22 Mar 2013

Of zombie budgets and mortgage subsidies

I haven’t blogged about the budget. The official reason is I have had two-thirds of my head in Cyprus. Now I’m back at Larnaca Airport, naturally it feels appropriate to blog about the budget.

The actual reason I did not have to write is that not a lot happened. When I reported on the zombie economy on Monday, I did not expect a zombie budget on Wednesday. The forecasts were worse, the borrowing numbers were worse. The national debt is massive and epic, though it is worth remembering that we have minimal refinancing risk on the UK sovereign.

The proportion of GDP required to service maturing debts over the coming year is very low by European standards. We have a long-term mortgage to repay (actually I doubt we ever will, but let’s not go there), not the infamous credit card bill analogy  (one day, in his memoirs, George Osborne will thank Gordon Brown for virtually doubling the average maturity of Britain’s bonds to 14 years).

There was the usual absurd accounting fiddle on this occasion to get this year’s borrowing number below last year’s. I’m glad to say we spotted it on the show after the budget. There was a lot of hot air from the opposition about the “spare homes subsidy”, but I find it inconceivable that this is, in any way, the intention of the government. Not ruling out ways to help first-time buyers with parental support (legally a second home), or in divorce case, is reasonable. The Lib Dems were floating taxing second homes last month; whatever their coalition contortions, they won’t go for subsidising them.

The big thing for me, however, is strategy. George Osborne is emerging into a master tactician and an apprentice strategist. “Help to buy“, the system of mortgage support and guarantees, is brilliant tactics, but bad strategy. The most convincing coalition narrative for their strategy of fiscal conservatism and monetary activism starts with a recognition of a wave of liquidity coursing through the world in the 2000s.

Labour harness it as a production industry called the City. They divert a proportion of it into unsustainable tax receipts, misjudging that the buoyancy will be around forever. In conjunction with a Bank of England that misjudged the Chinese deflationary genie as proof of inflation-fighting credentials, a largely unregulated credit boom, levering in hot money from all corners, poured into UK housing and credit.

The coalition knows that housing booms are bad.As James Mackintosh of the FT suggested, other countries respond to high house prices by limiting bank mortgage lending. In Britain, a free market Conservative chancellor gives it a further subsidy.

That the housing market has not crashed, but deflated a bit, is a miracle of policy, accident, devaluation and immense safe haven fortune by both governments since 2008. But the chancellor’s strategy of focussing on the perils of public but not private debt will not refloat long-term growth in Britain.

I spoke yesterday to a leading German banker. He said there was nothing in Britain for him to invest in. He has vats of capital to invest long term. Britain is devaluing and inflating its housing, and has no imaginative strategy for long-term growth, other than clinging to the City and overpriced housing. Right or wrong, he matters, and this is what he thinks, privately.

Mortgage schemes might have a role, of course, in giving the economy a short-term cyclical boost. I’m intrigued by what emerges from the consultation. It must be a concern that buyers will be left with mortgage repayments completely dependent on 0.5 per cent base rates. A mortgage of the living dead, from conception. Enabling priced out buyers of homes to accommodate and realise high house prices is so well down the list of Britain’s economic to-do list, and arguably well up the not-to-do list.

To believe that £12bn of risk guarantees and £120bn of mortgages is any type of priority when Vince Cable wanted more money for his business bank beggars belief. To effectively direct scarce bank capital towards extra mortgage lending, and at the same time present a list of unfunded yet crucially needed infrastructure projects, makes no sense.

To critique the notion of a “magic money tree”, and then immediately create a magic money forest of mortgage guarantees that don’t count as public spending, is baffling. Half of all mortgages in London are interest only. Interest only is effectively being phased out except for buy to let. This comes out of pressure from the FSA. If interest rates go up, and they need to refinance, where do these mortgage holders go? Actually, the reality is that many of these people do not really own their houses. They think they do. They are at most being leased.

This is the very zombieism that I tried to get across on Monday’s show. Something similar is happening in business. At least if you are propping up zombie businesses there are some productive returns and employment gains. In housing? Not really. Support should help restructuring etc.

Marry this with Carneyism and the first tweaks to the Bank of England’s inflation remit in 15 years (alongside the chancellor’s description of interest rates being “lower for longer”) and you do have a recipe for a pre-election housing bump. I note, in passing, that despite a unanimous view from both Balls and Osborne that taxpayer backing should NOT be used for buy-to-let mortgages, Lloyds, RBS and others have lowered savings interest rates and funded buy-to-let by using the Bank of England’s funding for lending scheme (funding for landlords, as I suggested last week). The Treasury select committee should urgently demand an explanation and the figures on FLS buy-to-let. What is the role of the state in supporting speculative hoarding of property during a housing shortage?

