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Coffee House

Cameron’s sub-prime thinking

12 March 2012

3:06 PM

12 March 2012

3:06 PM

You’d think the American sub-prime crisis would have taught
politicians the world over not to try to rig the housing market. But no, David Cameron is back on it today — about how to ‘unblock’ the system so the debt geyser starts to gush
again. ‘The problem today is that you have lenders who aren’t lending, so builders can’t build and buyers can’t buy,’ says the Prime Minister. ‘It needs the
government to step in, and help unblock the market.’ The idea that lenders may not lend because they feel the housing market may fall, and people may be unable to repay, is instantly
dismissed. He speaks as if debt is the solution, and unavailability of debt is a self-evident problem. He proposes using the debt-dependent government to lend
its borrowed money to new debtors to buy houses of a value of up to £500,000.

You can see the appeal, to Tories at least. In her brilliant book, Anatomy of Thatcherism,
Shirley Letwin described how home ownership and buying council houses formed the moral backbone of the Thatcher revolution. Once you became a property-owner, you saw the world in a different light
— and so (in her famous phrase) ‘vigorous virtues’ were encouraged, and Britain shifted a little to the right. This was a success from which the right never really recovered. In
America (where Karl Rove would regularly cite Letwin’s book) the Bush administration also ensured state-backed mortgage companies helped the low-paid achieve their dream of home ownership.
Fannie and Freddie were the weapons of choice. Sub-prime loans were born, and we know how that movie ends.

It seems rude to point it out, but in Britain real house prices have been plunging — as the below graph shows.

[Alt-Text]


Yet we hear very little about this. Why? Perhaps because housing is doing fine in London, where policymakers (along with national journalists) live and work. The capital is, however, quite unique.
Its property market is flush with money from Europeans, looking to move their assets into something that’ll hold its value when the Euro crumbles. The year before last, it was the Greeks who
had doubled their spending on London property. Now, it’s the Italians who are preparing for the comeback of a debased lira. According to Knight Frank, Italian buyers poured in almost half a billion quid into the London
property market last year. The politicians who live in London (especially its more upmarket neighbourhoods) could be forgiven for thinking that the market is still booming and the ‘housing
ladder’ is alive, well and living in Primrose Hill. Here, from Citi, is a graph showing how optimism in the London property market surpasses that of the UK:

I suspect the phrase ‘property ladder’ has no direct translation into Japanese. When their asset bubble burst in 1990, property prices hit levels to which they still haven’t
returned: anyone who bought a house in those days will be unlikely to live to see their money back. The ‘property ladder’ isn’t a Jacob’s Ladder — it’s more like
snakes and ladders. It’s not for politicians to nudge people on to that investment: property can go down, as well as up.

But more than anything else, it’s sobering to see just how few lessons of the American sub-prime crisis have been learned.

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