It is very rare that you find me supporting any proposal from the Tufton Street brigade. However, the Centre for Policy Studies has produced a report today, working with the Joseph Rowntree Foundation, about which they say:
A new paper from the Centre for Policy Studies warns that, as millions face losing their jobs when furlough ends next month, many will risk losing their homes as well when the mortgage holiday arrangements end at the same time. Even with the Job Support Scheme, many could struggle to pay their mortgages without reform to the support available.
Despite 1/3 of those in poverty being owner-occupiers, housing benefit only covers renters. Home owners can only get help with their mortgage interest payments, and even then, they must wait nine months to qualify - and the whole amount is withdrawn if they take on any work at all.
The report, supported by the Joseph Rowntree Foundation, argues that the Support for Mortgage Interest (SMI) scheme needs urgent reform to support low-income homeowners through the crisis,and more generally to improve the benefits system so that it better supports struggling homeowners.
It argues that as well as being necessary and compassionate, such measures will be far more cost-effective for government than seeing people lose their homes and go on to housing benefit. Largely because the current version of SMI is a loan-based scheme with virtually no ultimate cost to government.
To ensure those with mortgages who lose their jobs don't also lose their homes, the CPS is proposing that:
- the nine-month waiting period for SMI should be abolished;
- the first three months of SMI should be paid as a grant, not a loan;
- Government should allow people to claim SMI while moving into work, as with other benefits;
- lenders should make people who are at risk of losing their homes aware of this scheme automatically;
- to ensure that people do not remain in homes they cannot afford in the long term, SMI should be time-limited for claimants who are able to work and are not receiving a disability-related benefit.
The report also argues that there is a longer-term need to rebalance the welfare system to reflect the desire of those on low or moderate incomes to achieve, and retain, home ownership.
It is, of course, appropriate to note that the Centre for Policy Studies has woken up to this issue when homeowners are impacted, rather than renters: their bias is apparent. That does not, however, mean that this is not a real issue, because it is. As I have said, very often, during the course of this crisis, it will spillover, and quite dramatically so, into the property market, whether via the rent or mortgage systems.
In either case short-term measures of the type proposed by the CPS may be appropriate. But they are just sticking plasters. The real issues are systemic, and the CPS proposal goes nowhere near addressing them.
So what is really required to help mortgage owners as the property market begins to collapse under the strain of the coronavirus crisis?
First of all, job creation is critical.
Second, selective furlough has to continue.
Third, continuing mortgage holidays have to be permitted.
Fourth, it is essential that interest rates be kept low, come what may.
Fifth, a new industrial strategy is required so that people can be retrained and redirected towards meeting the needs that we must now address.
This is the only waited to deliver long-term prosperity. And, the problems implicit in a society which is overly dependent upon house ownership must also be addressed, including a restriction upon the right of banks to ever seek to recover more than the value of the property from the mortgage holder so that the concept of negative equity is eliminated from consideration. Householders cannot be held responsible for macroeconomic failure. Governments have this responsibility, and if they need to compensate banks for that fact, then so be it. But the torment of being held enslaved by a mortgage cannot be an outcome of this crisis.
For once I welcome a move from the CPS. But it is far too limited in its horizons to have any long-term impact. We need real vision to address the changes that are actually required to ensure that people can stay in their homes in the UK over the next few years.
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Its also interesting to see that The Bow Group has proposed amongst other things restricting ownership of residential property in the UK to UK nationals & residents only as well as making it policy that average house prices should not exceed 4x earnings.
My suggestion would be that there should be an ‘insurance based’ mortgage support system, paid for by a levy on mortgates and only available for loans that meet certain criteria.
Here’s support for your “4x earnings” argument:-
https://www.schroders.com/en/insights/economics/what-174-years-of-data-tell-us-about-house-price-affordability-in-the-uk/
Whether this country ever manages to get a government sufficiently uncorrupt to implement it is a moot point:-
http://www.theguardian.com/money/2016/mar/14/tony-cherie-blair-property-empire-worth-estimated-27m-pounds
Agree with all of that for that particular sector of housing provision.
