Help to Buy = Moral Hazard. What on earth could go wrong?

On Monevator, there’s a good and spirited discussion has taken Help To Buy apart in detail. So this is just a rant, since despite imploring Cameron not to fight the tape last year, he’s actually taken a bastardised concept that at least had some merit – favouring the first time buyer, and compounding the mess.

The housing market in the UK is deeply and fundamentally f*cked up. There really is no other way to describe it. It is a world of hurt for an awful lot of people, and there is no excuse for the Government criminally acting on behalf of a small proportion of the population that seems to hold sway over policy.

Let’s look at some of the facts. Only half of owner-occupied houses in the UK are owned with a mortgage [ref]before anybody boils my head for the fact that 31% is not half, note that all owner occupiers are 66%, and the non-mortgaged guys are 31%, a shade under half[/ref]. Assuming that tenure applies to adult occupiers, there are about a third of occupiers who rent in some way and another third who own outright. These latter two groups are taking the shaft from a high house price policy.

The renters are taking the shaft because a significant proportion wants to buy, and the ones who own outright are taking some of the shaft indirectly because they are old gits whose savings will be destroyed by the inflation being unleashed by the money printing used to drive interest rates down, so that damned fools can be persuaded to overpay for houses.

And now the Government now wants  to assist those fools in paying even more for houses. And I am hopping mad. Because I don’t want to go through the next depression when the music stops and our money is worth jack shit. At the very least it is rude or the Government to push the stick forward into the next housing-related financial crisis before we’ve done with the current one!

I hold too much cash as it is. I am starting to consider taking some of the Governments blasted money and mortgaging my own house. But then what do I do with the cash? What on earth holds value in this stupid world of make-believe? Where do you put it? In Euros thieving barstewards want to have at 10% of it, or more if they please, I don’t believe the US debt will do foreigners any favours when the chips are down. It is like we are living in end times, everything shimmers and nothing represents real value or a true claim on future human work.

60% of people living in houses don’t benefit from high house prices. We don’t need a crash, but we don’t need tosspots trying to inflate prices, leave ’em be and let the invisible hand do its stuff. Oh and if you are thinking goody goody the government has made it easier for me to own my own home, then perhaps you should read this cautionary tale. I walked away from half the price of my first house and all of my 20% deposit, more in real terms, ten years after the Lawson boom of 1989. House prices do not always go up. And the longer they have been inflating, the bigger the bust.

The tale won’t do any good. I didn’t believe people in 1989 when I stupidly overpaid for a house. You won’t believe me. But what really, really, pisses me off is having to pay for your stupidity in the years to come when we have the strings and violins playing for jerks like this, who will then claim benefits for their unsustainable lifestyle. I had to pay for my mistake myself, one sodding pound at a time.

Oh and one other thing. Pay your damn capital down, either via a bog-standard repayment mortgage, or via parallel investment systems like a S&S ISA or wizard wheezes like Monevator’s better way to buy a house, though in the latter case have the damn self-discipline to make it work – no splurging on having too many kids or foreign holidays.

Look ahead of you. The power balance in Britain is shifting away from labour to capital. Do you really want to commit so much of your future earnings to buying an illiquid asset at a spectacularly high price? There are better things to do with the fruits of your labour than to sink it into ten thousand bricks and a postage-stamp plot. It’s not impossible to imagine a Spain like property scenario here. As the Germans say, the good Lord sees to it that the trees do not grow into the sky. If house prices get inflated then the value of the money will be destroyed. The rest of us, that’s the 66% who either want to hold on to wealth to live on in our old age or build it to be able to pay our rent passively, will have to invest – in stuff, anything that pays some return and is reasonably nailed down in reality for when the results of this arrant stupidity come home to roost. There aren’t enough real assets in the world to compensate for the make-believe of house price inflation.

The tragedy is that if you need Help to Buy, you can’t afford a house. Look at the graphic in Monevator’s post. You are trying to buy a £200k house, so you save 10K and the Government loans you 40k interest free. You go whoopee-do because you can now pay 40k more than you could before. So you go to the estate agent and offer 20% over  the odds, because you now can, and because your brains fall out when you are British and buying your first house. Just like mine did. You have just increased your capacity to overpay by 400%, so you will lever up by 20%.

As it says on the tin

The Government will lend you up to up to 20% of the value of your property through an equity loan, which can be repaid at any time or on the sale of your property.

