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They Mustn't Mortgage Fairness To Buy Votes

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They mustn't mortgage fairness to buy votes

Underwriting loans to kickstart the housing market is a quick fix that poorer taxpayers will never forgive

You can see the temptation so clearly. Government in the doldrums; poll ratings tumbling with the economy; housing market frozen; and - hey, what's this? - a plan to kickstart the Government's fortunes by kickstarting the housing market by underwriting mortgage lending. Essentially, the taxpayer would be guaranteeing bank and building society loans for a while.

For the faction in the Brown Government that believes its present fortunes are caused purely by the national economic downturn - the Prime Minister and about two other people, I believe - you can see the attraction. A poll in The Times yesterday showed how badly economic confidence has tumbled in the past three years, from plus 58 (those thinking that the economy will fare well over the next year minus those thinking it will fare badly) to minus 55.

No doubt the Government could also fashion a way to keep mortgage borrowing off the balance sheets, as it did with Northern Rock. But look at the people consulted by Sir James Crosby, the former HBOS chairman asked by the Treasury to conduct the review that has hesitantly made this proposal.

“I have held extensive consultations,” he writes in his report, published yesterday, “with a wide range of” - wait for it - mortgage lenders, banks, building societies, specialist lenders, investment firms, mortgage brokers “and trade associations”, as well as the Treasury, Bank of England and Financial Services Authority, all of whose indulgence allowed the problem to explode in the first place. Now for which of those organisations is it not in their interest to come up with a fiddle that restarts the housing market and reflates the economy at no apparent cost to anybody?


But fiddle it would be, and Sir James knows it. “The persistence of market conditions,” he concludes, “could have significant implications for the economy. Even less desirable, however, would be interventions that distorted these markets and prolonged any recovery process.”

It doesn't seem to me that Sir James is all that keen on the idea of a temporary government guarantee; he is careful to emphasise the need to consider the “fiscal, debt management and legal implications, and the extent to which a transfer of risk to the Government might distort incentives and create moral hazard, rather than help investors and issuers price that risk more accurately”.

But a Government in dire straits, as this one is, will resort to desperate measures, and who knows what pressure might be brought to bear on Sir James between now and the publication of his final report in the autumn, at the time of the Pre-Budget Report. The Government is desperate - one minister was trumpeting this week the great achievement of getting the national policy forum at Warwick University last weekend to agree fairer sharing of waitresses' tips. This is the stuff of press releases in August, not a programme for government.

To give a false boost to the housing market by agreeing to underwrite mortgage lending would be immoral, dishonest and unfair. It may be catastrophic for the Government's popularity, but the fall in house prices is seen by many taxpayers as a proper and overdue correction. For first-time buyers, it is an absolutely good thing. Why they should foot the bill for potential future losses by the banks, when there is a risk that house prices will become artificially inflated not by the market but by the Government, is beyond them. Note that Sir James remarks in his report that he expects the banks will in due course be “more than compensated” for any losses that are being sustained at the moment. They do not need our help.

Nor would a government guarantee help the people who most need assistance in getting on to the housing ladder. It would instead help the many potential buyers who are stalling at the moment, not because they cannot afford to buy at today's prices but because they are hoping that the market will fall farther - a perfectly reasonable tactic, but not one that needs government help.

Yesterday the Bank of England reported that new mortgage approvals had fallen to a record low in June; hardly surprising given the doom-laden headlines. Yet despite the scary predictions, there is little panic out there among consumers.

Homeowners know their properties have been overvalued in the past few years, but they also know that land in the UK is scarce (this is the crucial difference between the UK and the US), not enough new homes are being built and that prices may fall but they will rise again. There is a stalemate between buyers and sellers; hence only a slight decline in real prices (just 1 per cent down from May to June, giving an annual rate of increase - yes, increase - of 0.1 per cent) compared to the hysterical daily predictions in the newspapers.

If the Treasury falsely kickstarts the housing market, these waiting buyers are the people who will dive in before prices rise again, and take advantage of the presumably generous mortgage offers that banks would be prepared to offer if they were underwritten by the Government. First-time buyers, with their lower incomes and low deposits, are not in a position to move as fast and would be left behind again, this time by a government-manipulated boom (and one presumably unsustainable in the longer term).

Mr Brown is caught in the middle - between allies attracted by a US-style Fannie Mae and Freddie Mac system of permanent government underwriting - and those who advise that these things be left entirely to the markets.

Steering a middle course of temporary government support would be a typically Brownian dither. Voters would see through it in a trice, and poorer taxpayers - first-time buyers or those who will never be able to afford to buy - will not forgive it. Meanwhile, the better-off and lenders will be... laughing all the way to the bank. Again.

Still can't force people to buy.

Edited by Ash4781

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