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.

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