But in social housing land, the bed room tax, the benefit cap and 2017’s two child limit are all still in operation even during Covid.
The first glimmer of understanding what the f*ck is happening to us finally creeps into sight
Election Maps UK
@ElectionMapsUK
In hindsight, do you think Britain was right or wrong to vote to leave the European Union?
Right to leave: 39% (-2)
Wrong to leave: 50% (+4)
@YouGov
, 23-24 Sep.
Changes w/ 8-9 Sep.
https://twitter.com/ElectionMapsUK/status/1310619761747910658
I’m not sure you have thought through your proposals fully.
It would lead to banks massively increasing their required deposit for a loan to be granted (to ensure that their full loaned amount was always covered by the equity in the property), reducing the availability of mortgages to everyone but the already wealthy.
More worryingly, you would effectively be underwriting the value of everybody’s existing house, with the householders picking up any gains, whilst any losses on a sale being covered by governments reimbursing banks for any shortfalls.
I’m not sure either of those are what you are looking to achieve ?
I have thought it through
It only makes sense with secure ling term social housing tenancies – which I also propose
We need secure housing for a stable society and what we have can now deliver that again so radical reform is required
And yes, that does mean that large quantifies o0f supposed value might well need writing off
But there is no won in what I propose for existing house owners: there is only a down side protection
@ David O’Leary
I agree some phasing in is required but the Tory government has set a precedent in being involved in stimulating the housing market with money. Of course they’ve been doing this on behalf of their main party funds contributors and revolving door job providers the finance sector.
However, if this country ever gets a government that is A) not corrupt and B) understands the reserves based monetary system the country operates means there is a Financier of Last Resort namely the government then it will be possible to stop the five decades long hyper-inflation in the private sector housing of both house purchase and rents. The government will simply top-up their restriction of the lower ratio under-writing standard they implement.
The government could, of course, completely take over the market for the provision of house mortgages on the basis it’s become corrupted and putting a roof over the head of its citizens is a basic human right. This may seem too extreme and they could leave private banks to fund the private rented housing market but again on a very tightly monitored under-writing standard. My preference though is that an affordable housing model is developed on a Shared Ownership basis so that over time it’s possible to increase your equity stake even to complete ownership. For those in retirement there has to be a fresh look at how to remove the maintenance responsibility of their homes to keep the housing stock in good repair. This I believe will also involve creating much more sheltered housing.
One can only dream that voters will wake up one day to realise how they’re being fleeced!
I like your ideas
Those CPS proposals look great in principle, but who pays for it?
There’s little doubt the Benefit system is unequal and gaps in eligibility (Like having £16k saving/assets as the upper limit!?) but ultimately property values are too high, rents are too high and foreign ownership of UK property has inflated values/limited supply to create a mess…..
Who pays for homelessness?
Remember we have a choice here: real, utter, human misery or some entries i9n a computer ledger
Which one would you prefer?
@ blimey
If you’re homeless then your not likely to function very well at your job assuming you have one will you and the overall economy will suffer. You need to do some joined-up thinking here starting with understanding why the reserves based monetary system the country’s evolved does have a “Financier of Last Resort” namely the government and you are being lied to by politicians and mainstream media journalists who repeatedly tell you government has no money of its own. (Note these people never offer up a coherent explanation how the country’s monetary system works. They usually disappear in a puff of smoke when you ask them to!)
In the future we have to recognise that there is a demand for socialLy rented housing and that the dream of home ownership promoted by Thatcher is well and truly burst.
In the 1960/70’s whole areas of unfit housing were taken for redevelopment. Even hoses that were fit were included I order to make a suitable area for redevelopment(pink land). This was needed in order to improve the quality of housing by building socially rented homes and ensure a supply of decent homes for rent.
As many areas now are occupied by people who rent why does the government not compulsory purchase, via local authorities, rented houses in a specified area and continue to purchase houses in the said area when home owners either move or die.
This would ensure a supply of socially rented homes in the public sector.
In theory this is possible…
Can I just check what you are saying is correct?
