Just leave the housing market alone, Dave

So the taxpayer is going to back 95% mortgages for first time buyers to buy new build homes. Now where have we seen this before? Governments fiddling in the housing market. Such a bright idea, it goes horribly wrong each and every time. You’re grubbing about with what is probably most people’s single most valuable financial asset, purchased on a highly leveraged basis. Small errors can get magnified stupendously.

What on earth could go wrong? Well, for a start the impecunious are usually better off looking to the second-hand market to get better value. It’s why I have never bought a new car. I could afford it, but I have no desire to take the sucker punch for that brand new kudos. Same for houses. I’ve never bought a new one, because the value is so poor. Let other people take the brand-new premium first. So why the heck is the Government screwing the first time buyers by making this mortgage guarantee conditional on them buying a new house? Yes, it’s good for the housebuilders, but why get the most cash-strapped to take the hit too?

There seems to be a belief that it’s every Briton’s human right to be able to buy a house in ther 20s. It isn’t. Some people are too poor to buy a house. That’s tough, but there are alternatives and have been throughout history. It’s called renting, and also sharing with others.

Let’s take a look at the decision-making process in how people buy houses. People look at what they can afford to spend at the time they are buying. If they are really clever they look ahead a little bit and allow for the extra cost of children, should that be a consideration. They then imagine that will carry on for the foreseeable future, and spend right up to that limit.

Make financing easier? Buyers will drive the capital cost of the houses up, as they can finance higher capital sums. Apply distorting measures to starter homes? Starter homes will go up more than second-rung homes. It’ll be harder for those that don’t qualify for the distorting measures, and the distorting measures will go into the pockets of house builders. It will take longer for the ‘beneficiaries’ of the largesse to pay off the increased prices they paid, because the largesse comes in the form of mortgage guarantees, encouraging them to overpay.

It’s about time the government discovered the value of the one of the principles of Hippocratic Oath in meddling in the housing market.

Primum non nocere – First, Do No Harm

Just leave it alone, Dave, let it be. That way existing house owners that benefited from the rising prices in the past get to take the hit, as they have to drop their prices to get a sale at all. The history of UK government intervention in the housing market is littered with epic fails.

Let’s hear it for:

  1. Mrs Thatcher in the 1980s selling council houses for below cost price to buy votes. What could possibly go wrong? Britain has no effective social housing any more, inflated property prices, and people so poor they would never buy houses elsewhere in Europe end up overpaying for houses they can’t afford and can’t maintain properly. They used to be able to rent from professional landlords on a reasonably stable basis. Now they have to rent from BTL amateur landlords on 6 month shorthold tenancies.
  2. Mortgage Interest Relief At Source What could possibly go wrong? Make mortgages less expensive and the punters will bid up the price of houses till the amount they pay is the same. At least this was axed a while back
  3.  95% taxpayer-backed mortgages for first time buyers to buy new build homesWhat could possibly go wrong? So we’ve subsidized foolish banks like Northern Rock that lend people more than they could buy, then flogged them to Richard Branson at a loss. Hey, let’s just cut out the middleman and lose the money straight off. What’s going to happen? People will bid up the cost of first time starter homes and expose themselves to the risk of negative equity, but never mind, the taxpayer will underwrite the losses.

Twits. When is government going to learn to butt out of the housing market. Their job is to provide equitable contract law, building controls, town planning and a Land Registry so that buying and selling houses is safe for both parties and the necessary disclosures and titles are made. Some basic regulation of rents, requiring some professionalism in landlords and taxing BTLers on their capital gains is probably as far as they need to go.

We’re about to enter a second long recession. Jobs will go. The last thing we should be doing is influencing people to take a long term illiquid investment on at a higher price than the market would normally set. It took me 10 years to recover from the cock-up of buying a house at a price inflated by stupid government intervention, Nigel Lawson, you know who you are. I wouldn’t do that now, but you can’t put an old head on young shoulders. I was lucky enough to keep my job and not need to move for those 10 years, the likelihood of that happening to a first-time buyer now is a lot less.

We probably shouldn’t actually stop house buyers acting foolishly in the face of market volatility, but as society we really shouldn’t wilfully add to that volatility. The housing market is a zero-sum game. Make it easier for today’s first-time buyers to buy a house, and you make it harder for the next bunch that comes along. What’s so hard to understand about that?


8 thoughts on “Just leave the housing market alone, Dave”

  1. I’m glad you’ve had a good rant about this! I was lying in bed last night, nose stuck into a bit of Homer (no, not in the orginal Greek 🙂 ) and this story came up on the Radio 4 news. With my divided attention, I wasn’t really concentrating, but did think to myself ‘That will probably make me a tad angry once I pay attention to it…’ Glad you agree, and thanks for fleshng out my initial gut-reaction.

