance away from owner-occupiers towards landlords, the supply and construction. Homes were always castles, not just in England, but also across Europe and the US. But during the madness they evolved into cash machines, surrogate pensions, principal pensions, and even livelihoods. And in many places, this is still the case.

Let’s go back to the foundations of what might be called the bubble machine. Rising house prices, to some degree, reflected underlying supply and demand in a competitive market. Greater increases in demand than in supply, and the prices went up, as in Britain. Large increases in supply over demand, as in the US, Spain and Ireland after the crisis, and prices go down. Simple enough.

Except, of course, this simple model is entirely misleading. The housing market is not really a market for houses. The housing market is driven principally by the availability of finance, mainly mortgage debt, but sometimes bonuses, inheritances, or hot money from abroad – London in particular has become the preferred residence of the world’s wealthiest people, from Russian oligarchs to Arab oil sheikhs.

There are 27m dwellings in the UK. The short-term supply is basically fixed. The number of new homes built each year has not topped 150,000 since the crisis – that’s less than 0.5% of the total stock. The amount of homes traded is around 900,000 per year, about 3% of the total stock. House prices set by the transaction of that 3% of homes determine property values, the solvency of banks, and the statistic that the UK property stock is worth £6 trillion.

The first thing to notice is that this is a highly illiquid market. Only a small proportion of the housing stock is actually being traded, or ever will be traded. On top of all this, transactions in the housing market are costly. Estate agents’ fees in the UK can typically reach 3%, and as high as 6% in the US, with stamp duty on top of that. These are the crucial features of a housing market: thin trading and high transaction costs. It is a recipe for dysfunction, distortion and inefficiency.

Imagine the entire UK stock of property was called Ladder Street, with 50 houses on either side of the road. Despite demand for two extra houses every year over the next decade or so, it in fact takes two years to build just one extra house. The result? Some of the extra demand will be met by converting houses into flats. But most of the demand will not be met at all. A house will be sold on Ladder Street only every four months. One house will remain empty. The end result is a long queue of people who will buy anything, old or new, good or bad, for sale on Ladder Street.

Now consider the price. In a market such as this, the buyer with the largest wallet wins the house and sets the price. At one time that would have been the buyer with the highest single salary, and who had saved the largest deposit. House prices would therefore rise roughly in line or slightly ahead of the rise in incomes. But imagine if the entire queue of prospective house purchasers is flooded with mortgage credit. At this point, the house price is set by the greatest optimist. Ladder Street’s housing market has become a market, not for homes, but for mortgage credit. It is the availability and terms of credit that have come to determine property prices. Every sluice gate was unlocked, then left ajar, and eventually flung open to accommodate the tidal surge of credit.

Take, for example, the length of mortgage repayment, beyond a typical 25 years. Between 1993 and 2000 the average mortgage period remained exactly 22 years. Around 60% of mortgages were for 25 years, and, typically, less than 2% of mortgages were for periods longer than 25 years. By 2006, nearly a quarter of all mortgages are for longer than 25 years. Around a fifth are now for 30 years or more, meaning an average first-time buyer will still be repaying home loans into their 60s.

‘If only we could afford a place of our own,” says one dainty green extraterrestrial to another in the cartoon advertisement as they sit in a pink car parked in Lovers’ Lane. “You can,” exclaims the advert, “with a Together Mortgage.” The Together Mortgage was launched by Northern Rock in 1999. In effect, it required of borrowers a negative deposit. Customers were able to borrow 125% of the value of a home: 95% as a secured mortgage, and 30% as an unsecured loan. This was the type of loan taken out by Esther Spick.