“including a restriction upon the right of banks to ever seek to recover more than the value of the property from the mortgage holder so that the concept of negative equity is eliminated from consideration. Householders cannot be held responsible for macroeconomic failure. Governments have this responsibility, and if they need to compensate banks for that fact, then so be it. But the torment of being held enslaved by a mortgage cannot be an outcome of this crisis”
Breaking this down:
1. Mortgages are just asset backed loans. The price of the loan is determined by interest rates, amount and creditworthiness of the borrower. Not really the underlying asset (it will have a small effect, but in comparison to the other things, not much).
2. Negative equity simply means that the present value of the loan is worth more than the asset. This would be the same for any asset backed loan, not just mortgages.
3. Are you suggesting the government should put a floor under house prices, and make any losses on mortgages good?
The immediate effect of this would be to massively drive house prices up. If you can buy an asset through leverage (a mortgage, for example), and you can ONLY win on the purchase (because the government will cover any losses) then the only sensible thing for anyone to do would be to buy as many as they can.
Of course, this would lead to even more housing shortages as people snap up every property they possibly can. it will also lead to even more wealth inequality as the rich will be able to buy more houses than the poor, and will benefit more from the rise in house prices. All whilst being protected from losses by the government.
How do you make this nonsense up?
Houses are not like other assets – in case you have not noticed the6 are homes
And in case you have not noticed no one can own a house at present without an equity stake, which they would have to lose in my scenario
No one is going to buy a house to create a loss – which is not even CGT allowable
Politely, stop being crass and look at the real world
One could ask the same of you.
What difference does a house being a home make to it’s value, when compared to other assets? Assets, including houses have a value. That value can be used as security against a loan. The loan is a fixed amount, but the value of the asset can change. That’s it.
“including a restriction upon the right of banks to ever seek to recover more than the value of the property from the mortgage holder so that the concept of negative equity is eliminated from consideration”
“And in case you have not noticed no one can own a house at present without an equity stake, which they would have to lose in my scenario”
Which is it. because if someone loses their equity stake, they are in negative equity. Which you also say the government should cover so no-one can ever e in negative equity.
“No one is going to buy a house to create a loss”
No. But you are going to buy a lot of them if you can’t have a loss, and you benefit from any profit. Which is exactly what would happen if the government compensates for any mortgage going into negative equity – or in other words any losses. If you can only win on the game, you are likely to play a lot and so will everyone else.
“Politely, stop being crass and look at the real world”
Politely, you should probably do the same before making such ridiculous utterances – it is clear you don’t really have an understanding of the topic and just blurted out the first things that came into your head in blog format.
With respect (and please do read that in the usual way) it’s very hard to deal with someone who does not understand that a home is not primarily an asset. If as an economist you have suffered all normal human sentiment being sucked from you I offer my sympathy. But that means that you are not able to comment on housing policy because, quite literally, you do not understand what it is about. No formula can in anyway explain what the value of a home is, or what the devastation of negative equity feels like. You don’t care. And I do. And that is in impossible gulf to cross, but at least I can recognise it exists, and you can’t even do that.
I am quite aware of what a home is, and how important they are to the owners. That does not mean they are not an asset.
Negative equity is only “devastating” if that person needs to move or can’t afford to pay their mortgage. At which point they will lose money on their home.
If they can afford their mortgage, they don’t suddenly lose their house though – they have just lost money on it.
This is exactly what happens for most people who end up in negative equity. Thanks to the long time frames involved most people are able to wait it out until the property market rises once more.
However what you are saying is that nobody should ever lose money on their home. Any losses should be covered by government.
This in itself has significant consequences. People would be incentivized to buy much larger houses they wouldn’t otherwise be able to afford, as the threat of negative equity is removed. There is no downside risk for them. It would also lead people to buying more property, as once again, there is no downside risk.
What you are suggesting would increase house prices, making it even harder for those without a deposit to get on the housing ladder, it would increase inequality as the richest would be able to buy and benefit the most, and at worst it would cause another housing bubble similar to what we saw in the US before 2008. It would literally make every problem worse, not better.
So, if anyone doesn’t understand the housing market – it’s you I’m afraid Richard.
