Tuesday 12 June 2012

Re: A canny way to revive our moribund housing sector

Dear Sir,

M/s Besley and Leunig give some good suggestions on finance and supply side of housing market.

However, it will not solve the first-time buyers conundrum. The problem is not shortage of properties. The population of UK has not exploded in the last 50 years that the houses are short.

The problem is the available homes are allowed to be taken up by the non-resident foreigners who not just take up the properties meant for locals but also inflate the price in the process thus creating a shortage of properties and rendering the surrounding properties out of reach of the first-time buyers.

The second problem is easy finance available to privileged few to gobble up multiple properties thereby locking up the properties creating artificial shortfalls for first-time buyers.

The solutions are as follows:

On the finance side, the properties should be available on mortgate to foreigners only if they are resident in the country. Also, the deposit rate for more than one house owners should be atleast 50% of the value of property.

On the supply side, the planning regime is robust and decentralised enough.

It is not the planning authorities who are at fault as the authors suggest. It is thanks to the planning restrictions that UK didn't go the Spainish way where there are more than 700,000 new finished unsold homes which distorted the Spanish economy beyond means and is the root cause of their financial downfall.

The fact is many commentators in the past and present have used first-time buyers as a front-end to fulfil their or their masters (read banks, construction firms) needs.

Kind regards,

Pradeep Kabra


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A canny way to revive our moribund housing sector

By Tim Besley and Tim Leunig in Financial Times on 12-Jun-2012

The construction industry has ground to a halt. The Office for National Statistics reports that house building in the first quarter was 20 per cent down on a year ago, 50 per cent down on 2005, and 80 per cent down from levels that prevailed in the late 1960s. This is bad for growth and bad for employment.

There are two problems. First, the need to rebuild balance sheets means that lenders are not offering mortgages in reasonable quantities, particularly to first-time buyers. Second, the planning system inhibits the availability of land even when people are willing and able to cover construction costs. The result is high land prices and high house prices.


Both problems need to be addressed simultaneously. If we sort out finance but not supply, house prices will rise. If we sort out supply but not finance, no one will be able to buy the newly built houses.

As regards finance, we propose that government should give the best housing associations a new role. They would issue bonds – underwritten by government – at low interest rates, secured on their (new) income stream. These bonds should appeal to pension funds who want long-term secure assets and would generally offer fixed rates of interest. Such bonds may be acceptable to the Bank of England were it to widen the scope of quantitative easing.

Housing associations would then contract with developers to build houses and flats, which the association would sell or rent in the open market. Crucially, it would also offer mortgages on the properties it sells. The interest rates would be low, reflecting the association’s low cost of capital and not-for-profit status. The private rented market is relatively buoyant, so the housing associations can build safe in the knowledge that they will be able to sell or rent the completed properties.

Housing associations would have conservative lending criteria in line with their not-for-profit status, but they would offer long-term, fixed-rate, low-start mortgages. The fixed rate means borrowers will not face large rises in monthly payments when interest rates increase from their current low levels. Low-start mortgages would have monthly payments with an optional 2 per cent per year rise, so payments increase roughly in line with inflation. The initial payment would be calibrated so that, if the borrower always accepts the rise, they will own the property after 25 years. If they never accept the rise, then they will own half the property after 25 years, at which point the mortgage can be extended, or they can be moved on to a part-own, part-rent model. Housing associations are experienced in this.

Housing associations would be able to buy land with planning permission from developers. To ease supply constraints, we propose allowing councils to offer farmers £75,000 a hectare for their land – and then to grant themselves planning permission before selling the land on to developers, including the housing associations. Important amenity land, including the greenbelt, would remain protected. Admittedly, £75,000 is far less than farmers would get were they to receive planning permission by conventional means – but far more than the land is worth for agriculture. This scheme would therefore appeal to farmers who did not expect to receive permission conventionally. The council, of course, stands to make money. This could pay for new services or lower council tax and would help persuade local residents to support rather than oppose development in their area. In order to prevent the land being banked, the planning permissions would require the purchaser to develop the site within three years.

This is not a strategy for the long term. In the long run, we need well-capitalised banks able to lend to credible borrowers, to buy houses built by commercial developers who can obtain land in a timely manner.

Today, however, we are in a deep recession of uncertain duration, and that calls for unconventional measures. Governments can and sometimes should underwrite markets and create institutions that can reduce risks by internalising them. In this case, and for two or three years only, housing associations, underwritten by government, get the housing sector moving again. This will increase employment, and growth, and allow more people to be housed decently than are now.

The writers are a professor at the LSE and chief economist at the CentreForum think-tank respectively

Wednesday 6 June 2012

We're All In It Together - ARE WE???

It's been 4 years since the financial crisis started as soon as Lehman Brothers went under. Still there is no light at the end of the tunnell. While the unelected central bankers are printing loads of money without any thought for the hardworking strivers and savers, the blame game goes on...

While The Bankers blame everybody (regulators, politicians, central banks low interest rate policy, greed of people, rating agencies) EXCEPT THEMSELVES.
The Regulators blame everybody (bankers greed, meddling politicians, central banks low interest rate policy, lack of resources, audit firms) EXCEPT THEMSELVES.
The Politicians blame everybody (greedy bankers, party in power, care-free independent central bankers, rating agencies, audit firms) EXCEPT THEMSELVES.
While the 'unelected-unaccountable' Central Bankers don't care to blame anybody, at the end of the day, it is the hardworking strivers and savers whose money these market-players are devaluing.

Welcome to the today's capitalist world of 'privatised profits and socialised risks' where 'the hardworking strivers and savers are punished while the free-wheeling risk-takers on other people's money are rewarded'

And then having the nerve to say 'We're All In It Together'!!!

Regards,

Pradeep