The Together Mortgage was part of what Adam Applegarth, former chief executive of Northern Rock, called his “virtuous circle strategy”. This essentially turned what had been a solid northern English building society into a giant hedge fund, laser-guiding global flows of hot money into some of the most sensitive suburbs of Britain’s property market. Although launched in 1999, it really took off as Northern Rock went into overdrive at the peak of the boom, doubling its lending every three years. Single borrowers were also offered multiples of as much as five times their annual salary to help keep pace with those borrowing off dual incomes. Competitors such as Abbey National and HBOS (Halifax Bank of Scotland) scrambled to get in on the game, also offering “five times” deals and zero deposits. “Credit has been democratised in this country. And that is a good thing,” crowed one HBOS banker at the top of the market, less than three years before the bank collapsed.

Here is the lesson for those who claim that Britain’s financial issues will be solved through the wonder of competition. There was no lack of competition as Britain’s old building societies spiralled the depths of credit insanity. So competitive were they that, at the peak of the bubble, mortgages were being written at a loss, almost from inception.

What is the most dangerous, toxic financial asset in the world?” This was the question put to me by the chief executive of a leading European bank. Anxious to display my superior knowledge of the darkest corners of the shadow banking system, I replied: “Credit-default swaps on super-senior tranches of asset-backed, security-collateralised debt obligations.” I thought I had come up with a pretty pithy answer.

The Default Line: Why the Global Economy is in Such a Mess
by Faisal Islam

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“No,” he gently chided me. “The most dangerous financial product in the world,” he paused a moment for effect, “is the mortgage.”

The mortgage: from the Old French words mort and gage. Disputed translation: “death contract”.

In the middle of the credit-crunch crisis of 2008 I met Esther Spick, then a 34-year-old single mum with two kids living in a maisonette in Surrey. It was the first home she’d owned, bought with an entirely inappropriate mortgage in 2005. She had been living on a council estate in Kingston, Surrey, working day and night to get a deposit to get a mortgage for her £235,000 maisonette. It had been sold – or mis-sold – to her during the boom by Northern Rock, and now the mortgage payments had rocketed by £500 per month. Faced with this, but determined to keep the keys to her home, she had been forced to hand her children over to their grandparents. She’d had to give up her local job and find higher-paid employment further afield. The result? Four hours’ commuting per day.

“I don’t want to have my home repossessed or for Northern Rock to say I haven’t been making my payments,” she told me. “I will do whatever I have to do, even if it means I have to get out and get a second job. I will definitely make these payments.”

At that point, however, she was in negative equity – not surprising, given that she had been lent more than 100% of the value of her home. And her new mortgage was eating up two-thirds of her new take-home pay. “They lent me too much. It was a time when everything was wonderful. There was a great big property boom, the prices went through the roof. You were encouraged to go out and buy.”

Now she had boxed up her children’s teddy bears after a charging order arrived in the post. She had fallen behind on just three payments on the unsecured part of the loan. Northern Rock had taken her to court in Newcastle, 300 miles from her home.

A “death contract” indeed, and there was much to behold in its making.

In the decade from 1997 to 2007 house prices trebled. More than that, the home evolved into a multifaceted financial instrument, on top of its traditional role as an indicator of social prestige. Every stage of the house chain is still riven with conflicts of interest, poor data, and ultimately a tendency to fuel inflation.

Housing is the only basic human need for which rapid price rises are met with celebration rather than protest. The house trap stretches from the estate agents mediating house-selling, to the provision of mortgages to buyers, the supply of mortgage finance to the banks and building societies, the construction of house-price indices, the skewing of finance away from owner-occupiers towards landlords, the supply and construction. Homes were always castles, not just in England, but also across Europe and the US. But during the madness they evolved into cash machines, surrogate pensions, principal pensions, and even livelihoods. And in many places, this is still the case.

Let’s go back to the foundations of what might be called the bubble machine. Rising house prices, to some degree, reflected underlying supply and demand in a competitive market. Greater increases in demand than in supply, and the prices went up, as in Britain. Large increases in supply over demand, as in the US, Spain and Ireland after the crisis, and prices go down. Simple enough.

