Property inflation has stagnated, because values have reached a level the majority of would-be buyers simply cannot reach. Do you give them a leg up, or do you bring prices down?
Forever blowing bubbles?
The BBC reports that this coming week the second phase of the Conservative "Help to Buy" scheme in England will be brought into force, three months ahead of schedule (cynically coinciding with the Tory party conference). Its purpose is to make mortgages more available to first timer home-buyers, even to the point of allowing borrowers in England to get 95% mortgages (i.e. with only 5% of the property value put down in deposit).
This is an utterly ridiculous proposal. The whole reason the UK (second, most recent) property bubble happened was that people were obtaining absurd mortgages costing a greater and greater proportion of their regular living expenditure. 95% is ludicrous. When the bubble began deflating last time mortgages were only at 90%.
The Tories supposedly believe in the free market, but if they did the market would be allowed to reset itself, and settle, and be left there. Over time family incomes will slowly increase and catch up and market activity would start once more at a more sustainable pace. It is unfortunate that some owners would be stuck with negative equity in the interim, but it is partly their own fault for allowing themselves to be driven to stretching so far. They just played into the hands of the money-suppliers by being irrational, and treating the roof over their heads as investment. If you own a property, and that property is your home, it is not an investment. You cannot afford to be without it. The fact of whether the intrinsic value of the property goes up in absolute monetary terms is somewhat irrelevant, because to realise that value requires finding another home, the value of which will also have risen with the market. In practical terms any financial profit is offset by the cost of replacement.
The thing is market movements (especially artificially driven) benefit the wealthy regardless of the direction. In times of boom they sell or use property as collateral for investment. In times of bust the cash generated from boom time goes back into buying cheap defaulted property. If you have money it is win/win. In the long run it will only benefit the wealthy. This is no less than a mechanism to kick-start the stirrup-pump cycle of bubble and burst. Give it a couple of years for the bubble to grow, then higher interest rates (which have to come eventually) will drive many buyers to the wall. Even without foreknowledge it would not take any clairvoyance to recognise this as a Tory policy, skewed toward generating more wealth for the wealthy at the expense of the public purse (i.e. the working population's tax bill) in underwriting the defaults it will inevitably foster, and of the financial losses borne those who find themselves defaulting.
The problem is not that people cannot obtain 95% mortgages. The problem is that they should not NEED them to begin with. The lenders allowed, and even drove property values to a ludicrous over-priced state, and now you want to encourage that further, Mr. Cameron? The Business Secretary, Vince Cable, has voiced this very concern. But then being a Lib Dem and not a Tory, he knows the difference between profiteering for the rich and providing what the population needs. Bigger mortgages mean bigger profits on lending, and - by enabling higher offers - also contribute to rising prices, which is great if you happen to be a lender. If you really want to help first-timers (or anyone for that matter) you should be promoting policies stimulating the property supply (i.e. building) to make cheaper property more available, and stabilise the market for the long term. But that is not going to happen, is it, because that doesn't line the pockets of those who can afford to sit above it all.
