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Is George Osborne’s ‘Help to Buy’ the equivalent of Bush’s sub-prime loans?

29 June 2013

11:18 AM

29 June 2013

11:18 AM

There is a strange disconnect between George Osborne’s enthusiasm that young people should buy homes, and the reluctance of young people to do so. The Telegraph has reported that fewer young people own homes than ever – and it fears, perhaps as the Chancellor does, that this has political implications because owners tend to vote Tory and renters Labour. The Chancellor stands in the tradition of a long line of conservatives being enthusiastic about promoting home-ownership in hope of turning people into right-wingers.  In her seminal book The Anatomy of Thatcherism, Shirley Letwin famously argued that home ownership released the ‘vigorous virtues’ and made someone more inclined to see the world from a Conservative point of view. The Thatcher right-to-buy scheme (opposed by Labour) was a huge success – emblematic of her bond with the working class voters. It was a success from which the Tories have never recovered.

Conservatives on both sides of the Atlantic have pursued home ownership ever since – with mixed results. The Bush government was much taken with this (I once saw Karl Rove quote aloud from Letwin’s book) and hawked underpriced debt. Mortgages were given to young couples who had not a cent of deposit and no means of paying the money back. The subprime crisis was born. We all know how that movie ended.

But we’re seeing a replay in Britain with George Osborne’s offering what are, in effect, sub-prime loans. Those considering buying a house have reason to be nervous. His ‘help to buy’ scheme (dubbed right-to-defualt) has been thusly described by Albert Edwards, who heads up SocGen’s global strategy team:

‘Why are houses too expensive in the UK? Too much debt. So what is George Osborne’s solution for first-time buyers unable to afford housing? Why, arrange for a government-guaranteed scheme to burden our young people with even more debt! Why don’t we call this policy by the name it really is, namely the indentured servitude of our young people I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business.’

And Andrew Bridgen from Fathom Consulting on Osborne’s help-to-buy:-

‘Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it’

Osborne shrugs this off, and focuses on the wider advantages of home ownership. He boasted about low mortgage rates in his Spending Review speech. It reminded me of what Alan Greenspan wrote in his 2007 memoirs:

‘I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk, and that subsidized homeownership initiatives distort market outcomes. But I believe then, as now, that the benefits of broadened ownership are worth the risk.’

But here’s the thing. A good many young people look at the housing market right now and see a trap. You don’t need to be a SocGen analyst to think there’s something wrong in a market where garages go for £500,000 and your average bank manager struggles to afford a decent family home. But this is a very London argument. Outside of the capital, houses are 20 per cent down from 2007 levels in real terms. By some measures, houses are more affordable than they have been for 15 years (although they are still expensive in historic terms, especially given tougher mortgage rules).

In London, where economic policies are decided and most political commentary written, people still speak of the property ladder as if it were Jacob’s Ladder, a magical stairway to financial heaven. Outside London, the picture is not quite so simple. In fact, most Brits who bought a home around 2007 will have lost rather a lot of money.

Screen Shot 2013-06-29 at 11.59.47As the Nationwide graph (right) shows, losses have been acute in Wales, Yorkshire and the North West. In Northern Ireland, prices have actually halved since the crash (pdf). This will have affected attitudes towards the very notion of homeownership: the young will have seen their friends and family badly burned by the idea of a property ladder. The losses suggested in the Nationwide graph are bad enough, but you can add another ten percentage points for the effect of inflation. It’s not hard to understand why teenagers growing up in houses that have lost a quarter of their value will be more suspicious of the idea of house ownership as a no-brainer financial investment.

It’s nice to own your own place. But how much borrowed money would you risk in pursuit of that goal? How sure can you be that another crash is not just around the corner? And what happens, even up north, when rates head back to the 5pc norm?

MORI has been publishing fascinating research into the attitudes of Generation Y, the under-31s. They are the least likely to recommend that a young couple buys a house. And why? This question does not involve affordability (homes are, anyway, as affordable as they were ten years ago outside London). They seem unconvinced that it represents a sound long-term investment. If prices collapse that the “indentured servitude” that SocGen talks about will become real: negative equity is a very hard master. Here’s the MORI research, showing the generational changes in attitude:

ipsos-mori-generations-immediately buy-couple

The Telegraph cover piece quotes the Joseph Rowntree Foundation talking glumly about ‘Generation Rent’ as if it were a basic human right to be able to tie up your wealth with property market. The phrase ‘property ladder’ dropped out of use in Japan after 1991 (here’s why). In Germany and France, most people rent. Politicians there have no incentive to fake prosperity by blowing a property bubble. Merryn Somerset Webb argued in a recent cover story that Osborne is doing just this. We’re living in freak economic circumstances where banks lend money at negative real interest rates, which is every bit as crazy as those 110 per cent mortgages given out in the bubble years.

In fact, the majority rent in Austria, Denmark the Netherlands, Korea, Sweden and the Netherlands as well as France and Germany. All of these countries get along just fine. And if young Brits prefer to rent, then there’s no reason they should not get along fine too.

UPDATE: Interesting Twitter reaction to this. I’ve had a few Londoners say that home ownership is self-evidently a great thing, but the young can’t afford it. Non-Londoners are more likely to say that the risk has put them off: as one puts it, ‘Generation Y is waiting out the bubble’.

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