Except, of course, this simple model is entirely misleading. The housing market is not really a market for houses. The housing market is driven principally by the availability of finance, mainly mortgage debt, but sometimes bonuses, inheritances, or hot money from abroad – London in particular has become the preferred residence of the world’s wealthiest people, from Russian oligarchs to Arab oil sheikhs.

There are 27m dwellings in the UK. The short-term supply is basically fixed. The number of new homes built each year has not topped 150,000 since the crisis – that’s less than 0.5% of the total stock. The amount of homes traded is around 900,000 per year, about 3% of the total stock. House prices set by the transaction of that 3% of homes determine property values, the solvency of banks, and the statistic that the UK property stock is worth £6 trillion.

The first thing to notice is that this is a highly illiquid market. Only a small proportion of the housing stock is actually being traded, or ever will be traded. On top of all this, transactions in the housing market are costly. Estate agents’ fees in the UK can typically reach 3%, and as high as 6% in the US, with stamp duty on top of that. These are the crucial features of a housing market: thin trading and high transaction costs. It is a recipe for dysfunction, distortion and inefficiency.

Imagine the entire UK stock of property was called Ladder Street, with 50 houses on either side of the road. Despite demand for two extra houses every year over the next decade or so, it in fact takes two years to build just one extra house. The result? Some of the extra demand will be met by converting houses into flats. But most of the demand will not be met at all. A house will be sold on Ladder Street only every four months. One house will remain empty. The end result is a long queue of people who will buy anything, old or new, good or bad, for sale on Ladder Street.

Now consider the price. In a market such as this, the buyer with the largest wallet wins the house and sets the price. At one time that would have been the buyer with the highest single salary, and who had saved the largest deposit. House prices would therefore rise roughly in line or slightly ahead of the rise in incomes. But imagine if the entire queue of prospective house purchasers is flooded with mortgage credit. At this point, the house price is set by the greatest optimist. Ladder Street’s housing market has become a market, not for homes, but for mortgage credit. It is the availability and terms of credit that have come to determine property prices. Every sluice gate was unlocked, then left ajar, and eventually flung open to accommodate the tidal surge of credit.

Take, for example, the length of mortgage repayment, beyond a typical 25 years. Between 1993 and 2000 the average mortgage period remained exactly 22 years. Around 60% of mortgages were for 25 years, and, typically, less than 2% of mortgages were for periods longer than 25 years. By 2006, nearly a quarter of all mortgages are for longer than 25 years. Around a fifth are now for 30 years or more, meaning an average first-time buyer will still be repaying home loans into their 60s.

‘If only we could afford a place of our own,” says one dainty green extraterrestrial to another in the cartoon advertisement as they sit in a pink car parked in Lovers’ Lane. “You can,” exclaims the advert, “with a Together Mortgage.” The Together Mortgage was launched by Northern Rock in 1999. In effect, it required of borrowers a negative deposit. Customers were able to borrow 125% of the value of a home: 95% as a secured mortgage, and 30% as an unsecured loan. This was the type of loan taken out by Esther Spick.

The Together Mortgage was part of what Adam Applegarth, former chief executive of Northern Rock, called his “virtuous circle strategy”. This essentially turned what had been a solid northern English building society into a giant hedge fund, laser-guiding global flows of hot money into some of the most sensitive suburbs of Britain’s property market. Although launched in 1999, it really took off as Northern Rock went into overdrive at the peak of the boom, doubling its lending every three years. Single borrowers were also offered multiples of as much as five times their annual salary to help keep pace with those borrowing off dual incomes. Competitors such as Abbey National and HBOS (Halifax Bank of Scotland) scrambled to get in on the game, also offering “five times” deals and zero deposits. “Credit has been democratised in this country. And that is a good thing,” crowed one HBOS banker at the top of the market, less than three years before the bank collapsed.

Here is the lesson for those who claim that Britain’s financial issues will be solved through the wonder of competition. There was no lack of competition as Britain’s old building societies spiralled the depths of credit insanity. So competitive were they that, at the peak of the bubble, mortgages were being written at a loss, almost from inception.

