Friday, 17 April 2009

Council Mortgages - a solution in search of a problem?

I have noticed that other blogs are inviting guest posts. I thought I should follow this fashion. Here is my first guest - Local Government Officer. Should local governments issue mortgages? As mortgage lending collapses, should they step in and try to prop up local housing markets?

I have been puzzled for some time by the apparently relentless bandwagon rolling in favour of local authorities issuing mortgages. I am less puzzled by the possibility of them doing it, and more by the arguments advanced in favour of it.

Steve Reed, Leader of Lambeth, argues that it would be a way to "get the housing market moving again, stop the crash in house prices, and help bring the economic recession to a swifter end". I cannot get my head round how anyone could believe that the problem in Lambeth is that house prices are too low. Here's a 3-bed terraced house in that local authority area, a bargain at just over £800,000. It isn't just "Lambeth Tories" who think lower house prices are sensible and desireable, here's a left-wing banker making the same argument.

The recent announcement that Dundee Council intend to begin issuing mortgages - to council tenants exercising their right to buy, and at 100% of the purchase price, has the potential to be still more troubling. In an economic downturn, likely to be followed by cutbacks in public services which employ a high proportion of Dundee residents, it seems the likelihood of default is potentially quite high, and following the fiasco of reserves in Iceland and pension funds with Bernie Madoff, local government can ill afford further damage to its reputation - surely nobody now can say "we never knew 100% mortgages could make a loss". Of course a Council house in Dundee isn't on the same price scale as a terrace in Kensington, but if they have quadrupled over one housing market cycle, can we really expect them to fall only a few per cent in a downturn?

Hopefully 100% of the purchase price is at least not 100% of the open market value in this case, since Council houses are sold to tenants at a discount. However in these times of uncertain asset values it is hard to be sure of the real value of anything, and in any case to argue that this makes the loan less risky in the event of repossession is to double-count, since the Council has already taken that "loss" by selling the property at below market value in the first place.

In any case, a real calculation of the costs would include opportunity cost of the money, legal costs of repossession, costs incurred in rehousing the now homeless former owners, and even the PR disaster of evicting people who were encouraged to buy by the Council itself, and have fallen on hard times through bad luck, illness, etc.

So is there a case for Council mortgages? They used to be quite common before they were, though not banned, regulated out of existence in the early years of the Thatcher Government. However what they will not do is stimulate an economic recovery. Indeed since Councils will be using money which would otherwise be invested with banks, the operation of fractional reserve banking and capital adequacy ratios means that a Council issuing, say £5 million of mortgages, could actually prevent the bank which would have had the money from issuing up to £100 million of mortgages. An individual Council calling down its reserves to issue mortgages is in fact engaging in a giant game of beggar-thy-neighbour.

Nonetheless, I can see limited cases in which I think it would be right for a Council to consider issuing mortgages. Essentially, this would be situations where the issuing of a mortgage generated "positive externalities"; lest I incur the wrath of the LGA word police here, I mean simply benefits which would accrue to the wider community in the area from issuing the mortgage, rather than merely to the lender and borrower.

If an area is overwhelmingly what the Department for Communities and Local Government would call "monotenure" (maybe that could go on the LGA's banned words list instead of coterminosity!) then it may be desireable to get a more appropriate mix of housing, by building more affordable homes for rent in the area that doesn't have them, and helping people buy (with a deposit though!) in the area that is currently all rented. Dundee doesn't appear to me to qualify here, even at the 2001 census, only 23% of residents lived in Council houses, a figure which has presumably fallen further since then.

Alternatively, if reviving a very local market might be useful to specific regeneration plans, but other lenders are not prepared to get involved (perhaps because of unusual construction materials or on high-rise properties) then the Council could, on a prudent basis, make an impact here. Again, Dundee don't seem to have an extreme situation here, they themselves say their Council housing is spread thoughout the city.

Another case where councils might wish to issue mortgages is in helping bring hard to mortgage properties back into use, for example if they are in serious disrepair or have been fire damaged, and could be redeveloped sensibly and appropriately, rather than turned into a pseudo-yuppy experiment as Sarah Beeny and Kirstie Allsopp compete to see who can install the most expensive-looking bathroom. This would be the carrot of financing help to match the stick of "Empty Dwelling Management Orders" to make sure we don't have a huge stock of empty houses while other people go badly housed.

All the same, I think this is one of the very rare times in my life where I am going to come close to agreeing with the Taxpayers' (which taxpayers?) Alliance, and their description of this proposal. "Well-intentioned, but completely wrong-headed". Using taxpayers' money to take unnecessary financial risks, prop up an overvalued housing market, and deplete the stock of affordable housing for needs-based allocation just isn't a very good idea.


Anonymous said...

Great article Alice, I especially liked the insight into the Dundee approach.

It would be amusing to see Councils issue 100% mortgages to tenants, which then default and are repossessed. Rather than being put out onto the street you can still stay in the property as its a council house once repossessed, and having just been repossessed you'll be needing a home off the council.

It's such a stupid idea i'm now worried it might be in the next budget.

Anonymous said...

They are just desperate to do anything that will keep the merry-go-round turning for a bit longer.

Notice that last week various (state-owned) banks somehow managed to come up with a reason why they should continue to offer 100% mortgages (even >100% in some cases).

Anything - anything at all - to keep those chickens from coming home to roost before the election.