Politicians are falling over themselves to help home-buyers. But the housing market is already saturated and funds should instead be directed to enterprise
David Cameron’s Conservatives last weekend set out their pledge to cut the deficit so that mortgage rates ‘stay lower for longer’. The Tories are right to worry about the deficit. And eminent economists have written themselves to a standstill, disagreeing over when to turn off the public spending taps. But whichever view one takes on that question, achieving fiscal consolidation while sustaining the economic recovery will inevitably mean higher mortgage rates and falling house prices.
In last week’s Mais Lecture, shadow chancellor George Osborne argued for the need to make an early start on cutting the deficit for three reasons. First, private consumers and investors will return only when they have confidence that the fiscal situation is under control.
Secondly, he says, unless action is taken early to give foreign creditors confidence, more urgent and damaging cuts might be forced on the UK by the bond market.
Thirdly, by starting the process now, a Conservative administration would have time to make carefully targeted public spending reductions: wielding the scalpel rather than the axe.
Opponents ask what will happen to the budget deficit and unemployment if the shadow chancellor is wrong and private sector growth doesn’t quickly fill the gap created by the retreating state. More recession, anyone?
On the other side of the debate, 60 economists recently argued that the recovery, far from being hindered by government deficits, is entirely dependent on it. Public spending was essential to offset the collapse in private consumption that caused the recession and, they argue, will be necessary until the latter returns. But here, too, it is unclear when the private sector will be able to stand on its own two feet. And for how long can the economy be propped up by the state before the UK goes the way of Greece?
Whatever view one takes of whether the deficit is helping or hindering recovery, the real question is when the private sector will be able to take up the slack. The government has tried to keep credit lines open to enable it to do just that. By recapitalising major banks and guaranteeing huge portions of their lending, the aim was to keep credit flowing to British businesses to sustain employment and create wealth.
As it stands, the government’s £300bn Special Liquidity Scheme and Credit Guarantee Scheme are funding around half of UK banks’ lending that isn’t covered by deposits. With any luck, that credit lifeline might sustain the private sector and supply the capital for it to grow.
But despite this unprecedented intervention, the state-owned banks’ lending isn’t going to the wealth creators. It is instead going into a giant UK property Ponzi scheme. Results from the Royal Bank of Scotland last week showed that its lending to UK firms was down by more than £12bn in 2009, compared with the year before. Yet its lending to the housing market was up by almost the same amount. If the next government is to halve the fiscal deficit over the course of a Parliament, this pattern must be reversed.
What’s more, credit is set to get even scarcer. The Bank of England has reiterated its commitment to wind down the Special Liquidity Scheme from next year, and the Treasury’s Credit Guarantee Scheme will end in 2014. Consequently, the price and availability of capital is only likely to get worse. This all points to a nasty credit shortage unless wholesale markets return to their former strength – something that seems as unlikely as it would be unwise.
The result will be that the apparently invincible housing market is likely to hit the buffers, raising the pressure on politicians to do something else to bring about greater lending for home-buyers. This would be a grave mistake.
If the UK economy is to be put on a sustainable footing, capital must get to the businesses that need it. This means that the government must use its involvement in the banking sector to divert credit away from the unproductive, overvalued, but politically sensitive housing market.
There’s only so much money to go around and housing is already getting too much of it. The inevitable corollary of a sustained recovery will be the rising cost of mortgage finance and a long – and hopefully steady – deflation of a housing bubble that is long overdue.
Ian Mulheirn is director of the Social Market Foundation
