10 Jun 2008

Houses are not for living in!

Jonathan Essex the Green Party campaigns person on out Exec has been thinking about the housing crisis...even in these brief notes he draws attention to the housing crisis as a massive example of market failure...rooted in Thatcher's housing revolution, demutalising building societies, opening up bank lending, killing the council housing tradition.

houses in Britain are commodities not just places to live and the marketisation is causing chaos...where will our children live?

Are demutualisation of building socs, sub-prime mortgages (sky high lending
ratios?) and new housebuilding targets linked???

LibDems are calling for public ownership for northern rock. Should failing
mortgage lenders be re-mutualised in some way? Should there be some kind of
regulation to limit the "privatised behaviour" of mortgage lenders? We have
Ofwat and Ofgen - perhaps we need OfMort (to stop the death of the mortgage
industry! - pardon the pun!). Is this consistent with our policy

I am suspicious that the sub-prime mortgage crisis, privatisation of
building societies to become banks (which have subsequently gone bust)
together with the trend to higher mortgage ratios (recently publicised as
sub-prime?, or is this different??) and the press to build more housing -
all seems connected... and nicely follows the end of council housing in the
1980s. Only article I have found making these links is in Red Pepper (see
link below) Has anyone else been writing about this in a joined up way? Can
we? Anyone done the research? Where? Thoughts welcome - suggested actions
even better!

Some thoughts below.

Best, Jonathan

-------------------

1. De-mutualisation driving up mortgage lending ratios and house prices?
(ironically after the housing crash of 1995)

Historically I understood that 2.5 (or 3 for a joint mortgage) was
considered highest payable mortgage lending ratio. Pretty damn difficult to
get any higher. But now in the days of mortages from banks until recently
could get sub-prime mortgage - a more risky mortgage with a higher ratio
than was normal in building society days (how high?)? Did demutualisation
lead to this widening of mortgage offerings as most mortgages now offered by
banks rather than building societies so profit calling the tune? Is the
trend to more unaffordable mortgage packages (that has since collapsed) the
key driver for the house price spike? So is the current collapse simply a
readjustment based on fact that mortgage lending is returning to
historically sensible 2.5-3 ratios?

Did the housing spike of late 80s/early 90s occur due to sell off of council
houses?
Did the housing spike of late 90s to now occur due to sell off of the
building societies?
Is all of this a way of pretending for thatcherite and blairite governments
that we were in "boom time britain?"
So, if we had kept council houses and building societies - we could have had
stable house prices for ages?
Then, what is going to be the next sell off - and what is the mechanism?


2. Sub-primes simply a way to increase profitability of mortgage lending for
shareholders?

Have sub-primes been driven by banks as opposed to building societies? Has
the existence of majority of mortgages from building societies in the past
stopped this happening?

[As a bank, loaning at a higher lending ratio would seem to drive up house
prices (rises as supply constrained with increased demand) and with higher
risk, a higher lending rate so both get more cash/unit lent and more
lending - both factors increasing profitability so good for shareholders?]

How do the trends in rising mortgage lending-ratios map to the
de-mutualisation of building societies in the UK (and did this happen in the
US too?)


3. Predict and Provide - More Houses, Higher Prices - at expense of
homebuyers and the environment?

Have sub-primes underpinned a kind of "predict and provide" strategy for
house lending and building? Greater ability to buy, driving down
person/dwelling ratios - which in turn is justified by the government by the
"higher prices" created by the increased demand (increasing housing "need")
.. Yet (!) housing "need" surveys appear to have continued to be based on 3x
mortgage ratio - even as sub-primes were rife, so supply of houses has
continued to be justified as a) house prices still high and b)

The high house prices has inflated stamp duty revenue and profitability of
new house construction, as costs no longer linked to price.

But what if house prices are more related and responsive to ability to
acquire finance (mortgage lending ratios) than demand?
Then the government is providing more housing than is required at a higher
price than is needed - setting up for a bigger crash in house prices than
would have occured otherwise, and incentivising us to invest in housing that
is beyond our previously defined needs (rather than sustainable stocks/our
communities).

e.g. see - Housing needs surveys have consistently been based on a 3x
mortgage ratio - why? (e.g.
www.reigate-banstead.gov.uk/Images/HNS-Summary-FinalReport-2005_tcm5-17945.p
df). If many new houses are sold to first time buyers, who have been
encouraged to take sub-primes then why base on 2.5-3 ratios - and why is the
no-mention of lending-ratios in housing needs surveys or representations to
government justifying house building?
www.publications.parliament.uk/pa/cm200506/cmselect/cmodpm/703/703we37.htm

On average, building societies fund 70% of their lending through deposits.
(http://www.guardian.co.uk/money/2008/may/03/mortgages.banking)
How does this compare to banks?
What happened in terms of source for loans upon demutualisation? What
trends?


