The issue is the proposed mortgage guarantee the government will give to all home buyers, who cannot find from their own savings the required 20% deposit. The Treasury Select Committee under its able chairman, Andrew Tyrie, has issued a critical report about this ridiculous proposal.
The financial regulators, the building societies and the banks are only too aware that rash lending with a reliance on ever increasing house prices was at the heart of the collapse of the economic model and remains an ongoing instability in the system. They recognise that house prices in many areas are still excessive and that further falls, especially as interest rates rise, are likely. They also recognise that repayment instalments must form a lower percentage of the income of the borrower than was previously acceptable, in order that the borrower’s own financial model does not become precarious and likely to fail. This is why institutions have returned to the prudential lending practices of earlier times.
A component of property bubbles of the past, notably under the governments of Heath, Thatcher/Major and Blair/Brown, has been an insurance company guarantee of the excess over the level at which the lender will accept the unsupported risk. Losses in this class of business were significant as the margin of value insured was inevitably wiped out when the bubble burst and prices settled back. Moreover borrowers on lower incomes found themselves struggling with repayment instalments beyond their means and unable to sell because of negative equity, leading to potential repossession and a contingent liability to the insurer of the insured balance claimed by and paid to the lender.
To reintroduce this financially unsound and destabilising mechanism into a financial system so many are at pains to repair, is an odd shift in government policy. It makes no sense within the terms of reference of the Coalition’s declared financial objectives and if it is taken up by significant numbers will work against the re-balancing of the economy, which is vital for sustained recovery.
That is underscored with a recent think tank forecast that such growth as may be hoped for in 2013 is likely to be driven by the housing market. This is the road which leads backwards into further crisis. It is difficult to see why this chancellor remains in his job. If he is still there in 2015 it is even more difficult to see a majority in the country voting for the party determined to keep him at the Treasury.
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