Link to video: Faisal Islam on The Default Line
If you went out on any Friday night during the go-go years to the classier pubs and clubs of Newcastle, you’d find them heaving with American investment bankers. Now Newcastle has many charms, but it was not the pleasures of the Bigg Market entertainment quarter nor the games at St James’s Park that had attracted the sharp-suited moneymen to the foggy northern corner of England. They’d come here to build Northern Rock’s factory of mortgage credit.

At the start of the boom Northern Rock faced a challenge of funding its mortgages. It was an ex-building society with no more than 75 branches and a low credit rating. “You’re Northern Rock, you don’t have a great rating. Until securitisation. Whatever you say, it gave Northern Rock a level playing field,” said one member of its team. New rules allowed banks to shift mortgages written after 1995 off their books, without having to tell their customers, into “sidepots”, based in tax havens – a process called securitisation. Securitisation allowed for mortgages to be sliced up and repackaged so that good loans were mixed with riskier ones. The sidepot, formally known as a Master Trust, received the regular mortgage payments from randomly selected homeowners. It attracted flows of hot money from the global financial markets into Britain’s already bubbly property market. The banks did not need to rely on money raised from ordinary savers to lend to housebuyers. The peak of the bubble saw a remarkable race between the banks to reduce the amount of capital put aside to support losses on these mortgages. The first wave of securitisation more than halved the capital, thereby enabling ever more lending. Alliance & Leicester set the benchmark. Instead of £4 of the value of every £100 of a mortgage loan book being kept back, A&L got it down to £1.40. In turn, the Rock enlisted Lehman Brothers to help further engineer away credit risk, getting the capital set aside to below £1 in every £100. With this measure, the team at Northern Rock was again top dog among the feral pack of soon-to-be-bust securitisers. Cheap funding was locked in from US charities, lenders in Africa, and Asian investors impressed by the Newcastle United shirts for mortgage borrowers, such as Esther, taking out huge loans.

And it was not just Northern Rock that strayed from the path of rectitude and probity. At Mortgages 4 You, based in Newbury, John Apicella admits he was not entirely exacting in checking the incomes of his clients. Mortgage brokers such as Mr Apicella were the driving force behind the banks’ desire to supply credit, and the desperation of ordinary Britons to afford a property. In 2007, two-thirds of mortgages (three-quarters of first-time buyer loans) were sold through brokers in Britain’s high streets and on the internet. In the past, prospective homeowners had been required to save for months or sometimes years before their local bank manager would even to agree to talk to them about a mortgage. In the boom, that first filter of the credit process was outsourced to a lightly regulated industry with opaque professional standards: the mortgage brokers. The result of this? Self-certification mortgages.

Mr Apicella is quoted in documents published by the regulators, the Financial Services Authority. When he started working in the mortgage industry he was advised to “just put any income down”. “I was guilty of all that because that’s the way I was trained,” he said. “That’s what the industry did.” The whole of the industry took the same view on self-certification mortgages. He said it was not his responsibility to assess mortgage affordability. “It’s up to the client to see whether they can afford it,” he told me. “I can’t sit in judgment and say you can or can’t afford it.”

When regulators eventually began to investigate certain mortgage brokers, they discovered they were using some innovative ways to up the income stated by mortgage applicants. At one broker in Colwyn Bay, this meant Tipp-Ex, and the mysterious restating of a £30,000 salary as £130,000.

Up until 2007, there were almost no actual checks on the activities of more than 7,000 mortgage brokers responsible for the majority of new mortgages. This industry grew rapidly during the boom, lured by typical incentives of £500-£1,000 on each mortgage signed. Most brokers were small one-adviser shops advising on fewer than 100 mortgages a year. Of the few hundred that have been investigated, more than 100 have conducted their mortgage broking in a way that warranted a prohibition, and 35 were fined. The time to be cracking down was surely as the bubble was inflating, not after it popped.

