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The Government’s misguided attempt to rig an over-valued housing market

Tom Winnifrith
Sunday 30 December 2012

This Government, like all Governments, wants to rig the housing market. It calculates – correctly – that it garners short term electoral gain by pushing up house prices even if this involves wholesale pissing away of taxpayer’s cash and ultimately also directly and negatively impacts on the standard of living. One day this almighty con must stop. UK house prices are too high and Call Me Dave might reckon that he can buck the market that he can beat nature, but like King Canute he, or some other Prime Minister will ultimately fail in a spectacular fashion. This is a great con trick played by the political classes on you with your money. We all lose in the end.

Oh okay, before anyone quibbles about UK house prices being too high: The UK price to income ratio is just above 5.5 – well above the Long Term Norm. When it gets well above norm a steep fall always follows. You do not know when the bubble goes pop but in the end it always does. We had a good burst in 2007 ( when the ratio reached 6.5) and in 1987 ( the Lawson Boom) the ratio was only 5 before it slumped ( to 2.6). So blather on about new paradigms if you wish but UK house prices are too high. They will fall one day. However the politicians will defer that day for as long as possible.

The calculation of those meant to serve us is that if house prices are stable or go up we all feel richer ( or at least those more likely to vote, i.e. homeowners and those over 30 feel richer) and so the party in power has a greater chance of re-election. Of course this is a con at every level.

Firstly, so what if your house goes up in value? Ultimately you will either sell to buy another house or die and see your house sold so your kids can buy a house/repay a vast mortgage taken out to buy an equally over-priced asset. What can you buy with a house? Another house. We are not really “richer” if the value of our family home goes up.

Secondly the cost of servicing a mortgage that is too large will (over the course of that mortgage) eat seriously into ones disposable income. Yes young folk, one day interest rates will be 10% not 0.5%. And that reduces the amount we have to spend on other items. Would you rather not have more cash to spend on holidays, alcohol or food for the kids?

Lower house prices would encourage more labour mobility. It would allow first time buyers to get on the ladder without numerous taxpayer subsidised schemes such as NewBuy. This is essentially the taxpayer shelling out hard cash to solve a problem that the taxpayer helps create. Lower prices would increase disposable income so driving economic growth ( and of course they would cut Government spending as schemes such as NewBuy could be scrapped). Falling prices would discourage folks from buying property as speculative investment ( so pushing up prices) and thus drive investment into more productive parts of the economy.

But though the case for allowing market forces to operate is clear this spineless Government like all of its predecessors has instead tried to beat the market. Importing new citizens via immigration whether they contribute to the economy or are a drain helps as these folk have to be housed. As you know I’d have unlimited immigration with the minor caveat that until anyone had paid five year’s taxes they got not a cent of benefits and no right to state funded housing. That would I suspect see the Abu Qatada’s of this world head off elsewhere. But current immigration patters stoke demand for housing.

There are other equally costly wheezes. The current wheeze is the large amounts given to the banks to lend to kick-start the economy. This has largely gone not to SMEs who need the cash but on funding a mortgage war. Once again you can get a dirt cheap 95% mortgage ( guaranteed by the State if you are a first time buyer).
The unintended consequence is that with free funding available for the Banks from the State, they do not need to borrow from savers so rates on savings accounts have plunged and are now, in real terms, negative on most accounts. So the prudent get whacked in order to allow folks to over-borrow to buy an overpriced asset. Perhaps someone can explain to me why this helps anyone?

Folks who believe that the State can beat the market are ultimately doomed to failure. The problem is that that socialists eventually run out of other people’s money. One would have hoped that a Conservative Prime Minister might have appreciated that. Clearly not.

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About Tom Winnifrith
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Tom Winnifrith is the editor of TomWinnifrith.com. When he is not harvesting olives in Greece, he is (planning to) raise goats in Wales.
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