Posts Tagged ‘mortgages’

If house prices boom all over again, then the chancellor may be able to take much of the credit. In fact, it rather looks as if he is gambling on rising house prices. It’s a shame, because there is something else the UK really needs to rise, and that is its stock of entrepreneurs and wealth creators.

George Osborne is spending £3.5 billion on helping people chasing a new mortgage. That’s a lot, and he is guaranteeing £130 billion worth of mortgages. That is a risky thing to do but perfectly safe, if – and it is a big if – house prices rise.

The plan is for the UK government to extend its share equity scheme, so that the government will offer an equity loan worth up to 20 per cent of the value of a new build home to anyone looking to move up the housing ladder. House buyers will be required to put down a five per cent deposit from savings, and the government will then loan a further 20 per cent interest free for the first five years and repayable when the house is sold.

“It’s a great deal for homebuyers,” said George.

The government will also offer a new mortgage guarantee, to be available to lenders to help them provide more mortgages to people who can’t afford a big deposit. These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending. In all, the government will guarantee £130 billion of mortgages.

These are bold moves. But what effect will they have?

The risk is that these measures will push up house prices, which will soon become unaffordable again, but for a new reason. At the moment the challenge for home buyers is raising finance. If house prices rise, the challenge will relate to being able to afford mortgages, even if the finance is available.

If the government really wants to help more people own their own homes, it needs to try to get house prices down, not up. It can do this by taxing land that is lying idle, and reforming planning regulation. It can do this by forcing zombie banks and home builders to revalue the value of land on their balance sheets. Such measures will benefit the UK in the long run, but will be hugely controversial.

You can’t blame George for not implementing these measures, because if he did, an election disaster may await but it would have nonetheless been the right thing to do.

For too long the UK has grown on the back of rising house prices, giving consumers the confidence to borrow and spend.

The UK needs to grow via business making bold investments, entrepreneurs creating wealth by dint of their ingenuity, and through creating an innovation culture in which innovators are not afraid to risk failing.

Instead George tweaked. Sure corporation tax is falling to 20 per cent: “The lowest business tax of any major economy in the world,” he said. But US companies are sitting on $1.4 trillion worth of cash, according to Moody’s. Companies in the UK and across the world have money, and they are not spending it.

Cutting UK corporation tax will give the UK an advantage over rivals in much the same way that a trade subsidy would benefit UK exporters, but it will do nothing to solve the problem of cash lying idle and sitting on corporate balance sheets around the world. There is a case for saying we need to see a global fixed level of corporation tax. Mr Osborne is pushing for the opposite.

The Chancellor is also cutting £2,000 from every employer’s contribution to national nsurance. This is a bold move. George put it this way: “For a person who’s set up their own business, and is thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on £22,000, or four people on the minimum wage, and pay no jobs tax.” Hats off to George – that is an interesting move.

But the UK’s underlying problem is productivity. According to the ONS, output per hour in the UK was 16 percentage points below the average for the rest of the major industrialised economies in 2011, which was the widest productivity gap since 1993. On an output per worker basis, UK productivity was 21 percentage points lower than the rest of the G7 in 2011. To enjoy sustainable growth, the UK needs improvements in productivity, and reducing the tax on jobs will not help.

The Chancellor announced other measures: a fivefold increase in the value of government procurement budgets spent through the Small Business Research Initiative; vouchers available to small firms seeking advice on how to expand, but these are little more than tinkering.

The most interesting idea to help business may have been his plan to cut stamp duty on shares traded on the AIM market. The Chancellor said: “Many observers of the British tax system complain that it has long biased debt financing over equity investment.” So the reform to stamp duty will encourage equity investment over debt.

Now it is time to turn to the missed opportunity. What entrepreneurs need is hard cash – money they can see, touch and smell.

Supposing that the £3.5 billion set aside to help home buyers was instead spent on funding entrepreneurs; perhaps spent on a sort of student loan system but for entrepreneurs, or just invested into venture capital firms and business angel networks. Now that really would have created the foundations for the UK to become the most dynamic economy in the world.

©2013 Investment and Business News.

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The latest data from the Nationwide, Hometrack and Halifax on UK house prices was out last week. And for the second time in three months they were unanimous. They all had month on month house prices falling: Hometrack by 0.1 per cent, Nationwide by 0.4 per cent, and the Halifax index recorded a 0.4 per cent drop in September. It has been frustrating over the last couple of years observing these housing surveys. Each month they have seemed to contradict each other. But all three reported falls in July, and in August two of the three reported falls (Nationwide had prices rising), and in September this rare agreement thing has happened again.

Perhaps more to the point, on an annual basis all three had prices falling too: Hometrack by 0.5 per cent, Nationwide by 1.4 per cent and Halifax by 1.2 per cent.

Mind you, they might have prices falling but house prices are not exactly crashing.

Meanwhile, politicians are busy trying to dream up ideas to try to get prices up. Nick Clegg wants to use money sitting in pension schemes to fund deposits, while Ed Balls has mooted the idea of using income from licensing 4G to fund a cut in stamp duty.

But, as is their wont, while on one hand the government is trying to dream up ideas to kick start the property market – such as funding for lending – is the other hand is also busy coming up with ideas to derail the market. According to analysis from Morgan Stanley, banks could be forced to find an extra £22bn in capital to fund changes to the way in which mortgages are risk weighted. The issue is complicated. Under the Basel rules, banks are required to hold a certain amount of capital. And under impending changes they will need to maintain 10 per cent capital ratios – other than mortgages, that is. Mortgages are seen as different, and carry a much lower risk rating than other asset classes. And who chooses this risk rating? Why the banks themselves, of course. It turns out that some banks have put such a low risk rating on their mortgage assets that, in fact, they can achieve leverage of near 100 to one – or one per cent capital.

It is not difficult to understand why the regulator is worried about this. This may seem like a radical concept, but some might say that it should not be down to the banks to risk assess their own assets.

So far then it all makes sense. Banks should not be allowed to risk assess their assets, and should not be allowed leverage of around 100:1 on some mortgage debt. It is just that if the regulators’ perfectly reasonable reservations were taken into account, bank mortgage lending might crash faster than you can say ‘property snakes and ladders’.

And that brings us to the baby boomers – you know those people who are due to swell the ranks of the retired to record levels. According to research from Lloyds Bank, just over half (51 per cent) of potential home movers are looking to ‘downsize’ within the next three years, compared to just a fifth (22 per cent) looking to trade up to a larger property. It is not that rare for home owners reaching retirement to downsize. The Lloyds TSB report, however, found that the reasons for downsizing have broadened in these tough economic times. Whilst 59 per cent want to move to a smaller property that is better suited to their circumstances, a third of potential downsizers would like to move to a smaller property to help reduce bills. Almost two fifths would like to free up equity in the property, and almost one in three said they want to downsize to help support retirement plans. A fifth of those considering downsizing are looking to trade down earlier than expected, with the majority citing financial concerns as the key driver.

So there you have it. The government can try to nudge us all into saving more, but as the UK enters the demographic moment of dread – the retirement of baby boomers – we are set to see a rush of people downsizing, creating an influx of supply onto the property market.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here