There is
a lot of controversy about the potential of the Help to Buy scheme to restart
the housing bubble. I must say that I share this concern and am disturbed by the
thought that Osborne may be deliberately reflating the value of the housing
market to enable himself to portray the government as having tackled the
problem of the deficit. To portray this policy as one of compassion for the
homeless, and to encourage homeowners to celebrate rising house prices, as
Cameron did on the Andrew Marr show yesterday, is disingenuous.
The
PM may sanguinely say people can afford
these high-proportion mortgages but how much do interest rates need to rise
until this is no longer the case? Cameron used the example of two people
earning £20,000 or £25,000 per year and an average house price of £200,000. Leaving aside the 5% deposit to make the maths
simple, the BBC mortgage calculator indicates that if interest rates rise to
only 3% this couple will now be paying nearly £1000
a month to fund their mortgage.
Clearly
the Tories think that offering young people homes financed through large
amounts of debt will be politically popular, but the historic pattern in
Britain of high and rising house prices and high rates of home ownership
financed through a mortgage actually serves the financial sector much more than
it serves British citizens. The explanation is simple: if your house costs
twice as much you pay the bank twice as much in interest.
Useful
data from the land registry indicates that the house price index has risen to
more than 250 compared with January 1995 (the graphic indicates the ratio of prices to earnings during this period). At its peak before the crash the index reached nearly 300, which means that prices had undergone a threefold increase
net of price inflation. As I teach my students, because of the compounding nature of interest, you are likely to pay back something like double the
principal when you take out a loan over 25 years. This means that when house prices double, twice as much is paid back to financial corporations in interest. No wonder
that those with friends in the City encourage us to celebrate house price
rises.
House
price inflation serves financiers and those who welcome the increasing value
of their home as though it were an asset are missing the point. Those who still
have mortgages are simply celebrating an increase in their housing costs; if
their house is a home then they have no greater value from it even if its
financial value has doubled. As it turns out in Britain the house is not a
machine for living in, as Le Corbusier once suggested, but rather a machine for
increasing bank profits.
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