All told, this looks like can-kicking in private debt that the chancellor says he abhors for public debt. We had the boom, the panic, the crisis, and the rescue. Britain now needs the housing market to clear. It is holding back labour mobility and productivity. If our sovereign balance sheet is to be lent to the private sector, it should be to industry, entrepreneurs, and infrastructure. That would be the rebalancing that the chancellor says he wants. Otherwise “lower for longer” might just end up referring to Britain’s structural rate of growth, as it did in Japan.

Follow @faisalislam on Twitter.


22 reader comments

  1. Philip Edwards says:


    “…a production industry called the City”?

    Really?…….Can you tell me what “the City” actually MAKES, what it actually DOES, when all those suited-up zombie spivs squat on their behind in front of VDUs and click at keyboards? What do they ACTUALLY DO except shuffle genuine productive wealth made by others from one column of figures to the next in favour of other spivs who pay them to do it?

    As for “isms” the only ism in action is capitalism. And we all know where THAT barrow boy system has taken us…………….

    1. Andrew Dundas says:

      Banks convert your savings into a reliable promise that you’ll be paid back in the future. You may actually gain extra purchasing power over time too.
      Where else besides a bank or other like institution can you convert your present earnings today into income a long time ahead?
      Without London Banks we could not have built an empire, been first to innovate & industrialise, buy food from around the world and defeat Napoleon and other assorted enemies.
      More specifically, how would Nelson have out-manoeuvred french & spanish ships without copper bottoms on British ships? Who else would have lent us the money to do that?

    2. Faisal Islam says:

      irony occasionally passes you by Phillip!

  2. Sputax says:
  3. Philip says:

    The best analysis of the budget around. Brilliant!

  4. Fufkin says:

    I work in a control function in an investment bank, and I can say when this particular initiative was announced many of my colleagues were staggered. The reason banks are requiring large deposits on mortgages is they now acknowledge after everything that happened during the credit crisis that house prices are not a one way bet and there is genuine risk of a correction at some stage in an overinflated market. Osborne is being disingenuous by claiming he doesn’t understand why banks are not lending: it’s because at last they have correctly captured the risk inherent in the housing market. I struggle to see how this policy will really help those it was designed for ( I’m being incentivised to transfer my home into my wife’s name and then take a punt on further house price inflation by buying another property) also consider that given rates are currently so low many existing mortgage holders will be on svr’s , able to switch mortgages with relative ease: I’m sure the £130bn could be quickly exhausted by existing mortgage holders refinancing in order to extract 15% cash out of their properties. There are a number of scenarios, and none of them are in the long term interests of…

  5. rob says:

    At last some proper economic journalism. Got to the heart of the problem, but no suggestion of what the solution is. How about properly challenging the politicians on air. We need to divert capital away from property and into the productive economy, only then will we see true growth in GDP. It’s not a debate over austerity or spending, it’s about taxation policy. Currently we tax income and productivity, but subsidise property encouraging landhoarding and rent seeking behaviour. A move to property taxes, ideally location value taxes would see hoarded land rapidly put to economic use. House builders would actually build houses without tax payers hangouts, and move away from land speculation as their actual business model. Infrastructure projects would become self funding as increase in location/rental values would yield greater tax revenue.
    There is a way forward it’s just that the less than 1% who own the 99% and have and continue to benefit from taxing the productive, might actually start having to contribute rather than extract wealth from the economy.

  6. David Gascoyne says:

    Ridiculous tinkering….to cap it all, the mortgage scheme will probably help very few people anyway and will harm others. The interest in sustaining the housing market has taken on obsessive proportions.

  7. Andrew Dundas says:

    Excellent analysis. But will you remind us during the next national election campaign?
    Or will you & C4, like the rest of British media, say nowt about these ruinous policies Lord Snooty & Osborne boasted would transform our nation at-a-stroke?

    [n.b., younger C4 watchers may not recall how Tories in 1970 claimed they could transform our fortunes ‘at-a-stroke’. Instead the launched a decade of ‘stagflation’ …]

  8. Andrew Dundas says:

    Osborne’s Budget completes the transformation of National Insurance into a 2nd income tax upon you, Faisal and millions of other employees.
    Lucky chaps like me only pay income taxes. So I end up with half the taxes of C4 workers on similar pay.
    I strongly object to that gross inequality! Why should I be taxed less than you bloggers and workers? You’re employment generates both National Insurance payments and income tax liabilities that C4 is required to send to HMRC. You get nothing extra from your dual NI contributions: no deduction for being contracted out of SERPS. Nor any SERPS pension from next year. NI has been transformed into a 2nd income tax that is only paid by wage earners. Tough for you but not me!
    When Tories are in power they always cut your NI entitlements and exemptions. No-one complains ’cause no-one understands the complexities of our byzantine NI regime. Simply put, workers pay that 2nd income tax, and investment incomes (incl pensions) do not. Simples!
    That’s the bit you missed Faisal. And Balls missed it too.

