Property of the state: housing policy

Socialism is a dirty word in many parts of the US. After all, America is a global symbol of free markets, muscular capitalism and the small state. Yet somehow the government has turned its mortgage market into a giant nationalised enterprise on a par with China’s Red Army or Britain’s National Health Service.

US mortgage finance vehicle Fannie Mae, created by Franklin D Roosevelt to drag the US out of the Great Depression, underwrote around one in five mortgages during the 1940s. It was seen as the archetype of Keynesian intervention. Yet Roosevelt’s efforts have been eclipsed by those made by 21st-century governments around the world to pull their economies out of the post-credit crunch tailspin.

Today, in the US, almost nine out of 10 mortgages issued in the US are subsidised by the state through a bewildering array of state-sponsored groups. They include Freddie Mac, the Department of Veterans’ Affairs, the 12 Federal Home Loan Banks and Fannie itself. Housing, in other words, has become an arm of the state.

One of these groups, the Federal Housing Administration, is so integral to the market that without it prices could have fallen a further 25 per cent, according to Moody’s Analytics.

And at the same time the Federal Reserve is soaking up some $40bn of mortgage debt a month – through “quantitative easing” – with more than one eye on the housing market.

It is hard to dispute that if you own a residential property in any of the 50 states its value is being held up by the whim of politicians and central bankers.

“The US doesn’t use the term socialist very much to describe policies like this, they use words like “progressive” or “redistribution”, says Edward Pinto, fellow of the American Enterprise Institute, a free market think-tank. “I recently spoke at a conference in New York where the Europeans were staggered by the extent of government involvement in our mortgage market.”

This new status quo is not entirely the result of conscious decisions by the political classes. Washington was forced to prop up real estate when it realised it was so closely entwined with financial markets and their “too big to fail” banks that letting either collapse would be disastrous.

Bear in mind that it was George W Bush, a Republican president, who nationalised Fannie and Freddie in the heat of the crisis in September 2008 – not his more leftwing successor.

But attempts to send the two mortgage underwriters back into the private sector have withered on the vine.

“There was momentum before the election but that has completely evaporated,” says Gary Painter, director of research and of graduate programmes in public policy at the Lusk Centre for Real Estate at the University of Southern California. “Now the new political focus is almost entirely on austerity instead.”

Meanwhile the Obama administration exhorts private lenders to relax their lending criteria for borrowers.

Across the Atlantic, the tentacles of the state have also become entwined with the housing market, albeit in different ways. The British government would not set Soviet-style targets for tractor production or widget manufacturing. Housing is a different matter.

The central interest rate has been slashed to close to zero. Tens of thousands are buying homes arm-in-arm with the state under “shared equity schemes”. Most strikingly, one in three mortgages taken out in the UK are through two government-controlled banks.

Lloyds Banking Group and Royal Bank of Scotland remain in majority state ownership with little sign of progress on a mooted sell-off. Lloyds had 26.7 per cent of the mortgage market last year; RBS had 7.5 per cent.

This is reminiscent of supposedly communist China, where most banks are majority-owned by the state with small public floats.

Andrew Jakabovics, senior director of research at Enterprise Community Partners, a US group, says Westminster is as involved in housing as Washington.

“It’s a matter of what you count as involvement in the property market,” he argues. “The British intervention was directly into the banks themselves ... we rescued the secondary mortgage market. That’s qualitatively different but not quantitatively different.”

Under last year’s new initiative, the Bank of England has pumped more than £14bn into a scheme called “Funding for Lending” aimed at forcing down the price of business loans and mortgages.

March 2013 saw the gradual nationalisation move up a gear as chancellor George Osborne earmarked billions more for shared equity programmes and – most controversially – paved the way for Britain’s own Freddie/Fannie system of mortgage guarantees.

In theory his move is meant to be temporary. But then so was the “short-term” rescue of Fannie and Freddie five years ago.

The house price crash was certainly spectacular. American homes have lost 35 per cent of their value on average. Irish homes fell by a third. How much worse would it have been without government intervention? “That is the million-dollar question,” says Martin Ellis, head of market research at Lloyds, which owns Halifax.

Yet the British market has recovered fast – much faster than the US. The average home last year sold at £246,000, up 10 per cent on five years earlier, according to the government’s Office of National Statistics.

That average disguises the mismatch between regions. House prices have powered ahead in London – but in Northern Ireland they are still down by a half from their crazy peak.

Ed Stansfield, an economist at Capital Economics in London – one of the few to predict the housing crash – says there is still a major mismatch between people’s income and house prices: “We still have a market where pricing is not at a rational level.”

Perhaps the interventions by the government have been, well, too successful?

Voters who own their homes are as asset-rich as they were before and many are making lower mortgage payments. But with lenders loathe to lend as generously as before the crash, young adults who lack sufficient savings remain locked out of the market. The average age of a first-time buyer has risen by eight years since the 1960s to 35, according to Post Office Mortgages. The ratio between house prices and earnings in Britain has barely changed since 2007.

One of my colleagues, Carly Ince, a 30-year-old editorial assistant, is an exemplar. She wants to buy her own flat in Tower Hamlets, a far-from-glamorous borough of east London where she grew up. Even there a basic former council flat in Bow is on the market for £220,000 – seven times the average London wage.

“When my parents first came to the area, both aged 22, they got a flat in east London and the rent was only £9 a month,” she says. “People could afford their own home back then. Now you have no chance unless your parents help you or you inherit.”

Critics say the UK government’s new £130bn mortgage guarantee scheme is more likely to drive up prices than to increase housing supply, re-inflating a damaging bubble.

“Is it just going to drive up house prices? By and large, in the short-run, the answer is, yes,” said Stephen Nickell, an official from the Office for Budgetary Responsibility. Alistair Darling, former Labour chancellor, says the move could create a new “housing bubble”, replicating the sub-prime crisis in the US.

The question goes to the heart of the dilemma faced by politicians on both sides of the Atlantic. How can they avoid another crash if and when they withdraw support from the market? Some experts speculate on a route out for governments, albeit over a long period.

“Nobody is talking about the government going cold turkey,” says Pinto. “You would have to phase it out over, say, five to seven years to give the market a chance to normalise.”

Roger Harding, head of policy at Shelter, a British charity for the homeless, says the ideal scenario would be for nominal prices to stay stable, allowing real-terms house prices to gradually become more affordable. At the same time ministers should address the issue of low supply, with housebuilding at a historic low; if they can break entrenched local resistance to development.

Harding says governments should use their armlock over mortgage lending to get homes built: “Otherwise we are going to repeat the mistakes of the past.”

The model, he argues, could be the 1950s, when housing minister Harold Macmillan oversaw the building of more than 300,000 new homes a year, mostly through local authorities.

“But politicians will struggle to square the circle. It seems likely they will remain chained to policies that prop up the housing market, even as they keep paying lip service to first-time buyers who they cannot help en masse at the same time.

“It’s broadly accepted nowadays that China still lives under the banner of ‘communism’ despite capitalist markets playing an increasing role in society. In Britain and America – at least where the housing market is concerned – the reverse process seems to be taking place.”

Jim Pickard is UK chief political correspondent for the FT

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