Blue Socialism

From yesterday's FT:

Sir, Martin Wolf believes that “a big danger for the UK is a sharp fall in house prices which would threaten the finances of households and banks” (1). He does not connect this big danger with the government`s proposed changes to planning regulations, which could easily make the danger a fact.

Most UK property prices include a significant site scarcity value. (2) Relaxation of the current restrictions on land use will produce a rapid increase in the supply of building sites. Unless this increase is matched by an equivalent demand, prices will fall. Only in London is there evidence of robust demand for residential and commercial property. The whole of the rest of the country is experiencing falling values and low volumes of transactions.

In the medium term, lower house prices should produce benefits for those who cannot now afford to buy. (3) But the shorter-term effect on the economy could be a large negative. The mark to market convention will oblige developers to write down their stocks of houses and land while mortgage lenders will – as Mr Wolf says – have to add to their impairment provisions at the expense of their capital. (1) If existing house owners experience a large drop in the value of their main asset, it is very probable that consumer confidence will fall.

Has the government thought through the probable financial and economic consequences of its policy? (4)

Timothy Bees, Wadhurst, East Sussex.

1) Maybe he did say that, a lot of people say that, but it is simply not true. While each individual mortgage is secured on land and buildings, all loans taken together are secured on all current and future borrowers' ability and willingness to repay them. If banks really have to write down mortgages which are in negative equity, then the same logic says that all unsecured loans and credit card advances have to be written off one hundred per cent as soon as they are made, which is a nonsense.

2) Yup, this socialist-style rationing is imposed by the incumbents for their own narrow benefit.

3) In the very short term, I think you'll find. This is a straight battle between Baby Boomers and young people, or parents waging economic warfare against their own children.

4) The financial and economic consequences of a fall in house prices would be largely positive, but all the government cares about is political consequences (and lining its own pockets), which is why the Blue-Yellow Wing of the Home-Owner-Ist Party is as keen to prop up house prices as much as the Red Wing was.