Saturday, 19 November 2011

Government set to help established homeowners

News is filtering out of the government's overdue housing strategy paper and it looks set to be a major shot in the arm for those at the top of the housing "ladder". The government appears to be siding more with the CBI's recommendations rather than those of the Intergenerational Foundation. However the proposal that both reports recommend, namely the removal of Stamp Duty, looks set to be ignored. The government instead is likely to go with a state-backed mortgage indemnity scheme.

"Under the mortgage indemnity scheme the government would cover the risk for the lender, which should enable first-time buyers to take out larger mortgages relative to the value of the home."

Firstly we can ask why tax-payers should be taking the risk when the banks get the interest (have we not learned anything from the financial crisis?). Secondly we can surely see that the ability to take out larger mortgages only serves to increase house prices (again a take-home message from the financial crisis is that inflating asset prices with ever increasing debt leads to bust). So this policy looks set to boost existing homeowners at the expense of first time buyers.

"The plans also propose that borrowers should be able to use money in their pension pots to boost deposits."

So not content with first time buyers paying an ever increasing proportion of their disposable earnings into housing, now we propose that they put their pensions into it too! As above, this only serves to inflate house prices which helps established homeowners at the expense of first time buyers.

"Cameron is also expected to develop his plan, first set out at the Conservative conference, to extend right-to-buy for council homes... The consultation will reveal the level of discount available to tenants wishing to purchase their homes and a broad outline of how sales receipts will be distributed."

An established government policy is to sell off stuff that we all own at a discount so that private owners can sell it back to us at a higher price. Witness the number of former council homes that are now rented out privately at the market price and typically sold at prices above which first time buyers can afford (since former council houses are typically bigger than new builds).

"Grant Shapps, the housing minister, has developed a "build now, pay later" model, to be applied on many of the sites. Developers will not have to pay for the state-owned land until homes are complete, relieving pressure on their cash flow."

So as far as the land goes (which is often most expensive element of UK homes) the developers are simply acting as an intermediate passing on the cost to the homebuyer. Why not then simply take them out of the chain so the developers do not need to worry about the cost of the land. This way the state really could make homes "affordable" by simply leasing the land to the buyer, so the buyer only need to raise immediate funds to cover the build costs. Without such a policy we are back at the previous point with the state selling off national assets, that we all have a stake in, at a discount. History tells us that this is one way street and we will soon reach the point where this land is being rented (either explicitly or imputedly) back to the nation with the proceeds pocketed privately.

So all in all a thorough package to boost the finances of existing homeowners. And we all know who are the biggest homeowners, currently holding the most property title deeds, the banks of course!