  9. bernard crofton says:

    You make some excellent points here. However, one aspect you miss. The main “welfare problem” for the Treasury is not job-seekers allowance or free bus-fares for millionaires. It is the inexorable rise in Housing Benefit. This is mainly down to the “resurgence of the private landlord”. One particular trend has been that a third of council homes sold under right to buy are now privately rented: at four times the rent/housing benefit. Homes intended for home-owners are rented out, again on Housing Benefit.Buyers can’t afford them, so neither can renters! So subsidised mortgages for “buy to let” have a built in additional cost to the taxpayer.

    1. Andrew Dundas says:

      Perhaps, Bernard, your excellent contribution reminds us that some rent controls are urgently needed? After all, we ‘control’ the supply of houses with local planning cartels. So why not control the inevitable price hikes too?

  10. Muggwhump says:

    The way this scheme has been spun in most of the media has made people think that the purpose of help-to-buy is to re-start the housing market by making the average home affordable to the average person. Of course it isn’t. The only point is to further underwrite a price bubble that would otherwise be unsustainable.
    I can’t get my head around the fact that I’ve got to subsidise home ownership for people that earn far higher wages than I do while I can’t afford to buy a home and never will. So millions of people like me will end up so far behind that any kind of shelter whatsoever will be totally beyond us. I just wish I wasn’t paying for it thats all!

    Think of it like this. I’m told I can’t subsidise a bedroom for someone poorer than me but I can subsidise a whole house for someone richer than me!
    It’s crazy.

    What is worse is that politically there is no opposition to the core policy, Labour’s token ‘opposition’ is a side issue gripe about second homes. Do the banks control all our politicians?

    1. Andrew Dundas says:

      Probably not Banks. Maybe the print media?

    2. Steve says:
  11. e says:

    Baffling? No come-on its colossal maladministration. In defence of plans drawn in opposition for Small State Neo-Liberalism which given the crash are indefensible, they gleefully pursue the ruination of all but that few they are capable of seeing, knowing and understanding.

  12. Chris says:

    The budget in the middle year of a governments term of office is often used to slide some kick-backs to their bigger donors (construction firms did well, but the brewers got a gesture as well) and it seems that was the case here.
    Next year’s budget will, of course, be a bribe to the electorate to prime the pump for an election campaign which will effectively be the jettisoning of ‘austerity’.
    Carney will only be too happy to monetize it all and hold the already-purchased gilts to maturity.

  13. Muggwhump says:

    Danny Blanchflower and Frances Coppola are saying that if house prices fell then the banks would have to be re-capitalised to the tune of £300bn!
    That really explains the ‘logic’ behind schemes like help-to-buy. We are literally underwriting a massive house price bubble that no-one can afford to buy into unless the whole deal is subsidised and any risk is shouldered by people like me.
    The long term implications of this policy are quite serious, for a start once you begin underwriting the ‘market’ like this you can never really stop because to do so would cause the very crash you are trying to avoid.

    Of course if you are the government you know that a vast percentage of those doing the underwriting are people who will be pushed further behind as prices rise and you have no intention of building the social housing they need.

    The ‘aspiration nation’ is is how you disguise the fact you’re not building council housing any more and dress up welfare for the middle class. that is how you brand the state underpinning of a house price bubble.

    ‘If only all those poor people subsidising our homes ‘aspired’ a bit harder to be middle class they’d get a home as well…’

  14. Ben says:

    It’s no surprise – long ago successive government redefined ‘growth’ as: ‘Britons selling each other non-wealth-producing assets at increasingly inflated prices’. They have no other ideas for how to generate growth, other than re-inflate the bubble.

    It’s like trying to cure the DTs of an alcoholic by buying them a pint of absinthe.

  15. Stumpy says:

    Has Treasury, OBR or anyone else published an assessment of what impact Help to Buy will have on house prices? And perhaps an alternative scenario of increasing new house completions to say 250,000pa (up 70% on 2012 but only a modest increase from 226k in 2007). Then let there be a public discussion on whether increased supply or increased demand helps the objective of affordable housing (and side effects such as lower rent/housing benefit inflation).

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