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In today's 'The Times' Andrew Ellison, Personal Finance Editor writes:

A strange conspiracy maintains the high cost of homes - hence these weird schemes to help the first-time buyer

The Government this week announced yet another scheme to “help” embattled first-time buyers. The latest plan is Gordon Brown-esque in its complexity but the essential idea is to make it cheaper for young people to get mortgages on new-build properties — by taxpayers promising to take on some of the losses if the loans are not paid back.

This latest policy development leaves many unanswered questions, not least why the Government is risking taxpayers’ money to encourage young people into huge amounts of debt to buy an overpriced asset. But perhaps the greatest question is why house builders, lenders and the Government are forever coming up with such convoluted schemes to help first-time buyers when the fundamental problem is plain to see: house prices are too high to afford. Why not allow the housing market to correct itself?

Well, you will never get a straight answer from the Government on this, but the principal explanation has to be that the main stakeholders in the housing market have the power and the motivation to maintain house prices at their current level.

Let’s examine each one at a time, starting with house builders. If the construction industry started marketing new-build properties at half their existing price, it would have no problem finding buyers. But instead of selling homes at prices that young people can afford, house builders — in collusion with the Government — conjure up all manner of complex schemes, such as shared equity, shared ownership and this latest wheeze in an effort to make new-builds “more affordable”. The construction industry refuses to cut prices because it got recklessly caught up in the property boom and hugely overpaid for the stock of land that it owns. House builders simply cannot afford to sell homes at a price that young people can afford because it would bankrupt the industry. The upshot is that first-time buyers are encouraged to overstretch themselves financially and risk becoming stuck in properties that will soon become too small for their needs.

So what about lenders? Well, banks and most building societies are in an almost identical position to builders. They know full well that the housing market is overvalued, which is precisely why they are reluctant to lend to borrowers with small deposits, but they don’t want prices to collapse because it would put them in a perilous financial position. The banks have lent vast amounts of money to homeowners, so if house prices did slump, and borrowers became unable to afford their loans, the industry would not get back anywhere near the amount it has lent out. The result would be huge losses and possible bankruptcy for some of our biggest financial institutions. This explains why lenders are acting so out of character by being sympathetic to borrowers in financial difficulty. The banks realise that if they were to repossess homes aggressively and tried to recoup their losses by selling these properties on the open market the sudden increase in supply might make prices collapse, undermining the value of the collateral that the rest of their mortgages are secured against.

The final stakeholder in the housing market is existing homeowners. Anyone who already owns their own property clearly benefits from sticky house prices because it protects the value of their principal financial asset. Owning a home outright or with hundreds of thousands of pounds of equity offers older generations a degree of financial security. By default it also offers parents a degree of control over their dependants because the only way that young people can afford their own home is to go begging to Mum and Dad. In effect, existing homeowners have been given the ability to protect the value of their properties by the Bank of England’s accommodating approach to interest rates. The record-low cost of borrowing has allowed existing homeowners to stay in homes that they might not otherwise have been able to afford and that previous generations might have been forced to sell if met with similar economic circumstances. Without forced sales, there is less downward pressure on house prices and so young people continue to be priced out of the market.

The inability of young people to buy property also means there is a growing demand for rental accommodation. This further benefits homeowners by giving them the option of letting rather than selling their homes if they cannot afford their mortgage or if they want to move and do not want to sell into a falling market. Again this means less forced sales and less downward pressure on prices.Low interest rates and high levels of equity also allow existing homeowners to buy properties to let, further supporting the housing market. The Government is complicit, essentially because it believes that if the housing market were to correct itself, economic confidence would collapse as millions of homeowners would lose their financial security and/or become stuck in negative equity.

This explains why a Government that supposedly believes in free markets is colluding with bankers and builders to micromanage house prices.

The result of distorting the property market in this way is a widening wealth gap between property haves and have-nots, a falling number of owner-occupiers and a growing resentment between young and old. That may ultimately prove to be a less bad outcome than collapsing house prices but it is far from cost-free.

I cannot see what anyone could add.