Where’s the small print, then? You are going to buy this when money is tight, kids may be on the way, oh and we seem to be stuck in a never-ending depression where everybody ends up working part-time. In three years the scheme will end, and all of a sudden people won’t be able to overpay for your house when you have another babe on the way and need to step up. What’s going to happen to house prices then, eh? If you’re lucky interest rates will still be on the floor, though if there really is a recovery then they won’t be, which will reduce what people can pay for a house. You’re going to have a barrel of laughs if you have to move for work, and discover that people don’t want to pay you as much as you paid. All of a sudden you find you’ve geared up your losses, from 10k to 40k. Of course, the Germans might be wrong and house prices will go up, and up, and up like Jack in the Beanstalk. You have to ask yousrelf, though, where will your buyer get the money from? If they don’t inherit it, they have to pay their mortgage from net income, and the IFS indicates taxes will have to rise in the UK to reduce the deficit (that’s right, the deficit. The debt is a lost cause). If taxes rise they will find that harder to do.

If prices don’t rise, you will find out what I did – it’s damn difficult to repay a mortgage if the asset you bought with that loan sells for less than the loan, because unlike in America, mortgages come with recourse in the UK – they chase you for the money you owe. How do you repay that? You take your salary, and throw some of it into a black hole for which you get nothing in return. I’ve been there, done that, and believe me, it was no fun.

Help to Buy would have totally shafted me. Instead of paying down about 50% of the addle-headed price I overpaid for my first house, I’d have ended up paying down about 65% of it. Wow. What a fantastic deal!

And you know what the worst thing about this is? If you are unlucky enough to be in your early thirties and looking to buy a house, you’re going to have no choice but take the Government up on this deal. Because every other stupid twit is going to, so even if you know this is a mad thing, you’ll either have to pay over the odds using the Government’s money or stick your life on hold for a few years as far as buying a house is concerned. That’s easy if you’re young, free and single, but not so good if you have a pressing need for more space now.

So I have one question to ask Dave.

Why are 60% of adults paying taxes to shaft themselves in favour of the 30%, who will find out they also took the shaft when the scheme ends?

What the hell is up with that? If the Government wants to spend money on housing, build council houses. And employ a Keeper Of the Commons, so that when a politician like Thatcher comes along and wants to sell commonly paid for assets to buy herself some votes, the Keeper of the Commons pulls out a silver revolver and holds it to their head with a wizened skull in their left hand as a memento mori. And asks them if they really, really, want to do that. If the answer is yes, then pull the trigger and invoke an immediate General Election. Reloading the revolver before the next cynical vote-buyer has a chance to get elected. There needs to be real and serious penalites for politicians buying votes now with the common good of the future. Thatcher did the British housing market a world of hurt by flogging off the housing assets that had been built with the common effort of the post-war generation so people would vote for her again.

It really is high time the British government butted out of the housing market. Every time they touch it, something about it gets worse for more people than benefit. Is that really the job of government in a democracy, to favour a minority at the expense of a majority? There are better ways to improve housing in Britain. There’s no God-given reason why so many people should aspire to owner occupation. We do in Britain because decades of Government policy, starting with Thatcher, have either destroyed perfectly decent alternatives (council housing) or made them so horrible, like renting from amateur BTL landlords who bodge repairs – my London landlord fitted the electric shower to the lighting circuit, for chrissake. Renting in general on shorthold tenacies with no long-term security of tenure is no fun. At least if you rent from the bank, as any of you with interest-only mortgage are doing ,then at least you get a few years security of tenure 😉 If the Government can’t make it better, then at least they ought to observe the Hippocratic oath, and do no harm.

Too many people borrow too much money in this country to overpay for crap to live above their means. Higher house prices are part of the problem, not part of the solution.

14 thoughts on “Help to Buy = Moral Hazard. What on earth could go wrong?”

  1. Excellent rant Ermine! Better out than in. 🙂

    Thanks for the links, but if I can be a bit cheeky I’d just like to point to a couple more.

    Firstly, I think there is a case for everyone mortgaging, as I wrote recently — the writing is clearly on the wall for prudent saving, especially in cash:

    That is the way I’d buy a house currently — not by saving for 20 years. The latter is far too risky (and I didn’t actually agree it was a good plan in the first place, it was more an accident arising from my own errors. 🙂 )

    Secondly, we saw this coming didn’t we with previous props to the market? That’s why I suggested buying housebuilders in late 2011:

    The writing has been on the wall for diligently saving cash in your pocketbook at the Post Office for five years now. I don’t say it’s right, but it’s clear which way politicians see as the least painful way out of this.

