Tuesday, September 02, 2008

The worst possible reaction to housing prices

Centre-left governments are funny with their contradictions. When property prices are rising beyond inflation, and people's family homes (and investment properties) are enjoying comfortable capital gains, governments are happy for people to enjoy the fruits of this. Indeed in New Zealand with property rates funding most local government activities, local government enjoys not only the fruits of property revaluations to increase rates, but they increase rates ANYWAY, so that local government revenues grow significantly faster than inflation.

Of course whilst property prices appreciate, there is concern about those unable to afford to buy a home. This is a public policy concern sufficiently that governments intervene in different ways including:
- Providing special schemes taking taxpayers' money to subsidise deposits for first home buyers;
- Using taxpayers' money to subsidise large scale new housing developments and new "eco towns";
- Using taxpayers' money to further inflate the cost of new housing, by building new subsidised rental housing (state/council housing).

Now there is an understandable concern about people being able to have housing, but by taking taxes off of everyone, subsidising people to enter the property market further inflates that market, producing a rather vicious cycle.

So what has the UK government done more recently. Property prices on average across the UK have fallen by around 10% in the last year. This creates problems for those who have 100% mortgages in areas of low forecast growth, so many thousands now have "negative equity" where their mortgages are worth more than their properties. These are part of the credit problem, whereby financial institutions lent money to those who were barely able to sustain buying property, and are now unable to shoulder the capital loss in the short to medium term.

This is painted as a disaster, which it is for those with negative equity, and isn't positive for those relying on property capital gains as an investment. However there is another side to this story.

Those not currently in the market can see an opportunity. With significant price drops, the catchment of people able to buy homes increases - though this is partly relative to the availability of mortgage finance. However, in effect the situation is self correcting. It SHOULD lead to less government involvement in the housing market as it has become affordable.

No. The UK Labour government couldn't let that one go, so what has it done? It is now letting local authorities buy up properties under mortgagee sales, it is also allowing councils to underwrite bad mortgages - in effect is propping up the market using taxpayers' money. The same taxpayers of whom some are suffering from decreasing property values and others who are seeking to buy - they are indirectly subsidising the market. A market where only part of the population benefits from this and many others lose.

It is a massive taxpayer subsidy to property owners, and it is vile and counterproductive for the UK as a whole.

Ross Clark in the Times damns the Brown government's moves saying "why should you want your taxes used to bail out feckless homeowners who borrowed too much during the boom and, worse still, the greedy banks that lent it to them?".

He points out that mortgage lending in the UK has dropped by two-thirds in one year, from £17.2 billion in July 2007 to £4.3 billion in July 2008. So while the market corrects itself, Gordon Brown wants to prop up those with an interest in part of the equation, because he figures the swing voters are in that category. The poor feckless lower income people vote Labour anyway, so screw them.

As Clark concludes:

"To force taxpayers to rebuild a stock of council homes now in a falling market is not just perverse; it would also rank alongside Gordon Brown's sale of gold reserves at the bottom of the gold market in 1999 as one of the most crass cases of public investment ever.

There are few problems so bad that a government cannot make them ten times worse by intervening. The housing market is no exception. Much as it will cause pain to those who bought too late into the dream of home ownership, the only sensible policy is to stand back and let the market find its own level."

The Times editorial today also sums it up:

the most fundamental objection to the housing package is that government has no legitimate function in targeting asset prices. The most direct way to assist first-time buyers is to allow an overvalued market to find its own equilibrium. There is no reason for the Government to seek political salvation by populist appeals to the economic interest of existing homeowners.

Indeed, and in the meantime some may be looking to snap up some good buys!

1 comment:

Elijah Lineberry said...

Real estate prices in recent years is an excellent example of a free market at work.

First you got the moaning minnies wringing their hands because housing was becoming unaffordable for first home buyers....and when the first home buyers disappeared and prices fell they are now hand wringing and moaning about the need to help those with negative equity!

These are the same (Labour) sorts of people who howled at the moon over "Privatisation" ...only to see British Telecom et al appear on the Stock Exchange and soar in value, at which point these (Labour) chaps then said "Oh, you sold it too cheaply"

One of the great things about Libertarians is the consistency vis-a-vis socialists...