UK house prices, the case of a too big to fail market.

I've seen a few housing bubbles and it took me a while to realise and see that conventional economic thinking when applied to house prices simply doesn't work, at least not in the UK. In part it isn't allowed to work because the UK housing market isn't a truly free market. It tends to be free when prices are going up, but as soon as price rises start to hit a blip then we get intervention, the strong vested interests of the housing industry start knocking on the door of Government asking what are they going to do about it.

Traditional free market theory tells us that Government should do nothing, markets should be allowed to correct, but the UK housing market has become a "too big to fail" market.  Too big to fail because of the knock on effect of the fall out on both the financial and general economy that would come from any correction.

First, any significant fall in house prices would hit the already under pressure UK banks. These are the same banks that are largely responsible for the problem in the first place as they relaxed their lending criteria and lived the good life on the back of the mortgage credit boom pre-2008. Given their ongoing potential liabilities, falling house prices would only make things worse.

Second, UK property owners have increasingly seen their wealth as being in property. The growth of home ownership since the early 1980's has been seen as much as an investment as somewhere to live and call your own home. The UK obsession with property and rising or falling house prices has a political impact in that politicians know that these people are more likely to be older and vote. Any Government risks the wrath of the electorate and losing votes on the back of any fall in house prices.

Third, it should also be remembered that politicians themselves are usually personally invested in property, quite a few have their own property empires as the expenses scandal of a few years ago showed. It is not in their own interest to see falling prices.

So, Government and Central Banks tends to intervene because choosing not to has a free market consequence that is dangerous to the whole economy. If banks go under credit would dry up, businesses would go to the wall, spending would fall, recession, potential depression would be on the cards.

UK Budget update 1 - Construction Sector

One of the biggest announcements made in the budget today was aimed at the UK housing market.

The Help to Buy scheme improves on a previous scheme known as FirstBuy. It enables buyers to put down a 5% deposit on a newly built home.

Up to 20% of the cost of the home is funded by a "shared equity" loan, which will be repayable when the home is sold.

That loan will be interest-free for the first five years.

Thereafter borrowers will have to pay a 1.75% annual fee, which will then rise by 1% above the Retail Prices Index (RPI) measure of inflation.

There is also a new mortgage guarantee scheme that is being compared to Fannie Mae and Freddie Mac in the US.

The chancellor also announced a new mortgage guarantee, which he claimed would dramatically increase the availability of loans. It extends the previous NewBuy Guarantee scheme to include older houses as well as new-builds.

"We're going to help families who want a mortgage for any home they're buying, old or new, but who cannot begin to afford the kind of deposits being demanded today," he said.

http://www.bbc.co.uk/news/business-21849974

No one should be surprised at Government attempts to prop up house prices under the disguise of "helping" people, usually priced out first time buyers, who are of course priced out for a reason - prices are too high. The immediate effect of this policy has been on the share price of companies in the construction sectors, most of which are seeing a big rise today. Taylor Wimpey, Barrett Development, Redrow and others are all doing well on the back of this news as they are likely to benefit from being in the new build sector.

On the other hand, once the dust settles and people realize that house prices are still too high for those priced out it will be interesting to see how high the take up is and how relaxed the Government are when handing out taxpayers money. The recent history of Fannie May and Freddie Mac is not one that should be held up as shining light of achievement. The UK Government seems to have decided that the UK taxpayer, whether you are currently a property owner or not, will be a potential tax loser if house prices fall.