The UK has a serious household debt problem. In 2012 it stood at almost 150% of disposable income, one of the highest levels amongst advanced nations. Added to this inflation stuck well above median wages and low levels of savings and you start to understand why the Bank of England is anxious about even the perception that interest rates might rise – writes Josh Ryan Collins, Senior Researcher at New Economics Foundation in his latest article.
Here is an extract:
Instead of encouraging further household deleveraging, the government will do quite the opposite: it is embarking on a massive subsidisation of the market for household debt. Help to Buy II will subsidize up to 15% of the mortgage of any household buying any type of home (worth up to £600,000) so long as they can get together a 5% deposit. So, if you’re lucky enough to have £30,000 lying around, the government will guarantee with tax-payers money a further £90,000 to buy your dream home/increase household indebtedness by £570,000.
Help to Buy I had its critics, but because it was limited to first-time buyers and subsidised only new build homes a defence could be made that it had natural limits and would stimulate the construction sector. There is no such saving grace for the second installment. Its launch has been bought forward from January by Osborne, a decision no doubt related to rising property prices across South East England and criticism from the IMF, Mervyn King, the Treasury Select Committee, Vince Cable, Barclays Bank andthe Council of Mortgage Lenders, among others.
Of all the problems with the UK housing market – a virtually unregulated private rented sector, a chronic lack of new homes, land-hoarding by developers, a regressive taxation system that encourages speculation and arcane planning rules – they have chosen the one area least in need of subsidy. All of the above problems help explain the 300% increase in house prices in the UK between 1997 and 2010, but it would never have happened without the creation of £417bn of new mortgage credit by the banking system.
It is quite possible of course that George Osborne doesn’t understand that banks create the majority of new money in the economy as debt. Or that new money, instead of inflating house prices, could go to small businesses, home building or energy and transport infrastructure.
