24 February 2009

Meaningless Soundbites of the Week

Given that it's only Tuesday, I realise I'm taking a bit of a chance with that headline, but I'm prepared to risk it, because it seems that right across the mainstream political spectrum, politicians are lining up to wade into the criticism of 100% mortgages. The big three parties have called for an end to them, the FSA have indicated that they are considering controls on them and the two main opposition parties have criticised the government for not doing something about them sooner.

At this moment in time it is completely irrelevant, because the chances of 100% mortgages being offered on a widespread basis is going to be nil for the foreseeable future. It's also a figure which looks important but is in effect completely arbitrary. In a completely static property market, the 100% level might be relevant, but our housing (or more correctly land) market isn't static, it bubbles and bursts. At the bottom of the market, a 125% mortgage might be reasonable, but at the top of the market, even a 70% mortgage might see the security value wiped out in the following slump.

The feeding frenzy also completely ignores the fact that mortgages aren't the only form of credit. Other secured and unsecured loans add to indebtedness; it's worth noting that Northern Rock's 125% mortgage was in fact a 95% mortgage and an unsecured loan for the remaining balance. Unless you limit all lending to secured loans capped at a certain level of the property value, there is no way you could guarantee people wouldn't become over-indebted through regulation.

All this talk of regulation and loan-to-value capping is just ignoring the simple fact that the only way you can ensure that poor credit decisions don't create wider economic damage is to ensure that all losses are borne by the lender's shareholders, investors and savers, rather than being externalised. The prospect of losing their savings would make people looking for an interest paying account pay more attention to the prudence of the institution they are considering investing with, rather than just chasing the highest interest rate irrespective of the risk.

And, of course, introducing a Land Value Tax and reducing other taxes by a corresponding amount would reduce the incentive for property speculation, resulting in a smaller bubble to burst in the first place.

1 comment:

Mark Wadsworth said...

Fair points, but you don't seem to realise how desperate Nulab (and it appears Blulab) are to reflate the house price bubble, so in a while they will be forcing the state owned banks to make 90% mortgages, once prices have fallen another 20% by the end of this year, they will then be 110% mortgages and so on.