    At least you’ve got a house — that should protect you from inflation to some extent — though better with at least a bit of a mortgage to get inflated away, too.


  2. @Ermine- Great rant! I’m an optimist by nature,but when I heard this on budget day , my heart sank to my boots. It is shameless vote buying and our country at this moment needs more vision,ingenuity and (dare I add)leadership from politicians than this. I am genuinely worried about the future of the country.


  3. @Monevator – I got house builders, from the logic of that very post 😉 And I hold too much cash because I can’t shovel it into ISAs fast enough, hell I even tolerate unwrapped holdings rather than cash.

    Call me square, but I’d really like us to feel the sun on our back and be shot of this housing-related depression before people rev up the next one. Normally we seem to cycle through the various jolly good reasons to have a financial crisis, but here it seems to be housing, housing, housing. All because our politicians are too craven to hit people with the stark message. An awful lot of Brits are too poor to buy a house outright over the course of their working lives and have what goes for a decent standard of living. They always were, but cheap credit covered the awful truth up for a long time. In the past those politicians manned up and provided alternative accommodation that people could raise a family in. The constructional standards of the old council houses to the Parker-Morris standards knock the ‘designer executive houses’ that your housebuilders and mine make today into a cocked hat. Thatcher’s dream of a house owning democracy has given us the dearest and crappiest housing I’ve seen in Europe.

    The trouble is after equities and perhaps gold, what asset class represents value these days? Gold pays no rent, and the volatility of equities means short-term liquidity has to be held in depreciating cash. This one’s gonna blow. Again 😦

    @Romany, I couldn’t agree more – it’s leadership that is needed on housing. Arguably in other areas too, but I’ll settle for housing at the moment. Previous generations managed it, but we seem to have become so soft we can’t face the challenge. Buying a house outright is hard graft, for at least twenty years. That doesn’t suit everyone, particularly is a less stable employment environment. It shouldn’t be beyond the wit of man to come up with a decent way of housing people that meets 21st century needs. Although many people want to point the finger at immigration, there is the added issue that many more of us live on our own, presumably by choice. We probably don’t all need Brookside family houses then, which is all our housebuilders seem to want to make.


  4. Good work on house builders. 🙂

    Yes, not much about beyond equities, is there?

    I bought timberland last summer via US-listed Plum Creek Timber, and obviously wish I’d bought more of it.

    Several of the commodity plays now look much better value in fact, but of course you can’t get away from equity risk with them. With your Peak Stuff theories, some might be worth a look?

    As an engineer, how do you feel about nuclear power? I’ve been looking at a uranium miner in Canada (cameco). A less crazy (but expensive) way to buy is the deeply depressed investment trust Geiger Counter. Not bitten the bullet yet. No income from the trust, a low by our standards one for the Canadian firm.

    I have been running some numbers on Spanish property recently. If the islands (Formentera or rural Ibiza) had come down I’d actually consider it I think. But they haven’t!

    But yes, not really away from equities at all there.

    And not recommendations at all, just some musings. There’s always something on sale! 🙂


  5. @Monevator:
    Perhaps a more balanced (and cheaper) play on the nuclear industry would be the ETF NUKP. I bought some immediately after the Tohoku earthquake and thought I was very clever until it got spanked with everything else in the “good grief the US congress really is that stupid” sell-off and hasn’t recovered since. I’m keeping faith though as I (and China & India) believe in it long term! Geiger Counter rings alarm bells for me & I don’t like commodities.

    Click to access 6352%20-%20etfx%20wna%20global%20nuclear%20energy%20fund%20-%20lse%20-%20usd%20-%20en.pdf

    Back on topic, I wonder how many people aren’t aware that if housing wasn’t so expensive, then they wouldn’t _need_ to save quite so much for retirement (be it paying off a mortgage or owning assets)?

    I still like my hastily-cobbled-together-in-10-minutes-mid-rant idea of a semi nationalised mega-REIT which can only build and then rent out, not buy and sell. What do you think?

