Monday, 28 April 2008

Affordable housing through corproate welfare

The recent housing crisis in both the US and UK has led to central banks to pump liquidity into markets and for governments to bail out banks with £100,000,000,000 (billion!) to one corporation alone, Northern Rock. The US governments bailing out of Bear Stearns in comparison is quite minor, both absolutely (weaker dollar) and relatively as a percentage of GDP. With an extreme right wing lunatic in the Whitehouse and a supposed 'Labour' government in no.10, it tells you how far to the right neo-Labourites have flung. FYI that's about £16k each tax payer is underwriting.

If governments were serious about helping home owners it would just cut out the middle man, the banks. Rather than give massive loans and underwriting hundreds of billions of pounds of risk they could easily setup a tax free mortgage payments system with loans issued directly by socially owned banks. There is already a system in place like this with The Student Loans company which has lent out £15.5bn in loans since its inception.

This would instantly lower interest rates on mortgages, as with the Student Loan Company which offers lower interest rates than the free market can possibly provide. Furthermore all payments into this social mortgage scheme should be tax exempt, both VAT and income. This would instantly reduce payments by 39.5% (17.5+22%) for those who truly need it. I can hear the free market fanatic already, 'how can this be paid for?'.

Well, we could perhaps stop pumping liquidity into private markets, pump it into social ones. Further we could save £150bn in bailing out banks and issue mortgages with those savings. Total loans for house purchasing in 2007 was £154.9bn (source: CML). The proposed scheme could have been funded purely by the bank bailouts for one year even if every single mortgagee defaulted. More realistically not everyone will default, actually default rates would be far lower than on private market due to mortgages being more affordable. This means the asset the government has isn't junk like subprime bonds which have high default rates.

All articles assert that central banks have to pump liquidity into the market, they have to bail out banks all so we can afford our mortgages. That is indeed one way of doing it, to be sure it is a very inefficient method of doing it. The rough scheme proposed here isn't workable in isolation. House prices would, of course, soar with buyers swimming in government supplied liquidity*; supply side issues would need addressing, perhaps by social house building schemes if we are to avoid this. Nonetheless, this took me about 5 minutes of googline to find the stats, why doesn't the press talk about it?

*: if these social mortgages were only offered to first time buyers on a property they wish to live in (as opposed to buy-to-let) demand would be reduced as only those who actually need to live in a house would buy. The situation currently has all the usual elements of bubble speculation which artificially inflate prices.

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