The credit feeding frenzy in suburban Britain during this time was feeding off itself. But one innovation casts a particularly long shadow. Increasing multiples, decreasing deposits, allowing self-certification and stretching the term of a mortgage are all rather tame compared with never actually expecting the repayment of mortgage debt. That was the strategy behind “interest-only” mortgages.

Interest-only deals boomed from 2002 to 2007, providing another fillip to the housing market. By 2007 a third of all mortgage sales were interest-only. And for the first months of 2008, the majority of new mortgage lending was interest-only. It had briefly become the norm. The FSA, which waved through what should have remained a niche product into the mass market, warned in late 2012 of a “ticking timebomb”. By May 2013, the Financial Conduct Authority, which took over the FSA’s old premises, restated this “wake-up call”. Martin Wheatley, the Financial Conduct Authority’s chief executive, told me: “The big concern is the 10% that as of today could get to the end of their mortgage and simply have nothing to repay the loan with.”

The rapid growth of the buy-to-let (BTL) market brings together all the elements fuelling house prices. For a start, BTL changed the British housing dream from owning your own property into owning other people’s property too. Many expected the credit crunch and recession to put paid to BTL. But the cult of the amateur landlord prospered in the crisis. Property values have held, rents have surged, and there have only been a piddling number of repossessions. After the new coalition government slashed planning red tape, mortgage volumes have ballooned.

A year after the crash, the old names in BTL lending were back in the game. At the National Landlord Show in Kensington in 2010, well-heeled amateur landlords leafed their way through cheap housing for sale in poorer northern English cities. “Eviction popcorn” was being distributed by a law firm promoting its ability to turf out troublesome tenants. Estate agents explained that few locals could obtain a mortgage to buy a £120,000 house. BTL mortgages, however, were priced on the basis of likely rent received.

Young first-time buyers such as Naomi Jacobs in Newcastle finds herself more in a property nightmare than a property dream.

“I’d love to buy a little house now,” she told me. She wants to have a family, and as the family gets bigger so she’d want a bigger house. That is the dream. Naomi is a science graduate, a science graduate with a job. But she can’t get a mortgage. She blames the buy-to-letters. “The smaller flats that first-time buyers would want are ideal for them to rent out,” she sighs. “But that’s the way it is these days. It’s slightly cruel when you think about it.”

This cruelty has state backing. Buy-to-let received a backdoor bailout from the Labour government. Lending was supported in the immediate aftermath of the crisis. The buy-to-let mortgage book of Bradford & Bingley remains in state hands, as does a substantial proportion of Northern Rock’s. Under the coalition, the Bank of England subsidises funding for British banks’ buy-to-let lending. Bank loan officers argue that regulatory restrictions incentivise the granting of loans to landlords above first-time buyers. The coalition’s Help to Buy scheme, as currently constituted, is actually Help to Sell new-build houses – and this was reflected in the share prices of the housebuilders. Predictably, in the absence of large-scale planning reform,it will simply inflate house prices still further.

Remarkably, through the credit bubble the likes of Northern Rock and Bradford & Bingley boasted to investors that Britain’s “very limited” rate of housebuilding supported their doomed strategies. Successive governments delivered that help. The deal for Britain’s young has transpired as follows: pay taxes, pay high rents and endure the sharpest points of austerity in order to help support a housing system that is delivering wildly expensive houses, or none at all, and to help bail out the failed banks that were built on that system.

Are we going to load the burden of adjustment from a decade-long bubble on to people who happen to have been born in the 1980s and 1990s? Progressive voices keen to redistribute through benefits have said very little about the overarching negative redistribution caused by the trebling of house prices. All political parties claim to want to foster “social mobility”, yet it seems that where you live will be determined more now by where your parents lived.

The recent history of property in Britain is wrapped up in notions of freedom and the social mobility of owner-occupation and right-to-buy. Yet right now, Britain faces a return to a more traditional relationship with the land, in which property is the principal agent for holding back opportunity for all. There are other options, as stable house prices, large high-quality flats and secure rental tenure have delivered in Germany, for example. The property ladder was a one-off opportunity for a lucky generation-and-a-half. Now we are back to a kind of neo-feudalism, in which your quality of life depends on who your parents are, and what they owned.