    At least I put more thought towards it than has gone into the average Tory idea. It really seems they are literally having a “brainstorming” session in the morning, putting all the ideas into a hat, picking one out and announcing it at lunchtime. At least they have the sense to do a U-turn on some of them a few weeks later!

    Oh and as I barely ever post here, as I only post when I have something to say and I pretty much agree with everything you write, may I say thanks for an excellent site – I’ve read pretty much everything here. 🙂



  6. A very good post ermine and spoken from the heart. Any policy made by the politians in Whitehall is fundamentaly flawed if they continue to hold such toxic attitudes to maintaining excessive house prices.


  7. Just noticed this on Tim Harford’s blog (who is on a crusade against bad use of stats).

    Here’s an extract:

    “Nobody can be surprised that Mr Osborne spun things to his own advantage. But are you actually accusing him of statistical tomfoolery?

    Of course I am. I’m ever more struck by the bizarre symmetry between Gordon Brown and Mr Osborne: both enormously pleased with themselves; both ideologically pre-committed to a particular course of action, regardless of the evidence; and both absolutely addicted to statistical fiddles.”

    Heavens above! Noooooo!


  8. Hi Ermine, an excellent post, almost up to standard.

    After the Budget i E=mailed my MP about the selfsame thing, mentioning is this not what caused the crash in 2008.

    I am also old enough to remember Nigel Lawson, 1983-1989 abolishing the multi-mortgage on property and giving 9 moths notice before doing so. Then wandering why property prices rocketed.

    I suppose the answer is to tax BTL Landlords as a Business and charge business rates on their property when empty. It might force them to be more realistic on rents that they charge.

    Also use of credit controls to enforce the 4 x max earnings to amount of mortgage. It would put a brake on property rises till/if if wages catch up.

    Just a thought watch out for a tax on Bank deposits coming to a Bank near you. If they get away with it in Cyprus. I am thinking about your Golden handshake on leaving.

    A link that you might find interesting.


  9. Sorry Ermine, wrong link, you may find it interesting, especially the The Long-planned Confiscation Scheme in NZ [dated Sept 2011]

    Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case
    [about 4/5 paras down]


  10. @Monevator, play your cards right and you’ll soon be able to buy Ibiza ‘nice waterfront property – on all sides’ for a song, like the fellow who bought a Greek Island. Fantastic business opportunity, with the club and bar scene, go 4 it 🙂

    I’m pretty convinced nuclear will be a strong part of the mix in the long run, but the trouble is the long run and the whole JMK thing since the constructional phase is many years, which amplifies the risk. Renewables ain’t gonna cut it IMO – not at current consumption levels. McKay in without the hot air nailed it – in section 19, every Big helps.
    Put it this way, my fridge is 50% of my power usage. I lived without a fridge as a student and a young adult (and indeed as a child – it was a big thing when the 2* freezer happened as it meant you could hang on to ice cream 🙂 It’s about 2kWh a day. You can charge your iPhone for months on that.

    @Lupulco ah, Lawson, yes, he caused the young Ermine to perpetrate the one single biggest personal finance mistake of my whole life. It’s why I loathe property. It works for everyone else, but I reckon history has still got some rhyme in it, and the Fat Lady ain’t sung there, though she has in Spain and Cyprus. Look at all those people who went to Cyprus for the sun and the 5% tax deal, without asking ‘why is this different from everywhere else?”. I’ve had a gutful of that from people in the pub a few years ago, along with the endless chimera of UK property being an incredible money making machine. I nearly bought IGIndex Halifax house price index before thinking to myself “Self, this is not your area of expertise. Don’t knowingly invest in shit you don’t understand.”

    I realised I was a creditor of a bank long before I had a bank account. It was the Paddington Bear story where he didn’t get his self-same fiver back. It tells you all you need to know about banking – it’s about trust.

    In some ways the Cyprus levy is more honest that the one we’ve eaten in the UK. I was lucky in that my AVC holdings were in a gobal index fund, which drifted up more than 20% to compensate for the slow bank robbery know as the devaluation of the pound over the GFC. That’s the art of taxation – to pluck the goose to get the maximum amount of feathers with the least amount of hissing. Devaluation works – no rioting on the streets and Russian presidents spitting bricks, just a drip, drip, drip away of value as cash dies quietly into the night.

    Having said that, I’d rather lose half my life savings than have to sleep with a gun under my bed. I’ve never understood the US attraction with keeping a close proximity to heat 😉


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