Stunted By Reality Just another know-it-all talking about life, business, technology, sports and music.


Labour’s dismal housing record highlights their failures

The British Labour party has been in power for 13 years now during which they've done some good things, a lot of bad things and some terrible things. In my mind housing is where they really screwed up because it ensured that the Labour's economic, social and immigration records are arguably poorer than they would have been. In this context when I say housing I'm talking about housing their citizens and giving those who need a lift the ability to house themselves. That last bit relates to the housing market.

For those who don't know I'm not a Labour supporter but I'll try to be as objective as possible. In fact I started this blog because I more anti-media than anything else. I feel that balanced reporting is important and at Stunted By Reality I try to discuss my interests in a balanced way. But, that's for another post.

The housing issue has been going through my mind for some weeks now and the news today that house prices have risen 10.5% in the last year is what finally prompted me to write this. Personally I feel that the housing market is linked to many things and has effects outside of its sector one of which is the economy as a whole. As far as I can see the credit crunch really came about because of the rate at which people where borrowing money to buy houses. In the US it seems that an artificial boom was created on the back of money being made available to people who were riskier than normal. Sub-prime borrowers. In short there was too much money chasing too few customers. In the UK it was because of the fact that UK house prices had risen way too much over the time that Labour had been in power to the extent that a lot of people borrowing money had a higher risk profile than before.

Historical UK House prices vs earnings graph

For example in 1997 when Labour came to power the average person would need to borrow about 2.5 times their salary to be able to buy the average UK house. By 2008 when the housing bubble burst average UK income was £38,302 with the average house costing £197,000. That is 5.1 times the average person's salary; a huge increase by any measure. Effectively, even the average buyer was bordering on being a sub-prime borrower! This, as I recall is when people started taking out 40 year mortgages. 40 years to pay back the mortgage on your house! Imagine that. People buying in the early 2000s used to be able to take out 25 year mortgages. Within 5 years just to afford a mortgage you had to stretch it to 40 years, or else you couldn't afford it. That's sub-prime for you folks.

A lot of people (egged on by the government of course) blame the banks for the credit crunch, but I'm not one of them. I blame the people who bought houses they couldn't afford. Moreover I blame the government who didn't create the market conditions so that people could afford to buy a house. Of course the banks were implicit in that they then packaged these loans into bunches of hundreds of thousands and sold them onto each other knowing that there were now increased risks that people would default. However there came a time when no bank knew which other bank had the dirtiest mortgage customers; and because banks lend to each other more than they do to us, they became concerned amongst themselves. That concern resulted in banks NOT lending to each other and there was an impasse during which Northern Rock amongst others couldn't borrow money. They of course had to get it from somewhere so they asked the government. Correct me if I'm wrong but in laymen's terms that's what happened except of course they used complicated financial instruments to do all this.

From a UK perspective the main reason I blame the government in this is because they could have done a lot more before the housing bubble burst to avoid the sub-prime mess. They could have done things differently after the bubble burst too, but they didn't. Here's what they could have done;

1. Increase the threshold of stamp duty.

Stamp duty is a tax payable on all house purchases in the UK provided that they go above a certain value. That value is set by the government and it works on "slab" basis, so percentages apply to the whole of the purchase price in a defined band. For example, a house priced at £250,000 would attract a tax of £2,500, but one of £250,001 would be liable to tax of £7,500. The result is that duty has a hugely distorting effect on the market, because a house is very difficult to sell at prices just above each threshold, for example, £255,000. The UK government could have used this to control house prices more than they used it to line their pockets. In 2002 when house prices went up 25% in one year, it should have been abundantly clear to Labour that it was now necessary to do something about stamp duty. The threshold remained at £60,000 yet house prices were now well over a £110,000. Meaning that even first-time buyers would have to fork out stamp-duty in addition to a deposit. Setting the threshold higher (at just below the average price) would have actually resulted in some house prices being brought down to take advantage of the new level.

2. Build more houses

The market and by extension the government really just didn't build enough houses. At the time we knew that a lot was being done, but it just wasn't enough. I applaud John Prescott's efforts in Hull, Stoke and other places, but a lot more needed to be done. Beautiful though Britain may be there are huge areas of dereliction not just in Stoke and Hull. London, Manchester, Birmingham all have acres and roads of dereliction that would have been good for redevelopment. An increased supply of houses would have resulted in a decrease in prices. The old supply and demand thing. Ironically this is one of the reasons that US house prices fell thereby triggering the credit crunch. But I'm being selfish here and only discussing the UK market. If the American market screwed some buyers after supply increased, too bad. A house is an investment. Buyers MUST be told that prices can go up as well as down and the best thing to do is to be in it for the long run and make sure you can afford your repayments.

3. Sell council houses

This is a practise that for some reason Labour did not embrace even though you'd have thought it was mostly their constituents. Margaret Thatcher was a big proponent of this in the '80s and I have to say I'm with her. I just don't see the point in not encouraging people in social housing to buy the home they leave in. I know that house ownership is not the be all and end all of life. So long as you have an affordable place you can call home that you can raise a family from I should think that should be good for most people. Germany has lower ownership rates than most countries and they are doing ok.

However, council houses though they are no longer built still make up a big part of the UK housing stock. Releasing some of that to the occupants and using the proceeds to build more would help increase the supply of houses for sale. This ties in with point 2 above. Councils have huge economies of scale and would be able to build and sell properties just as cheaply as house builders whilst still doing some good. They would be able to make money off properties. Crucially getting the social balance right so that yobs do not eventually take over new estates would be of utmost importance.

Overall these are all things that I think Labour failed to get right, which in my opinion led directly to the credit crunch affecting the UK the way it did. It's also ironic that one of the major issues of the upcoming election is immigration and as I heard one commentator say yesterday "Immigration is a proxy for Labour's failings in the economy, crime and housing. People love a scape-goat." You've got to admit that there's none better than the immigrant who takes someone's job, robs their kid and lives in a council home that they could have occupied. That this is not the case especially when it comes to the economy and housing is neither here nor there. The UK government would rather it was 'the immigrant wot did it' than the good man Mr Brown.

After the crisis began I felt that the government should have let the banks fail and only made sure that customers got their money back. I also believe that sub-prime borrowers should not have been rescued from their bad mortgage deals because if repossessions went up, houses prices would go down.

As it is we haven't had a proper correction in house prices and we're still sitting on a bubble. I believe the bubble didn't really burst. Some air was let out and now (horror of all horrors) we're starting to pump the bubble up again. No-one apart from the banks got burnt so borrowers are still looking to borrow more than they can afford. And now we hear that the politicians are planning to force the banks to lend. Well correct me if I'm wrong, but is that not what the banks were doing before the politicians let it all get out of control?

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