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In today's 'The Times' Andrew Ellison, Personal Finance Editor writes:

A strange conspiracy maintains the high cost of homes - hence these weird schemes to help the first-time buyer

The Government this week announced yet another scheme to “help” embattled first-time buyers. The latest plan is Gordon Brown-esque in its complexity but the essential idea is to make it cheaper for young people to get mortgages on new-build properties — by taxpayers promising to take on some of the losses if the loans are not paid back.

This latest policy development leaves many unanswered questions, not least why the Government is risking taxpayers’ money to encourage young people into huge amounts of debt to buy an overpriced asset. But perhaps the greatest question is why house builders, lenders and the Government are forever coming up with such convoluted schemes to help first-time buyers when the fundamental problem is plain to see: house prices are too high to afford. Why not allow the housing market to correct itself?

Well, you will never get a straight answer from the Government on this, but the principal explanation has to be that the main stakeholders in the housing market have the power and the motivation to maintain house prices at their current level.

Let’s examine each one at a time, starting with house builders. If the construction industry started marketing new-build properties at half their existing price, it would have no problem finding buyers. But instead of selling homes at prices that young people can afford, house builders — in collusion with the Government — conjure up all manner of complex schemes, such as shared equity, shared ownership and this latest wheeze in an effort to make new-builds “more affordable”. The construction industry refuses to cut prices because it got recklessly caught up in the property boom and hugely overpaid for the stock of land that it owns. House builders simply cannot afford to sell homes at a price that young people can afford because it would bankrupt the industry. The upshot is that first-time buyers are encouraged to overstretch themselves financially and risk becoming stuck in properties that will soon become too small for their needs.

So what about lenders? Well, banks and most building societies are in an almost identical position to builders. They know full well that the housing market is overvalued, which is precisely why they are reluctant to lend to borrowers with small deposits, but they don’t want prices to collapse because it would put them in a perilous financial position. The banks have lent vast amounts of money to homeowners, so if house prices did slump, and borrowers became unable to afford their loans, the industry would not get back anywhere near the amount it has lent out. The result would be huge losses and possible bankruptcy for some of our biggest financial institutions. This explains why lenders are acting so out of character by being sympathetic to borrowers in financial difficulty. The banks realise that if they were to repossess homes aggressively and tried to recoup their losses by selling these properties on the open market the sudden increase in supply might make prices collapse, undermining the value of the collateral that the rest of their mortgages are secured against.

The final stakeholder in the housing market is existing homeowners. Anyone who already owns their own property clearly benefits from sticky house prices because it protects the value of their principal financial asset. Owning a home outright or with hundreds of thousands of pounds of equity offers older generations a degree of financial security. By default it also offers parents a degree of control over their dependants because the only way that young people can afford their own home is to go begging to Mum and Dad. In effect, existing homeowners have been given the ability to protect the value of their properties by the Bank of England’s accommodating approach to interest rates. The record-low cost of borrowing has allowed existing homeowners to stay in homes that they might not otherwise have been able to afford and that previous generations might have been forced to sell if met with similar economic circumstances. Without forced sales, there is less downward pressure on house prices and so young people continue to be priced out of the market.

The inability of young people to buy property also means there is a growing demand for rental accommodation. This further benefits homeowners by giving them the option of letting rather than selling their homes if they cannot afford their mortgage or if they want to move and do not want to sell into a falling market. Again this means less forced sales and less downward pressure on prices.Low interest rates and high levels of equity also allow existing homeowners to buy properties to let, further supporting the housing market. The Government is complicit, essentially because it believes that if the housing market were to correct itself, economic confidence would collapse as millions of homeowners would lose their financial security and/or become stuck in negative equity.

This explains why a Government that supposedly believes in free markets is colluding with bankers and builders to micromanage house prices.

The result of distorting the property market in this way is a widening wealth gap between property haves and have-nots, a falling number of owner-occupiers and a growing resentment between young and old. That may ultimately prove to be a less bad outcome than collapsing house prices but it is far from cost-free.

I cannot see what anyone could add.

Baby, relax. Come in and join the ponzi. The water's lovely. Until it isn't.

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Good article.

Last time I read The Times (pre-paywall) that crazyhorse David Smith ruled the roost, with his insanse predictions for never-ending house price inflation.