    One other thing that really bugged me is the implicit assumption that raising the cost of housing again was described as a housing ‘recovery’. No, no, no – if something’s already over-priced, raising the price is not a recovey! Letting the market collapse to fair value is a recovey, IMHO. (Of course, being a fully-paid off owner-occupier, I would say that as I don’t have any negative-equity fears…. and it would allow Mr Monevator to take the plunge, too).

    Actually, come to think of it, perhaps I did think more about this than I realised… as they were talking about releasing ‘public land’ for housing development. No doubt parks and ‘brownfield’ ex-library plots…

    And no mention of stimulating the sector by building energy-efficient homes that people can afford to HEAT over the few decades they will stand (thereby bringing some VALUE into our housing stock). Or forcing developers to concentrate on starter homes instead of the executive mansions they favour for the profits.

    By sheer coincidence I spent a few hours in town yesterday, killing time whilst my car was at the garage (new cam belt – scheduled and budgeted maintenance – and flying through the MoT with its best emissions performance ever… 🙂 ) Walking around the ‘malls’ was so totally aliien to me, I could have been on another planet – they had nothing for me whatsoever, barrng a little browse in Waterstones. However, the High Steet ™ reflected your earlier observations around Ipswich – money shops, pound shops, phone shops, charity shops and one street is almost entirely estate agents. So what better chance to review the market on a boring Monday afternoon?

    Two main observations – after the news over the past year or three saying estate agents were going bust all over the place, there seems to be more now than ever. How come? Admittedly some old ones had gone, but there were far more new ones. Very few (less than half) had any customers inside, and I was the only ‘window-shopper’.

    The prices were roughly equal to or slightly down from when I last ‘surveyed the market’, back around 2003/4. The cheapest were of course the ‘Maggie Mansions’ on the sink estates, where £70-80k was not uncommon for 2/3 bed houses, while the trad 2-up, 2-down student-quarter terraces were maybe £85-95k (location, location, location 😉 )

    But that shows a flat 5 yeas AT BEST. Judging by the number of properties advertised, and the popularity of the phrase ‘Further reduced asking price’, I’d say the stagnation is demand-side rather than supply-side, so I really can’t see any merit to Cameroooon’s latest.


  2. I haven’t been to the High Street since that raid six months ago, but Mrs Ermine tells me it’s not looking any better at all.

    Also picking up signals from some small businesses and small traders that work is getting thin on the ground. Prices aren’t going up any time soon, which makes your rash of estate agents somewhat bizarre.

    Seems to be a sudden rush of blood to the head in terms of Government intervention withthe invisible hand – first this, and then Nick Clegg’s idea of paying employers half the wages of NEETS. I’m sure weve seen that idea before somewhere.


  3. Wow, I wrote my post this morning before I read yours. Will pop you in the links tomorrow! Definitely agree that distorting influences are ludicrously apparent in housing — stamp duty is my favourite one.

    Houses above £250K either sell at £255K so the buyer can knock off £5K and think he got a deal, or they sell for £275K to make it clear he can’t!


  4. When will people stop talking about “getting on the housing ladder”? There is no longer a ladder – house inflation is less than mortgage interest – or at least its a very short ladder and the first rungs will still be missing


  5. @RGM yes, curious terminology, that. Some bugger took half the rungs out of mine when I had to pay down half the cost of my first one in negative equity. I don’t know who these people are who have this linear progression. I guess my Dad did, but my experience of buying houses is that “the value of investments can go down as well as up and you may get back less than you invested”. I’ve probably done okay overall after over 20 years in the housing market but that’s a long investment horizon!


  6. I couldnt agree more – too much tinkering and its still going on, nearly 4 years after the original post! I appreciate I am a little late to the party on this (Im working my way through your blog :)) but I had to comment on the new build side of thing. I always wanted to go for an older home, and potentially do it up (the other half laughs at me given how bad my DIY is!), however we did end up buying off plan. I would do it again (apart from the legal fun and games). We got a lot of space compared to existing homes in that price range. It comes with a 2 year warranty – any problems, we phone up and they fix for free (we are tucking money aside for when the 10 year building warranty finishes). We also had the shock of a life. A couple of the houses are on the market, up nearly 50% from what we paid for… 2 years ago. The house prices in London are INSANE! I do pity people starting out in London now, however I have seen people do it on relatively modest sums, but they are the exception.


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