Housing misery built into the system

Soaring house prices, a frenzied housing market, unaffordable rents and massive overcrowding. Welcome to ConDem Britain 2014, where only the wealthy can get a decent roof over their heads while those in genuine need can only stand and watch.

The average asking price on the Rightmove property website jumped by £8,103 in January and a typical property is now costing £252,000. But that’s a national average. Live in London and you can expect to pay around £500,000 to get on to the bottom of the “housing ladder”.

House prices soared by over 11% in the capital last year and the pace of increase is continuing. Bubble-like conditions are making first-time buyers stretch themselves too far, says the Money Advice Service. It researched 1,000 first-timers who had bought over the past two years, and found that one in five wished they had bought somewhere cheaper.

More than half admitted that the running cost of their first home was also more than expected, prompting the service to warn buyers: "You can afford your mortgage, but can you afford your home?" Affordability is most stretched in London and the south-east. One estate agent said that over the past year, the average property it sold in London went up by 18.4% to £448,800, a rise of £69,784 over the year, double the average salary of a Londoner.

Private renting is the only option as local councils and housing associations have few properties available for households without children. But it’s not a cheap alternative to a mortgage. Official figures show that average weekly rents are more than 50% of average local wages in more than half of London’s boroughs.

In Kensington and Chelsea, average weekly rents were a staggering 73% of local wages, and 71% per cent in Westminster. Even in poorer areas like Hackney and Southwark, the ratio was still over 50%. No wonder reports are growing of  young people actually moving back in with their parents to save on housing costs.

Adding to the pressure in London are cash-rich buyers from the Middle East, Russia and other areas who can plonk down ill-gotten gains at the estate agents. They are completely indifferent to the prices being paid.

Labour leader Ed Miliband’s call to make these homes available to London residents first is no solution. Firstly, they are out of the reach of most people who are not already home owners. Secondly, it would be a nightmare to enforce. Building more new towns is just another way of saying London is a rich man’s playground and that’s how it’s going to stay.

For a long post-war period, local authorities built millions of homes for rent, enabling most new households to find somewhere to live. Rents in the private sector were controlled. Since the early 1980s, a housing market driven primarily by the obsession with owner-occupation has replaced state intervention.  

It coincided with the deregulation of the financial system that provided anyone who wanted it with endless amounts of credit. Not enough money to pay your mortgage? Don’t worry, just borrow five, six or seven times your annual income.

In the ten years to 2007, real average house prices doubled while disposable income only rose by 15% in the same period. In London, prices soared by over 350% over the first decade of the Blair government. It couldn’t last and it didn’t. Come the 2008 meltdown, mortgages dried up while the house price bubble was maintained by a shortage of supply.  

In the 19th century, Frederick Engels wrote about the “so-called housing shortage, which plays such a great role in the press nowadays” and asked rhetorically:

How is the housing question to be solved then? In present-day society just as any other social question is solved: by the gradual economic adjustment of supply and demand, a solution which ever reproduces the question itself anew and therefore is no solution.

Capitalism actually recreates shortages in housing and other areas over and over again because that’s the way it works. A system that feeds on human misery is immoral and unacceptable.

Paul Feldman

Communications editor

Another 'fix' for debt junkies

The true nature of New Labour doesn’t come clearer than this. If you are a low earner, New Labour says you should pay more tax. But if you are a banker, government hand-outs are the order of the day. So prime minister Brown is “standing firm” over the abolition of the 10% tax band, which reduces the incomes of five million people, while his chancellor is today helping out the major banks to the tune of £50 billion.

New Labour, which came to power a decade ago as champions of global markets and corporate-driven globalisation, is now struggling day and night to keep the faltering fantasy finance show from closing its doors to the public. With the market system holed below the water line, Brown’s government is launching one bail-out operation after another in an increasingly desperate bid to save it from floundering altogether.

The latest move is for the banks to trade in bundles of mortgages that until recently they bought and sold speculatively in financial markets. They used this trade to support mortgage and other loans to the general public. Since the credit crunch got underway, these kind of deals have taken on the air of musical chairs, where the last banker standing ends up holding bundles of increasingly worthless “assets”. The game is no longer played and, as a result, mortgage deals and loans to businesses are hard to come by. Interest rate cuts have not been passed on and instead are being used to bolster profits.

This outrageous behaviour by financial capitalists, whose reckless profiteering threatens to bring misery to millions in every country, ought to be condemned. The way they have gambled with other people’s money provides ample ammunition for them to be taken over without compensation to their major shareholders. Here is the case for reorganising the financial system on a mutual, not-for-profit basis. This is the furthest thought from the minds of the executive management of Britain PLC – aka the Brown government.

