Young? Can’t afford a house? You’re getting shafted by the government

(Image by: magnus ^[2])

What has the UK government got against young people? Why is it obsessed with pulling up the drawbridge to anyone who’d like to buy a home but who can’t afford (or won’t pay) credit bubble prices?

I will declare my interest: I rent, having decided several years ago that housing was too expensive ^[3]. I believed I was making a sensible decision, weighing up the risks of losing my 25% deposit in a frothy market.

I could afford to buy, but I decided to keep saving and wait for house prices to come back to sane levels.

Well, I had it all wrong. Apparently, the correct thing to do was:

• Lie about my income on a self-assessment mortgage application
• Buy a house I could only afford if interest rates stayed low for 30 years
• Furnish my new house on credit cards
• Wait for the taxpayer to bail me out
• Go bankrupt without any stigma if things turned pear-shaped

And people wonder why nobody saves anymore.

Gordon Brown is forever blowing housing bubbles

I have watched (and posted ^[4]) with incredulity as the government has scurried to keep inflated what was clearly a house price bubble.

Its latest wheeze to prop up house prices is a two-year mortgage holiday ^[5] for homeowners unable to repay their mortgages. (The interest is rolled up and paid back later – presuming the owners can then pay. Otherwise you and I as taxpayers will have to cough up for the lot).

Not just anyone will qualify, of course: Only those with less than £16,000 in savings will get their mortgages paid. If you were sensible and put cash aside as a cushion, you will be penalised by the government.

Now don’t get me wrong: I’m sure there will be sensible people who risk losing their homes in the coming recession. That’s unfortunate, but deliberately targeting aid at the most exposed segment of the population isn’t in the best interests of the country. Those who can’t afford their house any more should simply sell. If it must ‘do something’, the state should offer extra rental support.

Yes, renting isn’t as nice as owning, but that’s already the case for those who rent. And they’re not getting any extra cash!

The government support (also known as ‘the oil onto the fire fund’) aims to maintain valuations reached with cheap money during the credit boom, set by people who spent on plastic, didn’t bother saving, paid too much for houses, and ignored the fact they were wildly over-valued.

It has nothing to do with helping sensible “hard-working families”. Many of those families couldn’t afford houses, so they didn’t buy. Sensible people spend what they can afford, and have savings for tough times.

This support is really about stopping repossessions from bringing house prices down further, and taking the Labour government with it.

Young, renting, unwanted

(Source: BBC house price guide ^[7])

Young people can’t complain though. When they struggled to buy as property prices went up exponentially (far outpacing salary growth), the government offered them two years of mortgage payments, too.

Except of course it didn’t.

Already over-priced to anyone who wanted to see it, the housing market was instead talked up further by ministers. They bragged about stability and low interest rates while presiding over the biggest boom in history – right up until buying a house was as safe as putting your life savings on red at Vegas.

The government apparently considers that status quo perfectly reasonable – it recently urged lenders to return to the lending levels of 2007. (You know, the reckless lending that has given us a near economic meltdown ^[8].)

Young people might want to ask their local MPs why:

• If you aspire to own but can’t afford it, you get no help
• If you already own but can’t afford it, you get taxpayer support

The answer is that like some Herman Munster of a pied piper, Gordon Brown told everyone boom-and-bust was over. Those foolish people who believed him are now HIS people. He will stand or fall on what happens to them, not to the ‘hard-working families’ he never stops banging on about.

Through hubris, a politician who set out to help the poor and preached prudence is now in hock to the reckless gamblers at the margins. And the rest of us have to pay for it.

Why do we no longer want affordable housing?

It was only 18 months ago that newspapers were reporting how first-time buyers were locked out of the market. “Something must be done!”, politicians boomed.

The response was usually one of:

1. “There’s a shortage of housing in the UK, we need to build more houses!” [Builders]
2. “It’s market forces at work, young people should give up on owning a home if they can’t afford it!” [Older home owners]
3. “So what! House prices are make everyone better off. Go and moan about pesticides!” [Landlords]

All three retorts were utter nonsense:

1. There was no housing shortage – it’s a myth. If there was a housing shortage in the UK, rents would have risen as fast, too. That didn’t happen ^[9]. All those new build flats that have now fallen 40-75% in 18 months are proof that the bubble was essentially manufactured out of speculation and cheap money.
2. Those who said “Give up if you can’t afford it” bought back when housing was very cheap. I know moderately paid engineers and teachers in their 50s and 60s who bought in desirable areas on a multiple of two to three times their earnings in their twenties (and with tax relief, too). The same house would cost 20-40 times the earnings of their young equivalents today!
3. Rising house prices do not make most of us, even homeowners, better off. If you want to buy onto the ladder, cheaper is clearly better. Even if you’re already ‘in’, you’d be better off if the next house along the chain was also cheaper. The only time we benefit is if we sell out of the market completely. For most people that happens when they die, so only their heirs gain. And that inheritance is invariably put back into property. So much for social mobility.

It could all be so different

Now the house price boom has burst, just as bubbles always do, the Government should be celebrating. Young people might aspire to own again. Everyone else could be glad the money wasted on mortgages and agents fees might go into more productive start-up technology businesses or better health care.

But no. Falling prices are a great evil that must be stopped. Despite no steps being taken to stop the boom.

Besides garnering votes, the real reason for supporting prices is that until a floor is put under valuations, banks will continue to struggle ^[10]. Even if you accept this argument, government support should be targeted at prudent savers. That’s the kind of behaviour you’d want the state to encourage, not overstretching.

There are several ways the government could more fairly support the market:

1. First-time buyers could be exempted from stamp duty
2. The government could provide new first-time buyers with a special discounted mortgage rate
3. It could purchase vacant new build properties, increasing social housing in the short term (instead of paying for families to live in hotels) and sell out again in 5-10 years
4. Any ‘mortgage holiday’ relief for current homeowners should also see the state take an immediate 5% stake in the property in return for the risks. Homeowners could buy back the stake at market rates as and when the credit market thaws.

Sadly though, for our politicians ‘moral hazard’ might as well mean the danger of being caught with your pants down.

If you’re currently renting and you aspire to own your own home someday, you’d better hope they’re as ineffectual as they are economically illiterate.