We really are reaching the stage where opinion-formers in the press are starting to be the ones who can't affort homes.

Next stage is when these same people start becoming editors of newspapers. And MPs. It's coming. I am astonished how many bear-food crumbs have been dropped recently.

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So what about lenders? Well, banks and most building societies are in an almost identical position to builders. They know full well that the housing market is overvalued, which is precisely why they are reluctant to lend to borrowers with small deposits, but they don’t want prices to collapse because it would put them in a perilous financial position. The banks have lent vast amounts of money to homeowners, so if house prices did slump, and borrowers became unable to afford their loans, the industry would not get back anywhere near the amount it has lent out. The result would be huge losses and possible bankruptcy for some of our biggest financial institutions.

Out of the shakier assets RBS dumped into the Asset Protection Scheme, a total of book value £281.9 billion (£111.45 billion of which UK obligor assets).

Residential mortgages dumped in with a value of only £10.4 billion.

It must be the knock on to the other stuff such as fears of business slowdown being able to service debts if house prices fell. Or just plain homeowner resistance by those in charge of policy. Acting in self interest of existing homeowners who hate the thought of them losing value. Even for those who've seen their homes increase many times over the years not liking the prospect of them being worth less. Combined with wanting developers to make maximum margins at expense on new young buyers.

I can understand why LBG wanted to stay out of the APS with its £0.5 billion annual fee, and why RBS were talking about exiting earlier this year, because RBS on the hook for losses upto £60BN with UK Treasury scheme absorbing 90% losses above that, but also the scheme getting 90% of all profits if value returns.

HM Treasury

Royal Bank of Scotland:

details of Asset Protection Scheme and launch of the Asset Protection Agency

PDF: http://62.164.176.164/d/rbs_aps_apa.pdf

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We really are reaching the stage where opinion-formers in the press are starting to be the ones who can't affort homes.

Next stage is when these same people start becoming editors of newspapers. And MPs. It's coming. I am astonished how many bear-food crumbs have been dropped recently.

Very true, the newspapaers are downsizing - getting rid of their expensive higher paid journos is attractive, the youngsters coming on up the scales will get particulalry galled at having to regurgitate propeorty company, government, estate agent and lender/banking tripe.

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Very true, the newspapaers are downsizing - getting rid of their expensive higher paid journos is attractive, the youngsters coming on up the scales will get particulalry galled at having to regurgitate propeorty company, government, estate agent and lender/banking tripe.

I see where you are coming from but I'm not convinced. Many newspapers need the income from property advertising and their "Thursday property special" has to pump prices even if stories for the rest of the week directly contradict this. Until we have a proper economy to replace these advertisers with real products the hand that feeds will not be bitten.

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In today's 'The Times' Andrew Ellison, Personal Finance Editor writes:

A strange conspiracy maintains the high cost of homes - hence these weird schemes to help the first-time buyer

The result of distorting the property market in this way is a widening wealth gap between property haves and have-nots, a falling number of owner-occupiers and a growing resentment between young and old. That may ultimately prove to be a less bad outcome than collapsing house prices but it is far from cost-free.

I cannot see what anyone could add.

Well spotted.

Deserving of a much wider audience - I've snipped it over to the Northern Ireland Forum under media articles - hope you don't mind.

Our local media are becoming more realistic also, so it seems to be catching.

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We really are reaching the stage where opinion-formers in the press are starting to be the ones who can't affort homes.

Next stage is when these same people start becoming editors of newspapers. And MPs. It's coming. I am astonished how many bear-food crumbs have been dropped recently.

I mentioned this before on HPC some months ago and I agree that as the priced-out generation get older (and the homeowners retire) they are beginning to grab hold of the levers of power and take up positions of influence in the media. Although HPC was a trailblazer for this kind of article, we are now seeing more and more articles like this hit the mainstream.

Edited by pl1
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We really are reaching the stage where opinion-formers in the press are starting to be the ones who can't affort homes.

Next stage is when these same people start becoming editors of newspapers. And MPs. It's coming. I am astonished how many bear-food crumbs have been dropped recently.

Same here.

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  • 415 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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