What the fuck is Osborne doing here?

In an overtly political move with an eye fixed firmly on the 2015 general election, Mr Osborne announced that the Government would offer five-year interest-free loans worth up to 20 per cent of the value of new-build homes costing less than £600,000. From January, another scheme will see taxpayers underwrite mortgages to those with small deposits, including more than a million people trapped with so-called “zombie” loans, where the fall in the value of their homes has left them unable to move.

The Government will offer £12?billion of guarantees covering mortgages worth more than £120?billion. They are intended to help 644,000 people over the next three years.

Facepalm.

Wasn\’t this rather played out in the US during the 90s and oughts?

And, err, wouldn\’t we rather that house prices declined than that they are propped up with subsidies?

Politics and economics just aren\’t a good mix, are they?

35 thoughts on “What the fuck is Osborne doing here?”

  1. No, Tim, you are wrong. House prices must continue to rise. That way people get rich and keep voting Tory. Some people even believe the first half of that equation.

  2. Well yes, but from Osborne’s POV he’s sitting on top of huge bubble of personal and business debt (from buy to lets), most of which is secured against the asset value of housing, so any significant fall in house prices is, at the very least, politically toxic.

  3. According to the Telegraph, he’s hoping that a housing boom will kickstart the economy. And why not? I mean, it worked so well last time, didn’t it?

  4. I suggest we call the British versions Georgie Mae and Gordon Mac.

    Of course, “Gordon” is now a rude word so Gordon Mac would need a formal name that could be spoken in polite company, while carrying the same connotations. I suggest “Royal Bank of Scotland”.

  5. In theory, one parliament cannot bind the hands of the next. In practice though, the next parliament will find it incredibly difficult to reverse these subsidies without causing severe damage to homeowners’ equity.

  6. On the other hand if this scheme persuades developers to actually start building more houses (as is the plan) then house prices will fall through greater supply.

  7. The plates must be kept spinning, whatever the cost. Could the government give me an interest free loan to speculate on the Stock Market, sorry “purchase the cherished family share portfolio”?

  8. Insanity. We need a clear out of the financial Augean stables, and they keep piling in more shit.

    Unfortunately, people cannot accept that they generally (and the country as a whole) have been living beyond their means, and will vote for anyone who says it ain’t so.

    One day, reality will intrude and people like us will be insulated by our wealth or distance from the worst effects.

    But 95% of the population are screwed. I seriously think there will be revolution.

  9. There is a rich literature on property prices, and if it is not too pompous of me to reference it without writing a book…

    It’s not so much that people have been living beyond their means, it is that the prices have been inflated, deliberately, beyond their means. As Tim says-

    “And, err, wouldn’t we rather that house prices declined than that they are propped up with subsidies?”

    High prices are always good for vendors and bad for everyone else and the economy as a whole. Because of the development of the dogma that a house (a consumer good) is an “investment” we have tolerated a deliberate policy of massive inflation. So, I will now propose a policy up with which the voters will not put-

    “And, err, wouldn’t we rather that house prices declined than that they are propped up with subsidies?”

    -because that is the only fix for this problem, however utopian and crazy and impractical it may be.

  10. Shinsei1967 – sorry but they won’t. Because if the government has guaranteed low-deposit loans then the government cannot afford to let house prices fall.
    This scheme is, in practice, an announcement that the government will prevent house prices from falling. I would like to say that it is stupid, but unfortunately it may be good politics, though bad in every other respect.

  11. So Much For Subtlety

    I would suggest it might be a challenge to think of a worse policy. In fact I think it would be hard to come up with a dumber idea. But then I look at Ed Miliband and realise that it is possible.

    It is further proof that we no longer have a conservative party.

  12. @Crayons, when I said “living beyond their means” I was talking not so much about the property market, but about people in Barratt homes with an Audi TT and a BMW 5 Series on the drive and two foreign holidays a year, all financed by credit.

    It is very hard for any politician to say* to these people, ‘You actually can’t afford these cars or those holidays – you should be driving round in a Mondeo and going to Clacton’ – for exactly the same reasons that it is not politically possible, unfortunately, for them to allow the housing market to correct by raising interest rates and putting a lot of voters out on the streets. So the pressure builds, inexorably.

    *It’s actually none of the politicians’ business, of course, but what they have done over recent decades is create the illusion of prosperity which allows people in fairly average jobs to think they could live like this with no consequences.