4. Most lending has shifted from building society to bank:

http://www.thisismoney.co.uk/news/columnists/article.html?in_article_id=4307
01&in_page_id=19&in_author_id=6

Northern Rock is not the only mortgage bank to have disappointed
shareholders over the past year. Alliance & Leicester's share price at £5.25
is less than half its £11.97 peak. Bradford & Bingley has, at times since
demutualisation, meandered in an entirely unfocused manner, at one time
attempting to reinvent itself as a financial broker and bizarrely sending
potential mortgage borrowers to other lenders.

Woolwich, Abbey and Cheltenham & Gloucester have been subsumed into banks
while Bristol & West savers are now with Britannia Building Society.
Halifax, meanwhile, merged with Bank of Scotland to gain the muscle needed
to trade blows with the big boys. Most of the remaining building societies
have, however, stuck to their core business of serving their members, and
largely riding out the credit crunch that has sent jitters through the
banking industry.

Over 80% of gross mortgage lending in 2006 by banks not building society.
Only top ten lender now that is a building society is Nationwide (6% of
total) - is it still a BS?
HBOS 21.2%
Abbey 9.4%
Northern Rock 8.4%
Lloyds TSB 8.0%
Nationwide BS2 6.1%
The Royal Bank of Scotland 5.8%
Barclays 5.3%
Alliance & Leicester 3.7%
HSBC Bank 3.6%
GMAC-RFC 3.5%

http://www.bsa.org.uk/consumer/factsheets/asset_size.htm


5. three articles - one last week and one last year and redpepper quote:

http://www.redpepper.org.uk/Rocking-the-market - extract
Although mutual organisations are far from perfect, they do offer the
opportunity of a different form of business model - one for which profit is
not the driving force and that could develop different types of
accountability and participation. However, partly because far too many
people on the left were stuck in traditions of socialism that focused only
on the role of the state and of labour, there was no substantial attempt to
save them. We are paying the price of that narrow vision today.

http://www.guardian.co.uk/business/2008/jun/08/banking.demutualisation
It is difficult to argue that either ownership structure is inherently
superior: the Co-op's unlisted supermarkets are not self-evidently better
than those of Tesco plc. But flotation pushed the smaller former building
societies into uncomfortable territory, with too much risky lending and
funding.

And the best argument for mutuality is blindingly simple -a building society
is owned by its savers and borrowers, so its sole purpose is to serve them.
That goal is not complicated by a conflicting need to satisfy the Square
Mile.

The floats can be seen as part of the Thatcherite credo of wider share
ownership. The privatisation of utilities and lenders were meant to create a
more efficient corporate sector and a share-owning democracy. Now our power
and water companies are mostly in foreign hands, bills are rising and,
without being jingoistic, UK households may not be top priority for a French
or German owner.

As for the mortgage banking sector, if customers had known demutualisation
would lead to risk-taking, loan rationing and possibly a housing crash,
would they have been so keen to take the windfalls? Outside of City
restaurants, there's no such thing as a free lunch.

http://www.guardian.co.uk/commentisfree/2007/aug/06/mortgagingourfuture

The housing boom underpins and exacerbates Britain's descent into
inequality - and it shows how the property market has failed.

Britain has become two nations once more: of housing haves and housing
have-nots. The latest forecast reveals that property prices are set to rise
by 40% in the next five years and the average house price will top £300,000.
It sets Britain against Britain.

Around 70% of people in Britain now own their home. Their vested interest is
in the continued rise in house prices. The rest just sit and watch the
lowest rung on the housing ladder fade into a distant dream. When average
household income is little more than £20,000 the affordability gap becomes a
chasm. The lending ratio for a mortgage on this basis would be 15 times
joint salary.

....

But it is also an example of market failure. The private sector has born
most of the responsibility for building new housing stock since the
introduction of right to buy and the end of new council housing in the
1980s. The market has failed to match supply with demand. The reasons are
complex, much of it to do with the hoarding of land banks.



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