This is an edited extract from The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam.

George Osborne’s property bubble will lead to disaster

I have previously commented on George Osborne’s housing bubble but the Spectator adds to the story…

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Imagine, if you can bear it, that you are a first-time buyer in the UK. You go to look at a 500-square-foot box masquerading as a two-bedroom flat in an average sort of area masquerading as an up-and-coming part of London. It’s a new build — one you can just about imagine downgrading your lifestyle expectations enough to live in. The problem is that you can’t quite afford it. The good news is that your Chancellor is behind you on this one. With you all the way. George Osborne really wants you to be able to buy a house. So here’s the question. Would you like him to help you do that by interfering with the market to ensure that you are offered a long-term loan you wouldn’t normally have been able to get? Or would you prefer that he didn’t interfere with the market at all, but prices fell to a level, relative to your income, that you could actually afford, and you got yourself a mortgage you could also actually afford on your own merits? I’d go for the latter and I rather imagine most first-time buyers would too. Sadly it isn’t an offer Osborne is planning to make — for the next couple of years at least.

Look at a long-term chart of UK house prices and you will see immediately what I mean. Houses have long cost, on average, just over 3.5 times the average salary. In previous booms, the multiple has risen to well over four times earnings, before reverting. Booms would be followed by busts and prices would crash before calming. Not this time. The graph shows houses soaring to six times earnings in 2007. Then there is an initial sharp fall in the ratio to just over five times followed by… nothing. Instead of continuing to fall, average national house prices have stayed at just over five times the average annual salary. Firmly within bubble territory.

Most people will tell you that this is down to the huge demand in the UK for houses. We have a small island and a growing population, they will say, so house prices can’t ever really fall much. This is nonsense. The reason, and the only reason, that house prices have not collapsed in Britain as they have in, say, the US and Ireland is because the government has not allowed them to. Our base bank rate is the lowest it has been since 1694. This has brought mortgage rates down substantially.

On top of that, just to be sure, pressure has been put on the banks to hold off on repossessions. So while default rates look lower than usual in this rather deformed cycle, James Ferguson of MacroStrategy Partners calculates that in the first part of the crisis alone some 700,000 people were moved from repayment mortgages to interest-only mortgages. This is strange, given that interest-only mortgages were being pulled from the wider market. The Financial Services Authority also estimates that around 8 per cent of households were some kind of forbearance. In a normal world all these people would have been defaulters.

Next up was Funding for Lending, another Osborne scheme that was supposed to pump money into the banks in exchange for encouraging them to lend across the economy. That hasn’t done much for small companies, but it has so far done wonders for mortgage rates (banks have to hold much less capital against securitised loans such as mortgages than they do against loans to businesses). When the scheme kicked off, the cost of a two-year fixed mortgage at 90 per cent of the value plunged from 6 per cent to more like 4.5 per cent. It’s impressive stuff — assuming you think that keeping house prices up is the most important economic policy a country can have. But it doesn’t end there. Just in case there was anyone in the country who felt they might be deprived of the opportunity to spend their life in hock to a house, the state has introduced a variety of schemes to encourage them to overpay for property while simultaneously subsidising the housebuilders (win win!).

The latest is the one that worries even the king of stimulus himself, Sir Mervyn King. It’s called Help To Buy, Osborne’s latest market-distorting scheme that effectively forces the already overcommitted taxpayer to underwrite £12 billion of mortgage lending to people who haven’t got an adequate deposit of their own, or who lack the income to have a go at producing one and who therefore shouldn’t really qualify for a mortgage at all.