  13. Interested, I don’t want to start another argument but, one does have to ask where the credit came from….0.02049

  14. dearieme-

    Sorry, that one’s gone right over my head. Presumably Surreptitious Evil is correct about my sense of humour 🙁

  15. We land taxers have been saying since almost the beginning of this geological aeon that governments stay in power by pumping money into the property market ,never mind the ensuing housing bubble and worldwide crash,as the banks’ loans collateralised against house prices go phut.And we have been right royally monstered on blogs like this.Now the Conservatives have intervened massively in the market to secure their usual ambition (of propping up the house prices) its all out in the open:we were right all along.That’s alright:do n’t bother to apologise.(Tim himself excepted from above: his understanding of Adam Smith’s land tax has always seen him right)

  16. Governments in most of the Anglophone countries (America actually being less bad than the others, but still probably there) will continue trying to prop up the housing market. They will do anything, anything, anything, up to and including turning their countries into Argentina, to keep doing this.

  17. Surely the best realistic course of action was the one that we were already going along with – let the numerical value of house stay static, which inflation gradually reduces their actual value. Thus we don’t get mortgages defaults and negative equity in spades (as we would if the market corrected downwards in a sane way), while gradually deflating the current bubble.

    Who are all these hoards of people who need a 20% deposit anyway? When I took out my first mortgage last year, I earnt under

  18. second half of my post:

    Who are all these hoards of people who need a 20% deposit anyway? When I took out my first mortgage last year, I earnt under 20k pa, and Iu got an agreement in principle for a 85k loan on a property worth up to 95k no problem at-all. As it was, I paid less for the house and then borrowed a bit from my parents (to whom I pay interest, unlike the those borrowing from the government under this scheme) to get myself to a 20% deposit because it brought the interest rate I had to pay down about 1%.

    Maybe things have changed (it was about this time last year I started house hunting), but at the time my bank’s attitude to what they would lend me struck me as quite reckless – they would very happily lend me quite a bit more than I though I could afford, and spent more time trying to sell me life insurance (~3hours – I’m single, no dependents, really couldn’t care less who get my house if I die), worrying about the address on my bank statements being different to that on my driving license (straightfoward explanation, still took 2 weeks to sort out), than they did worrying about my budget and how I was going to pay for it (15mins max).

    If that’s banks in full on lockdown mode, goodness only knows what they were like before the crash…

  19. Ian,

    I believe it is a reference to a certain game of rugby football played between the two southern nations of Britain.

  20. Maybe things have changed (it was about this time last year I started house hunting), but at the time my bank’s attitude to what they would lend me struck me as quite reckless

    I’ve had the opposite. I’m about to put down £550k in cash on a £650k purchase in London, and I need to borrow £100k. Actually, I need to borrow about 50k, but £100k is the minimum they will lend. On the advice of their “credit risk team” they are insisting I pay it back over 5 years instead of the 8 I requested. And they have “concerns” over the fact that I won’t be living there, but my father will, and he is over 70. And without going into too much detail, I can pay back off the mortgage out of a year’s salary if push comes to shove.

    I’ve long suspected that banks and credit card companies have two or three “model scenarios” which they perceive – often incorrectly – to be low risk, and everything else is judged to be high risk or not worth the effort. Whatever the case may be, I don’t think they can calculate risk for shit.

  21. @IanB, to be honest, where the credit came from is irrelevant, though of course it is largely generated by credit providers in response to public demand in favourable conditions created, in this country, not only but egregiously by Gordon Brown to help ensure his party’s re-election by imbeciles who either rely on the State for their jobs or believed that the economy really was booming.

    But as I say, it’s irrelevant. You could create all the credit in the world and you couldn’t persuade some people to take it up, because they try to live within their means and they don’t need a new BMW to feel good about themselves.

    @DBC Reed – struggling to see the logical connection between the Tories being a bunch of cunts and LVT being a panacea.

    The point is, stop fucking taxing and spending so much, and allow interest rates (and everything else) to find their natural level. That (and jailing a few dirty money men now and then, and allowing idiots to go properly bankrupt) will cure it all in a jiffy, the only problem being at the boil is now so big that lancing it will cause lots and lots of pain.

    @theprole – not enough info to descide on that. Was the house a terrific bargain? That way, they are covered if you default?

    If you’re still listening, I assume from your description that you are youngish, and you’re obviously low paid. Yet I assume from your presence here and your posts that you are somewhere between fiscally conservativ and rabidly right wing, in an economic sense.

    If I’m right about all of the above, can I ask how many of your mates are like you?

    Why are you like you are and how do slightly older (I’m 45) and quite a bit wealthier (though I wasn’t always) people get through to people 20 years younger than us to get more of them thinking your way?