The idea that anyone would be incentivised to but more than they could afford because they could have a limited – but nonetheless real, and quite devastating loss on it – is so absurd that I have to say that your comments lack and relationship with reality
Right now, of course, it the bank who can sell a mortgage without risk
So the informed party with economic power is protected and the individual is put at risk
And you see no risk of moral hazard in that?
Why?
@ Miriam
“However what you are saying is that nobody should ever lose money on their home. Any losses should be covered by government.”
Do you live in the real world? The Americans spent $29 trillion rescuing capitalism in the aftermath of the fraudulent mortgage bond catastrophe that led to the 2007/2008 Great Recession. A fund of $75 million was apparently created by the Obama administration to help out those owners faced by foreclosure, little of it was spent and many lost their homes through foreclosure whilst the financial sector was bailed out.
http://www.levyinstitute.org/pubs/rpr_4_13.pdf
So you advocate .. Losses on buying property must be paid by the government. Profits can be kept by the buyer!!!
Property becomes a one way ticket to prosperity!! Oh hang on what’s on the other side.. it’s the lenders who eat the losses – who will ever lend money again? No mortgage no one getting on the housing ladder..I suggest you think before you write
I did nit say losses must be borne by the state
I said negative equity should not be allowed
That is very different indeed
Please do not make up what I did not say
Richard,
What you have said is plain old nonsense.
If negative equity “shouldn’t be allowed” then either house prices can’t go down, ever, or someone is going to have to step in and compensate for losses when they do. Can only be one or the other.
Which means government, unless you think banks are going to do it (here’s a clue – they won’t).
It’s very clear that I said macroeconomic risk must be born by the government
Who do you think should bear it?
Why should personal investment risk be borne by government? Why stop with houses? Why not also do the same for any asset which is important for people’s lives – pensions as well for example.
What you suggest means socializing losses but privatizing gains. All that is going to do is cause a huge housing bubble, let rich people make a fortune at the risk of the taxpayer and increase inequality.
Sounds like a solid plan.
Maybe you are talking your own book though – problems paying the mortgage your end?
You clearly have no clue about social issues
Nor, come to that, have you any idea what 5 m million unemployed and their inability to pay rents and mortgages might have on the housing and finance sectors
There will have to be a circuit breaker. You are suggesting misery. I venture to suggest mine is better. But you can stick to misery if you want. But that is not what this site is about.
And for the record, at 62 I am in the fortunate position of no longer having a mortgage
What has this got to do with social issues? We have a social security system to deal with them. You are talking about house prices, which ha
Instead you are saying is that any losses a private investor might face should be socialized and paid for by the government. Which means the taxpayer in general. You literally want the government to backstop the housing market so it can never fall.
You also totally ignore the other effects that would have on the housing market. I for one would go and get as many mortgages for as much as I possibly could, and buy as many houses as possible. Why not if the government is going to cover any losses I face. I’d guess everyone with a brain would do exactly the same – because we can’t lose money now, thanks to the government. I’m sure that will help all the people struggling to get on the housing ladder just loads.
You clearly haven’t thought any of this through.
“We have a social security system to deal with them”
I despair
Please do not call again
AFAIK in the US, if the bank forecloses, it can only get the proceeds of the sale, nothing else
Hence the ‘giving back if the keys’ routine
Something they have right
We have, I suggest an unfortunate obsession with home ownership.
One of my Great Grandfathers was Inspector General of HM Waterguard after WW1, he never owned a house in his life and would have never thought of doing so. My paternal Grandfather was a Company Secretary at Joseph Nathan, which became part of Glaxo, he didnt own a home until after WW2 when he retired and that was mainly as a result of disruption caused to the rental market by WW2.
One of the biggest issues home owners face after their mortgage is maintenance & I am sure many of us can tell horror stories about what the previous owners of our homes did, partly as a result of incompetence but often as a result of lack of money or skill.
It seems to me that for many a properly run social sector as is found in many European nations, plus of course pensions that allow us to pay the rent in retirement are as important a part of housing provision as owner occupation