It is left to Vince Cable, the Liberal Democrat Treasury spokesman, to say: "We cannot have a situation where the banks are able to privatise their profits and nationalise their losses. Since the mortgages from the banks are of inferior quality and higher risk than the government bonds they replace, the implication must be that taxpayers are shouldering the risks and losses of the banks. This cannot be right."

But it is right as far as the government is concerned. You give us the relatively useless mortgage bundles and we’ll give you loads of cast-iron government bonds, which you can trade on international money markets. What’s more the “independent” Bank of England – which has resisted bail-outs for feckless bankers – has been ordered to arrange this swap shop at the expense of the taxpayers.

Whether all this will work is highly questionable. The credit crunch is a global phenomenon and the financial markets are wholly inter-connected. Germany’s banks, for example, are now in major difficulties, while Britain’s second largest bank RBS is having to raise £10 billion to bolster its balance sheet and may have to sell off parts of the group.

The value of assets like housing are continuing to fall in Britain and the United States, as well as in countries like Spain. Economic activity is already slowing to the point of recession in the US. Similar pump-priming action by the Federal Reserve in the United States has made little discernible difference. US interest rates are now just 2.25%, below the rate of inflation. Yet the more Fed does, the more the markets seem to need. They have simply become debt junkies, needing one fix after another.

Paul Feldman
AWTW communications editor

Millions in mortgage crisis

The thing about capitalism is that it appears to solve problems only to recreate them in a new, more dramatic form. Take housing, for example. Until recently it seemed that everyone could buy a home, watch its value rise and borrow against the property to buy consumer goods to keep the economy moving. Now up to two million households in Britain and a similar number in the United States face a struggle to retain their homes as the economic and financial crisis takes its toll.

The Financial Services Authority (FSA) has expressed concerns that many homeowners with large mortgages could face repossession. Listing the warning signs, the FSA says problem mortgages are those where the loan was taken out for longer than 25 years, where it is worth more than 90% of the home and where the amount borrowed is 3.5 times or greater than income. Over a third of 5.7m mortgages sold between April 2005 and September 2007 fall into one or more of these categories. In other words, two million households are at risk. The alarm bells got louder today as surveyors predicted that 123 homes a day will be repossessed this year.

What the FSA is concerned about is that rising household energy and food bills, together with big credit card and other debts, leaves many homeowners badly prepared for worsening economic conditions. Banks are also increasingly reluctant to pass on interest rate cuts to borrowers because of the credit crunch that has undermined the financial system. When you add in the fact that 1.4m fixed-rate mortgages are due to mature in the next 12 months, you can understand the FSA’s concerns.

Lyndon Nelson, the FSA's head of financial strategy and risk, said: "It is not necessarily the affordability of the mortgage. It is their other debt. Customers with other borrowing in addition to the mortgage are struggling. The other borrowings tip them over the edge," he said. Just as in America, where some 2.2m foreclosure documents - including default notices, auction sale notices and repossession papers - were filed on 1.28m properties during 2007, many recent mortgages were taken out by households who were lured by the promise of easy money but who did not necessarily have the means to pay.

A key role in creating this housing crisis has been played by New Labour. From the start, they cut back on the building of new social housing for affordable rent as they continued the Tory policy of creating a “property-owning democracy”. People like nurses and teachers have been lured into expensive “shared ownership” schemes built by housing associations on the basis that is the key to long-term wealth. In effect, the financing of such schemes amounts to a subsidy from the state to banks in order to compel more people to buy a house or a flat because they are desperate for somewhere to live.

The impending housing crisis is further proof that the market economy is a trap for millions of ordinary people. Unlike bank directors, they do not have the wherewithal to ride out the economic storm. A campaign should begin to halt all repossessions as the first step towards reorganising the financial system altogether. Unrealistic mortgages could be converted into affordable rents or other forms of payment as part of transforming the provision of housing. Land should be owned in common rather than by private developers and social rather than market solutions to the basic right to shelter have to be sorted out so that new households can find somewhere to live. Above all, we must prevent working people from becoming the victims of a policy foisted on them by governments and banks.

Paul Feldman
AWTW communications editor

Britain’s very own sub-prime housing crisis

The credit crunch in the global financial system is now beginning to interact with the British housing market. Lax credit conditions that allowed prices to spiral are drawing to an end and many home owners are staring at sharp increases in their mortgage repayments. Record outstanding debts of £1,400 billion and low savings rates all weigh heavily on the property market. Experts are warning of a dramatic fall in house prices ahead.

Britain has its very own sub-prime crisis, which has already wrecked the US houing market and sparked the credit crunch. Large but unknown numbers of people have fallen prey to commission-based “financial advisers” and mortgage brokers who lured them into loans on properties far beyond their means. Using self-certification of income, these middlemen encouraged people to grossly overstate their income so as to qualify for the massive loans secured on over-valued property.

