Britain’s Government Sponsored National Housing Ponzi Scheme
When it comes to housing policy in the UK, the Conservatives are a one-trick pony. They have form. It is designed around dividing the citizens of the country. This is evidenced yet again with the housing and planning bill currently before parliament that will inevitably make the housing crisis worse than it already is.
This bill will reduce the total number of affordable homes in the backdrop of a rising population, it also encourages ever more property speculation, as if it needed it. Margaret Thatcher’s housing policy legacy was to sell off over four million council homes where 40% ended up being in the hands of private landlords.
The result of all this political meddling? A housing crisis where nearly two million households (families, not individuals) are on waiting lists for a council home. Home ownership is now plunging. Debt is soaring just to keep the family above the waterline, homelessness has now risen 300% in five years, poverty is escalating, child poverty with it. One third of Britain’s children will live in poverty by 2020 – thanks in large part to housing.
In this bill, extending even further the right-to-buy sell-off comes at a cost to the housing associations who are being forced as privately owned organisations to dispose of high value units onto the open market. This scheme, forecasted to be unworkable by the Local Government Authority will cost councils another £6billion of desperately needed cash. Any ‘household’ with an income that exceeds £40k in London or £30k in the rest of the country will pay market rents or be kicked out.
Under Thatcher, the ‘Right to Buy’ scheme allowed tenants to buy their home with a discount of 33% – 50% off the market value, depending on the time they had lived there. Councils were prevented from reinvesting the proceeds of these sales in new housing, and the total available stock, particularly of more desirable homes, declined dramatically.
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This proved to be disastrous and the sell-off kick started the housing crisis we have today. Rolled out during the first half of the 1980s, the selling of council stock homes was accompanied by the slashing of housing budgets and ever more draconian controls on local authority borrowing and spending. The result was large rent rises, falling house building and, by 1986, an estimated £19bn repair backlog for council homes and £25bn for private sector homes (Hughes and Lowe, pp.217-8).
The Conservatives also introduced greater powers for private landlords and liberalised mortgage lending for buy-to-let investment to boost the private rental sector and help to develop major property companies, agencies and estate agents.
Today, there are over 1,000 mortgage products on offer as if the buy-to-let frenzy needs any further assistance to gather pace.
From 1980 to 1990 4.39 million homes had been sold-off, transferred from councils or demolished to make way for new private developments. Tens of thousands were repossessed in the housing crash that started in 1988 that didn’t end until 1994. Many were bought up by private landlords at knock-down prices. Outrageous bank profits resulted in family chaos.
Today, the taxpayer is pouring billions into what will turn out to be a sub-prime implosion but for now – market manipulation by any other description.
First, the Bank-of-England distorted money markets with a near on Zero Interest Rate Policy (ZIRP) forcing anyone with cash savings to invest. As no-one trusts bankers or ‘financial advisors’, hundreds of thousands became reluctant landlords. One fifth of all house sales are now snapped up by buy-to-let investors and 40% of new homes sold are. Nearly 40% of all property sold in the UK today is bought in cash.
In a political soundbite to help struggling buyers, two bogus house price escalation schemes were cooked up by George Osborne in the guise of Funding for Lending and Help to Buy. The former dramatically failed and ended up lowering mortgage rates, the latter forces the already overcommitted taxpayer to underwrite £12 billion of mortgage lending to people who haven’t got an adequate deposit of their own, or who lack the income to have a go at producing one and who therefore shouldn’t really qualify for a mortgage at all. To help struggling buyers even further, the taxpayer is now burdened with another £835 million in subsidies with the Help to Buy Isa – a tax free Isa and top-up scheme to help create a deposit.
All of this might have worked if someone had thought beforehand to build some houses.
In Britain, prices are increasing because of a lack of supply. The overall volume of property transactions has completely collapsed, falling 40% since 2008 – the property market is now artificially supported by the government with a wave of financial instruments.
As one headline put it, it is “Financial Illiteracy Laid Bare“. The government is now funding a sub-prime category of borrowers who can’t afford a deposit. The reason these people can’t afford a deposit is because of the rent they already pay is draining them of every penny they earn. That’s called by no coincidence – wait for it … the “cost of living crisis” where no less than 40% of Britain’s citizens are now so poor they can’t participate in society.
As capx.co reports – “The UK residential property already attracts a £3.7 billion public subsidy through Help-to-Buy mortgage guarantees and equity loans, a further £6.7 billion a year in mortgage interest tax relief and £10.4billion a year in Principal Private Residence Tax Relief. If the European Commission were to investigate the UK for providing state aid to the residential property sector the UK would be bang to rights”.
It doesn’t help that London is now the money laundering capital of the world when it comes to ‘cleaning’ dirty money through property investing – pushing property prices even higher. An investigation by Transparency International reported on the scale of this problem in the UK and it makes truly depressing reading for any law-abiding citizen. It found 36,342 London properties are held by offshore haven companies. Needless to say the government has done nothing about a crime wave sweeping Britain involving terrorists, drug smugglers, thieves and charlatans from all over the globe.
The result of all this is largely disheartening, dismal and dispiriting when we read what the future presents to our youth.
Large numbers of older households have benefited from decades of unabaited house price growth who now hold substantial amounts of housing equity. This creates an incentive for government to preserve house prices at existing levels or higher as it’s a vote loser when house prices decline. Obviously, high house prices also create a barrier to new buyers, particularly through the size of deposit they need to obtain.
The high deposit required is only the result of the last disaster that successive governments allowed to happen when the housing market imploded in 2008 after years of mindless financial deregulation. Here, the government stepped in to stop a full correction, which was badly needed.
Recent work by the Council of Mortgage Lenders demonstrates the scale of the challenge the Government has put our youngsters in. Analysis of homeownership by age cohort shows that around 64% of households born in either 1960 or 1970 owned their own home by the age of 35. They now predict that only 39% of those born in 1990 will own their home by the time they reach 35 years old. Rather than creating a nation of homeownership, politicians have only created a generation (or two) of homeowners.
In this environment, 52% of first time buyers, determined to get on the housing ladder end up with deposits being provided by the “bank of mum and dad“. And if mum and dad were unable to help, it was finances that forced half into buying a property with a partner when they would have chosen not to.
Figures in the latest English Housing Survey, show that tenants paid half their income on rent. In London, renting a home costs an average of 60% of gross earnings. What’s worse is that most have to get state aid to help pay the rent, without it, the average renter would be paying 72% of their entire income on housing. Now, 64% of all British families need state aid just to survive. What a shocking indictment of capitalism and the free market, neither of which are functioning as they should because of constant interference and government control in housing that forces prices up.
In the past two decades alone, property prices have increased by more than in any other country in the G7; which by some calculations makes British property the most expensive in the world, save in Monaco.
In that same two decades, the population of Britain has grown by 11%, more than double the average in the 28 nation EU. People are marrying much later than they did and divorcing more readily and living longer, meaning that one in ten adult Britons now lives alone, the effect only exacerbating the demand and therefore the need for more homes.
Britain is in the middle of what can only be described as a classic debt-financed speculative housing bubble, supported by a narrow-minded government feeding a largely unaware public to a rabid banking industry that cares little for anything except the size of its annual bonus. This is a housing Ponzi scheme, you can’t describe it as anything else. As soon as this investment model fails, and it will, the housing market will crash and another massive bank bail-out, or more likely, bail-in will be required.
The UK is in need of a rational national housing policy with a long-term horizon based upon the needs of the nation, not based on outright greed and how bankers and politicians can profit from the intensifying poverty trap that the housing market now brings.
Graham Vanbergen – TruePublica