Still, however Sir Mervyn feels about it, most people think the scheme will work as long as borrowers are persuaded that it is possible for house prices to keep rising — as they usually do. The Centre for Economics and Business Research predicts that prices will surpass their pre-crisis peak next year, while Knight Frank has just put out a survey noting that Londoners’ expectations of the value of their houses have hit a record high. Even this is unlikely to be the end of it: as one enthusiastic building society chief keen on ‘even more initiatives’ wrote last week, ‘There’s no shortage of ways government could step in.’

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It all sounds so stupid, doesn’t it? Why would you want to obstruct so completely the free operation of a vital market? It comes down to what Sir Mervyn calls the paradox of policy, whereby ‘policy measures that are desirable in the short term appear diametrically opposite to those needed in the long term.’ We need to move away from attempting to create an economic recovery out of consumption, and work on increasing investment in productive areas. Ideally, by cutting our debt and pushing up exports. But until that happens we must work to avoid total misery by supporting the bits of the economy we used to rely on — hence the low interest rates designed to save our banks (which couldn’t cope with a property crash and need to rebuild their balance sheets) and stop consumption collapsing (would you be able to afford to go out to dinner if your mortgage rate was 8 per cent?).

But it isn’t as easy as it sounds. The UK economy is showing almost no signs of rebalancing. Given our huge debt and ageing population, it seems highly unlikely that the economy will return to what we once perceived as ‘normal’ growth levels in the near future.

How does it all end for our ongoing house-price bubble? There are three possibilities. The first is a semi-miracle whereby, somehow, wages rise to the extent that house prices no longer look crazy. Unlikely, but not impossible. The second is OK too — we carry on as we are, and house prices freeze until the rest of the economy has caught up with them. The third is that prices go up for a few years as the state throws every policy instrument it can at housing, but that the market eventually reasserts itself. You can argue that house prices are fair, in that mortgage payments as a percentage of average incomes aren’t out of line with historical norms. This is entirely true. But it is also an argument devoid of common sense, for the simple reason that interest rates (and hence mortgage rates) are out of line with historical norms.

Since 1950, the Bank of England base rate — against which most mortgages are set — has been 6.9 per cent on average. But when it rises, it tends to go up very quickly. It is usually connected to inflation, but above it. It climbed from 5 per cent in late 1977 to 14 per cent in early 1979, a near-tripling in not much more than a year. Now think about the bank rate today: it is well below the rate of inflation. If the base rate tripled, it would still be only 1.5 per cent. But if it were normal relative to inflation, it would be around 5 per cent. Then mortgage rates would be at least 7 per cent. Could you pay your bills then? Could your neighbour? And what about all those people who had to be shifted to interest-only mortgages because they couldn’t afford normal ones, even with the bank rate at its lowest level for over 300 years? Quite.

The idea that the UK housing market should in any way be driven by market forces was abandoned long ago — anyone who has bought a house in the last five years, or indeed who is paying a mortgage, has already in effect been helped to buy. If anyone other than the government manipulated a market to this extent, it would be illegal. And anyone scammed into buying a house at today’s prices — and in particular a fast-depreciating new build with a locked-in mortgage lender — would one day be able to sue for hundreds of thousands of pounds.

They’d probably want to sue in about five years — once they had started paying ‘loan fees’ linked to RPI inflation on the bit of the mortgage the government guaranteed. Also standing in the queue for compensation would be the many thousands who, regardless of the endless help offered, have stayed locked out of the housing market thanks to stupidly high state-manipulated prices. But because it is the government messing with the market, it doesn’t fall into the same camp as, say, Libor or oil-price fiddling. And all those people stuck and soon-to-be stuck with unnecessary debt have no comeback.

They aren’t, of course, the only losers from the ongoing policy of overstimulus. Savers, annuity purchasers and anyone on any kind of fixed income are hurting too. But homeowners are the only ones whom Osborne, in his apparent conviction that the answer to every problem is higher house prices, is quite so directly herding towards disaster.

Merryn Somerset Webb is editor in chief of MoneyWeek.

This article first appeared in the print edition of The Spectator magazine, dated 25 May 2013