Monday, 21 November 2011

UK tax-payer new sub prime lender - £400M scheme to "boost" mortgage lending.


Today the government revealed a new initiative to "boost" the housing market. The new £400M scheme is aimed at encouraging first-time-buyers to take out 95% LTV mortgages, or put in another way encourage the lenders to approve 95% mortgages by guaranteeing the losses. Many experts believe that this is a good initiative as it will release some of the so-called pent up demand and, crucially, stop the house prices from falling. Unsurprisingly the estate agents are quick to praise the scheme (why bother asking them) and mortgage lenders likewise (because what is their downside?). However my humble opinion is that the scheme and anything like it is perverse.

We, including the government, are complaining about excessive risk taking by the banks during the boom years. They did that because it was easy to remove the risk from the balance sheet through securitisation. Now as way to boost the housing market, the government has decided to make it palatable for banks to lend more by underwriting the risk. The government is turning itself into a sub prime lender.

But that isn't actually my biggest problem with the scheme. I am of the belief that house prices are too high (yeah yeah, but that's my opinon and this is my blog), I do not believe it is for the greater good that most people has to take on huge amounts of debt just to live a sub prime existence in a two bed semi-d. The only reason why people are so desperate in the first place is that the rental market is pure wild west, two sides of the same story. The government should do the responsible thing for the next generation and preside over a gradual deflation of the property bubble, probably down to a sustainable 50% of today's values, and use whatever schemes they have to support people that are disadvantaged by the correction. In addition, improve tenants rights, cap the number of investment properties one can own (like in China), set the max ltv far lower than today. It will hurt but your children will thank you. A house is a home, not an investment.

As said, not an experts opinion, just an opinion.




No comments:

Post a Comment