Excellent letter in todays FT on the house price bubble and Browns flawed mortgage scheme for FTB's by Professor Phil Davis of Brunel University ..........
First-time buyers better served by letting prices return to more affordable equilibrium values
Published: May 25 2005 03:00
Sir, The proposals announced on Monday by Gordon Brown for aiding first-time buyers by having the government share in the housing equity along with the lender, while having obvious political attractions, would seem to be fraught with dangers ("Brown proposes help for first-time buyers", May 23).
Introducing such a scheme when house prices are, by most estimates, up to 30 per cent above their equilibrium levels (based on income, interest rates and, in some cases, demographics and housing supply) would seem likely to perpetuate or even increase the misalignment. The eventual correction when an inevitable "shock" to confidence occurs could hence be yet more painful.
Furthermore, moral hazard can arise from this policy at a number of levels. The most obvious is that belief may grow in the existence of a "Brown put" at a macro level, whereby the government is expected to introduce measures to underpin the housing market, for fear of negative equity, whenever a fall is likely. The history of the "Greenspan put", which extended the equity price bubble in the 1990s and thereby aggravated the correction, is a painful reminder of the related dangers.
Second, there may be moral hazard vis-à-vis the borrowers, who may hold the government responsible for any future negative equity, given its "agreement" in the original price paid for the property. Third, the lenders may feel over-confident as a consequence of the government's involvement and hence fall into excessively lax lending practices; the abuses of the savings and loans crisis in the US spring to mind.
Finally, such schemes, once introduced, are hard to reverse and might be subject to pressure for extension. This raises the question, How much housing equity (which could, in some cases, be negative) is it wise for the government to hold?
While it may sound harsh, first-time buyers would in my view be better served by allowing prices to return to more affordable equilibrium values, as well as reducing the equilibrium itself by allowing supply to expand.
E. Philip Davis, Economics and Finance, Brunel Business School, Brunel University, Uxbridge, Middlesex UB8 3PH