Rapidly rising house prices gave the impression of higher values, enabling people to borrow against the market price of their homes, increasing their existing loan. Now tens of thousands have sunk into even greater debt, overwhelmed by repayment demands. As the small print says, your home is in danger if you do not keep up the payments and repossessions are rising.

That is not the end of this particular story. An estimated 2 million poorer borrowers are on lower, introductory fixed-rate mortgages which were an extra inducement. These are drawing to a close and people with this kind of a mortgage face a staggering 60% rise in housing costs in the coming months as interest rates are readjusted, according to the credit ratings agency Standard and Poor.

The buy-to-let business has also boomed in the past five years. The number of such mortgages more than quadrupled as increasing numbers of people came to regard it as the dependable alternative to uncertain savings and pensions. In this speculative market, reckless profiteering combined with loose credit for mortgages has led to such drastic overvaluation of property that, as interest rates have risen, repayments on loans in many cases far exceed rental income.

At the heart of this problem is "creative financing", enabling buy-to-let investors to borrow 100% of the cost of their new properties - not the 85% maximum most lenders permit. With 85% loans, investors have to come up with money of their own, and so are limited in how much they can buy. But with 100% mortgages, the brakes are off and there's effectively no limit.

The "creative financing" was made possible by discounts - typically 15% or more - which property developers offered to buy-to-let investors who bought flats in bulk. It helped power a construction boom as new blocks of flats and apartments mushroomed in city centres for the buy-to-let market. With interest rates up, and the market oversupplied, prices are starting to fall sharply outside London, leaving property owners and their loan companies in deep trouble.

The more than £8 billion that Northern Rock has borrowed of the unlimited support provided by the Bank of England since its crisis erupted two weeks ago, will soon look like the summit of a much larger mountain of unrepayable debt. Meanwhile, with New Labour’s financial support, the bank continues to offer 125% mortgage and personal loan packages, whilst refusing to support applications for personal bankruptcy from its overstretched customers.

Decades of persuasion to “get on the property ladder”, declining social housing, the sale of council housing and a decline in affordable private rented accommodation together with historically unprecedented, impossibly easy credit have lured millions into levels of debt that can’t be repaid within their lifetime.
Gerry Gold

AWTW economics editor

Financial 'Katrina' begins to blow

For some days now, banks and finance houses have been watching the unfolding crisis at major investment bank Bear Stearns, as it tries to limit the fallout from the failure of two of its hedge funds. Like many such investors, Bear Stearns had a lot of products riding on the back of property-related debt, and, notably, the US "subprime" mortgage market. Subprime refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history.

The two failed funds have grand titles: the High-Grade Structured Credit Strategies Enhanced Leverage Fund, and the High-Grade Structured Credit Strategies Fund. These meant-to-be reassuring names hide a high risk reality. In the trade, such products offered are based on credit with a quality rating politely referred to as "junk", or less politely, "nuclear" or "toxic" waste. The buyer gets the possibility of high returns, but runs the risk of getting little or none of his principal back. The "enhanced leverage" fund was worst hit because, as its name implies, the underlying capital represented only 10%, the rest being borrowed from other sources.

As we have discussed previously, the housing market in the US has been in decline for many months. It is leading the way down not just for the American economy but, behind the misleading appearance of continued worldwide growth, is having a major impact on the rest of the global economy. Subprime mortgages are the most risky ones where the homeowners are at least able to make the monthly payments. The rate of default has been accelerating, and many of the lenders have been forced into bankruptcy. This is a problem for the so-called securities houses like Bear Stearns which despite its reputation as one of the shrewdest actors in the mortgage market, with the best set of controls in place, finds its funds failing, and its customers and creditors scrambling to sell.

As the swirling clouds of credit and debt that have swelled the markets in hedge funds, and more recently private equity, have ballooned in recent years, it could only have been a matter of time before the iron law of value began to make itself felt. There is much speculation about the extent of the impact on the rest of the world’s financial markets. One of Bear Stearn’s investors put it like this: "They didn’t realise this was Katrina, they thought it was just another storm." According to The Economist "perhaps the most worrying thing for financial institutions holding mortgage-backed paper is not the subprime market itself, but the unnerving parallels with an even bigger one to which they are also exposed: leveraged loans to companies. As Daniel Arbess of Xerion Capital Partners points out, corporate lending's giddy leverage echoes the high loan-to-value ratios in subprime; … subprime, says Mr Arbess, might well be ‘a dress rehearsal for something bigger and scarier’."

Gerry Gold, economics editor