Saturday, September 26, 2009

How housing madness destroyed democracy

   It’s often said that a man’s price is just a few pounds short of his mortgage -  though in Westminster that should now be his second mortgage.  And women MPs, like Hazel Blears,  have been just as bad as the men.   It’s widely accepted now that the cleansing of the Augean stables in Westminster will require a constitutional convention and radical reform.  But there is something else that is needing reform: the housing market in Britain. 

   Our national obsession with property corrupted parliament by turning half the House of Commons into property speculators.  MPs have been fiddling and flipping their second homes to gain, in some cases, hundreds of thousands of pounds from properties wholly or largely funded by the state. As a result, some estimate that half of all the MPs will be forced take early retirement, be deselected or be voted out by outraged constituents.   They should erect a monument to Kirsty Allsop outside the Commons as a grim reminder of what happens when people become addicted to the drug of property.

  And a copy should go to the city of London too.  Housing madness helped to destroy the banking system.  Bankers who believed property prices could only ever go up created an inverted pyramid of debt on the slender basis of dodgy mortgages in American and British inner cities. The losses and write downs from  the mortgage-related securities fiasco has so far reached some $4 trillion world wide, according to the IMF.    In Britain around £1trillion has disappeared from the asset base of the middle classes who had been maintaining their living standards for the last decade by borrowing against the nominal value of their homes.

    The housing boom begat the debt bubble, which begat the construction boom.  The mania for property diverted investment from productive activity into real estate on a colossal scale.  From Riga to Dublin, European cities are surrounded by thousands of acres of unfinished developments, many of which faee being demolished for safety reasons because there’s no money to complete them.   The housing boom has inflicted the devastation of a small war on the national finances of countries from the sun belt to the Baltic. Vast sums of public money are being wasted buying toxic mortgage bonds from insolvent banks.  

   Amid this devastation,  ruined political careers in Westminster may seem the least of our problems, but the scandal of MPs second homes is important because it was both a symptom and a cause of the crisis.   Politicians became infected with housing madness under New Labour and started plundering the public finances to buy and develop second and sometimes third and fourth homes.  So it’s hardly surprising that MPs didn’t ask very pressing questions about the housing and credit bubbles. After all, their constituents were making a packet too.  Between 1997 and 2001, house prices in Britain nearly doubled under Labour.  Between 2001 and 2005 they went again by nearly as much.  It was as if the government had handed every homeowner in Britain a hundred thousand pounds.  No wonder Labour won tthree elections.

MPs felt entitled to get their own snouts in the trough.  But how, you ask, could MPs justify making these gains to their consciences?   The reason is that, like many of us, MPs stopped seeing housing wealth as real money.  People often talk of their house ‘earning’more than they do, but they quickly follow this up with an assertion that it’s not real  because ‘you always need a house’.  But for first time buyers it is very real money indeed.  Just try to get a mortgage for a flat in Glasgow or Edinburgh right now, and if you don’t have a substantial depoit and an ability to cope with debt worth five or six times average earnings, you’d be lucky to get a two bedroom flat. 

   Moreover, there is a generation of well heeled baby boomers who will be retiring in the next few years who will be living very comfortably on this unreal money as they downsize their houses and cash in on thirty years of housing inflation.  Homes don’t generate wealth; they merely transfer it.  In this case, from young people starting out, to older people retiring. Now a new generation is now coming along who can’t afford homes at all even after the property price crash. Young families, still paying student loans, are being seduced with low interest rates take on colossal mortgages that will be a burden for their entire lives.   

  Politicians talk about the housing boom rather as if it was an act of nature; something out of political control. But it has always been underwritten by the state.  From mortgage interest tax relief, brought in by Margaret Thatcher to the tax breaks given to buy to let investors, the state has actively encouraged house price inflation. Housing is the only asset on which no one  pays capital gains tax. Inheritance taxes are being abolished by both Labour and the Tories in order to allow people to hand on up to a million pounds in tax free gains from housing.  You can’t do that with any other asset like shares or savings. 

   Governments gave huge incentives to people to buy council houses and then barred local authorities from using the proceeds to build new social housing. This created a national housing shortage that pushed prices higher and higher.  Even now, councils like Dundee and Edinburgh are using public money, not to build houses, bur to finance 100% mortgages to private home buyers even though the Financial Services Authority is trying to ban them.   Someone needs to call a halt to this misuse of public funds  It is not the job of local authorities to subsidise private mortgages.

      More widely, tax breaks on residential housing must be ended, buy to let curbed, and property treated like any other asset.  Firm guidelines should be laid down by the FSA on income multiples to end 125% suicide mortgages, self-certificated “liar loans and all forms of sub prime.   Above all, there needs to be a commitment to build enough homes for people live -   “to nest in rather than invest in” as politicians used to say before the great corruption.   Hopefully the next generation of politicians will see sense.  After all, unlike the present lot, they are going to have to buy and equip homes at their own expense, just like the rest of us.   


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