  22. @ Pr
    “let the numerical (nominal?) value of house(s) stay static (while) inflation gradually reduces their actual value” Right, but that is not going to happen by laissez faire ,not when you’ve got massive State capitalist intervention in the market (by a neo-Thatcherite Tory!) pushing to inflate house prices (ultimately land values).
    This requires,(wait for it): the JS Mill from- here- on only Land Value Tax which preserves existing house prices (some speculators will cut and run bringing down land prices) but scalps,so prevents any inflation.This Osborne scheme wont work without this back-up.

  23. DBC-

    “let the numerical (nominal?) value of house(s) stay static (while) inflation gradually reduces their actual value” Right, but that is not going to happen by laissez faire ,not when you’ve got massive State capitalist intervention in the market (by a neo-Thatcherite Tory!) pushing to inflate house prices (ultimately land values).”

    You’re confused here. Laissez faire is by definition a state of government not intervening. Which is the whole point really; if the State weren’t intervening either directly (ridiculously excessive planning laws) and indirectly (via the State/bank cheap credit system) land values would fall to market values and you don’t need a land tax or any other modifiers. Just have people pay what the land is actually worth on the market, not what a tiny parcel of land which has gained planning permission after several years of byzantine bureacracy, the purchase of which is funded by an artifically pumped credit system, is worth.

  24. @Ian B
    Confused? What’s new? Here, I think I’m saying that high speculative land values are not going to dissipate under laissez – faire conditions.That’s not so unreasonable is it?(Though admittedly far from clearly expressed.)
    The idea that excessively high land values stem from too much government does not hold up.Henry George wrote his Land Value Tax treatise of 1879 on the back of his experiences in California when the population was 380,000:it is now 38 million.There was such a shortage of workers that they imported coolie labour which George went bananas about.Rather than a dirigiste government,there was virtually an absence of government. But the big moment of enlightenment for George was ,when riding through a deserted landscape near Oakland, he discovered that land cost $1000 an acre.Not Socialism, not Statism, market forces dictated the price.But market forces tend towards monoply and cartels and government has a certain minimum duty to prevent this happening.
    In the last few years we have had more and more High Tory anarchy and the worse things have got, to the point that Brit capitalism is n’t working any more.Why are you so sure ,so unconfused,that one more push,in the direction of privatisation,deregulation etc is going to work this time?

  25. @Interested (if your still here)

    I don’t think my house was a particular bargain – if anything I probably paid a couple of k over the odds because I needed somewhere to live fast (one can only kip on mate’s sofa’s for so long, and I was in danger of running out of suitable mates – meanwhile goverment regs mean renting for a few weeks is basically impossible). If I defaulted tomorrow the bank wouldn’t take a loss, but if the housing market went significantly pete tong I could imagine the house losing enough value to leave me in -ve equity (I’m not overly fussed if that happens – I need somewhere to live, and provided I can carry on servicing the mortgage the paper asset value isn’t overly important).

    I’m not sure I’m a particularly representative young person (I’m 26 in a couple of weeks), in as much as I’m politically interested, and always have been (I can remember listening to “the world at one” in the early to mid 90s, when I was aged between 5 and 10 – maybe that’s why I became a political geek), but in answer to your question my main observation is that most of my mates are right leaning types, like me – just without any political interest.

    I think the public at large are actually quite right wing (often even tribal Labour types) – the problem is there appears to be no plausible mechanism for getting genuinely popular policies enacted. I’d like to see us move to more “direct democracy”, with minimal government and regular referendums on issue (although probably there would have to be some mechanism to stop people continually awarding themselves goodies and tax cuts without any realistic method of paying for either).

    For those people who aren’t economically enlightened, I’m not quite sure what one can do. I’m friends with a few people (mostly female, thinking about it), who really don’t seem to get basic economics – One person in particular springs to mind – they had “The Undercover Economist” on the shelf, and they still didn’t seem to understand why (for instance) coffee bean growers are usually poor. Same sort of people really really don’t get the “jobs are a cost” logic either.

    On a personal note, I’ve more or less given up on the government ever actually doing anything economically sensible – and am obviously studiously ignoring all opportunities to work “income tax free”… I reckon the best thing to do is to starve the beast. (I run the truck on cooking oil these days, not so much because it’s significantly cheaper, as because the treasury doesn’t get a penny from it).

  26. @theProle – thanks.
    Re the house, the bank obviously thinks you’re a good risk, then.

    Re you and your mates, that’s interesting. I wonder how representative you are? I hear all the time that Emgland is basically a conservative, right wing country but I’m not sure. Maybe in the homes and pubs, but everyone running the joint is either soft left or pretends to be.

    The fact of being friends with otherwise numerate and intelligent people who don’t get economics is familiar!

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