💵 Helping People Pay Their Mortgages Is Elitist

Terrible news hit the wires last week. The government is planning to help Britain's mortgaged homeowners keep their homes. Absolute incompetence. Don't they know they're only supposed to protect the 1%?

(Sarcasm is cathartic and nobody can convince me otherwise)

Seriously now, why can't there be a reasonable debate about British housing? Or indeed, housing anywhere...?

A lot of the commentary around the announcement of these government support measures is deeply Orwellian.

We can agree that the housing situation is out of balance while also thinking that people shouldn't be thrown out of their homes and burnt at the stake for the heinous crime of being 'asset rich' and cash poor in a system that specifically incentivised that outcome.

We'll get back to that though. I'll set out my bias early. I think housing is a deeply complex issue that goes far beyond Inequality™. There's no easy solution to 'fix' this.

Land Value Tax is the best theoretical solution. I still have deep reservations about the size of second order effects it might bring about (despite David's best efforts to convert me)...

That's not to say that we shouldn't give it a go. Maybe phase LVT in over a decade or so (while proportionately reducing the tax burdens on labour and capital), but that's not really the point of today's note...

Emotion is the enemy of understanding

That's the point. Instead of getting emotional about a subject and banging on about fairness, equality, punishment, greed, ignorance or whatever, it's better (in my view) to dig a bit...

Figure out what led us to this point.

See, today's problems can usually be traced back to yesterday's solutions.

For example, the modern tyranny of Buy To Let mortgages, which has helped create a professional landlord class in Britain since their introduction in 1996.

Start with a simple question.

Why would anyone introduce this type of mortgage product? 

As it happens, the UK housing market went through some seriously tough times in the early 90's.

Look at those repossession stats. Worse than the aftermath of the Great Financial Crisis... 👇

Graphic from a timeline of the UK housing market (it's just a series of rolling problems and solutions).

From Q2 1989 to Q4 1995, inflation adjusted house prices fall by -37% over 6.5 years

Far from ideal.

Much of the preceding boom can be traced back to Thatcher's Right To Buy, Mortgage Interest Relief At Source (MIRAS), and the liberalisation of the mortgage industry in the early 80's.

But none of that matters right now. Buy To Let mortgages were the 'solution' for two big problems 👇

1. "Local authority house building has all but ended"

2. This 👇

So, there was essentially no rental market, because everyone had been encouraged to lever up and buy. Those are the seeds of today's rentier generation.

Then it all went to shit, and a LOT of people were in negative equity and/or having their homes repossessed. 👇

Unsurprisingly, negative equity has severely negative economic consequences.

Spending slows, and a general malaise sets in as society slowly battles it out to see who pays the costs and over what time horizon.  

It seems much of this nuance has been lost in the 'debate' about protecting homeowners from the impact of the sudden and drastic rate rises of the past year or so.

Commentators wants government measures to be more targeted. It doesn't matter what the problem is. Defining who is deserving of this help is far trickier.

Take this guy... 👇

Loads going on here. The most obvious point is that even the cheapest 5 bed properties in Wimbledon are renting for £4,250 pcm, so £2,700 is still well below the going rate to live in Wimbledon...

Hard to have too much sympathy for Gareth drawing down on those savings that he's accrued over the years. That's what 'savings' are for mate.

It's a fun story, but he's hardly representative of any kind of majority within society.  

Then there's the debate over this help being focused towards those who least need it...

First up, incomes vary over time, and for all kinds of reasons. People lose jobs, change industries, start new businesses, care for younger/older generations, and so on.

Income is not as static as we'd like to believe... 👇

In any case, the help on offer is more of a Minimum Effective Dose than anything ground-breaking.

Repossession as a last resort after twelve months, and six months interest only to get over the hump if possible. That's it. No debt relief, no jubilees. Just an obligation to help for a bit.

And it's entirely plausible that lenders would have chosen to implement these measures without any government input whatsoever.

Lenders don't want to repossess. They're really not set up for efficiently dealing with property sales, the legal costs are astronomical, and 'the public' won't benefit if that's where we end up.

We've seen what happens if the property market falls apart twice now (90's and GFC). Trying to pro-actively offer solutions to avoid those outcomes is a GOOD thing.

This is what lies ahead according to JPM 👇

If higher rates persist, it's going to get very squeezy around here. Personally, I'd rather they didn't just tinker around the edges with the assistance. Make it explicit. People will generally self-select for this stuff. They won't usually request assistance unless they actually need it.

On that note, policymakers will generally favour the least bad option rather than anything we could define as optimal. Frustrating as it is, that's usually the best choice.

Although, looking back over the history of the UK housing market does highlight the absurdity of the constant boom/bust cycle, and makes me wonder even more about that Georgism thing...

Right to Buy leads to bust. Solution... Buy To Let Mortgages & increased mortgage availability... Leads to bust. Solution...Help To Buy... etc.  etc.

Via Savills 👇