Wednesday, 13 August 2008

Vince Cable's perverse economics...revisited

I got into a discussion last week about the housing market in a post entitled 'Vince Cable's perverse economics.' There are two different strategies that can be pursued towards the housing market at this stage. You can kick start mortgage lending and promote house building, which is broadly the Government's approach. Or you can go the way of Vince Cable and insist on a return to the mortgage market of twenty plus years ago, lending no more than three times annual income in order to deliberately engineer a collapse in house prices.

Vince Cable's approach is recklessly masochistic. The collapse in house prices that would be necessary to make housing affordable for first time buyers on a three times income basis would push 100,000s into negative equity, repossession and back into the private rental market having lost their deposit. This is regardless of the fact that multiples greater than three times annual income can be afforded (if they can't be afforded then the mortgage shouldn't be agreed.) How do I know it can be afforded? Because people, particularly in the South East and London, are already paying rent that is higher than a three times annual income mortgage!

Luckily the Government is going a different way. They are looking at further measures to rebuild liquidity of wholesale capital markets to ensure that good and affordable mortgages remain available according to The Times this morning. It is the wide availability of affordable mortgages and an increase in housing supply with a range of shared ownership options that gives more first time buyers the opportunity to get on the housing ladder.

Lib Dems complain that they can't get their message across in the media. On this issue it is a blessing rather than a curse.


  1. ..........would push 100,000s into negative equity, repossession and back into the private rental market having lost their deposit.

    I agree with your first point, but those last two look tenous to me. Just because you are in negative equity it does not mean your house will be repossessed. Surely the majority of house owners will continue to afford their mortgages as they will still be doing the jobs they are doing now. So there won't be hundreds of thousands, tens maybe...

  2. Many people are on two-year fixed mortgages. When they come to re-mortgage, that's when they would take the hit as they will have difficulty finding a mortgage. And what if they need to move?

    This would all be accentuated in a housing market that was in a greater downward spiral with no chance of recovery for a considerable period of time with more restrictive mortgage lending. A nightmare in other words.

    300,000 people are already in arrears in the early-ish stages of a declining housing market and an economic plateau:

    Imagine what that figure would rise to if house prices collapse and mortgage finance is far more heavily restricted than it is now.

    I haven't even begun on the economic impact of this....