“Government never furthered any enterprise but by the alacrity with which it got out of its way.” Henry David Thoreau
It’s seldom good when governments intervene in markets. The law of unintended consequences often comes into play, creating unexpected winners and losers.
David Cameron and Nick Clegg raised a few eyebrows this week when they launched a new scheme to help “unstick” the housing market and make the “dream of home ownership” a reality for more people. Taxpayer-backed 95% mortgages are a controversial feature of the scheme. If the housing market were to suffer a severe downturn, the taxpayer would potentially underwrite hundreds of millions of pounds of mortgages under the proposals. Amazingly, Cameron believes the government can provide for such an eventuality. “What the government is doing is using the strength of its balance sheet, as it were, to back the banks and to back people that want to get mortgages,” he said. “The alternative is to sit back and see a stalled housing market.”
It’s as if Cameron and Clegg have never heard of Fannie Mae and Freddie Mac. Their solution to an economic downturn initially caused by a housing bubble is to, well, create another one! It may be commendable to help young people get on the property ladder, but everyone will feel the splinters if they slip down.
Government intervention caused problems with the lower end of the housing market in the first place. Allowing landlords to benefit from offsetting mortgage interest against tax skewed the market, raising demand for modestly-priced homes and forcing prices beyond the reach of first-time buyers. Buy-to-let landlords are also eligible for tax relief on mortgage arrangement costs, maintenance costs such as painting and decorating, depreciation in the value of furnishings, cleaning, buildings insurance, letting agents fees, accountants fees and insurance policies. All of this has boosted the private rented sector, but lack of controls mean even rented accommodation has become unaffordable for many ordinary working people.
At a time when this country is trying to reduce spending, it seems strange, to say the least, to transfer private liabilities to the public sector. If the government feels it must intervene in the housing market to help first-time buyers, it should do so by removing tax relief on buy-to-let mortgages and creating a more level playing field.