Let's agree for the sake of this discussion that negative equity is in and of itself A Bad Thing, and it certainly is for those who are in it (be that through greed, recklessness, gullibility or simple bad fortune).
One of the arguments advanced for the Help To Buy scheme is to prevent people falling (further) into nequity and by association, to help them out of nequity by driving up prices, thus increasing the likelihood that future purchasers will end up in nequity and so on in a happy Home-Owner-Ist death spiral.
So Our Beloved Government has generously promised to create another £130 billion in credit, underwritten by the kind hearted taxpayer, sometimes disparagingly referred to as "extend and pretend".
You can make up your own mind what the costs (the interest subsidy) and potential losses from all this will be, let's call it one-fifth of the principal sum of £130 billion = £26 billion. And this is not the cost of sorting out nequity here and now, this is the cost of shoving it onto purchasers and taxpayers in future.
But how much nequity is there really? According to the Financial Conduct Authority Risk Oulook 2013, about four per cent of mortgage borrowers are in nequity (as many as twenty per cent in Northern Ireland). Let's make a guess that average nequity is one-tenth of the original mortgage/cost of home.
There are about twelve million households with mortgages, total mortgages are about £1,200 billion = average mortgage £100,000.
So that means that about half a million households are in nequity (about 100,000 of those in Northern Ireland) to the tune of average £10,000 each, so the total amount of principal which would have to be paid off or written off to get them all out of nequity overnight is £5 billion.
It strikes me that spending £5 billion on paying off/writing off* every penny of nequity and telling people to be more careful in future is a more sensible course of action that putting £130 billion at stake with potential costs and losses of £26 billion. You can muck about with the figures as much as you like, the "pay off/write off" option is almost certainly cheaper than the "extend and pretend" option and certainly a damn sight more effective (providing it doesn't lead to moral hazard).
But maybe that's just me.
* £5 billion is about half the typical annual cost of UK bankers' bonuses.
Friday, 24 May 2013
This whole negative equity thing
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18 comments:
To eliminate the moral hazard, why not just give people the option of handing the keys to the council? The council can then pay the bank off and then they have an asset to match their housing benefit liability. Also helps to avoid having all the council housing concentrated in one block. It's a sop to the banks of course but much cheaper than Help To Sell
M, that's a splendid plan. Councils can refinance at 0.5% interest or something anyway (easily covered by rental income), and we'll get the [taxpayers'] money back from the banks with a bank asset tax or something.
Hmm... it actually seems pretty brilliant mombers, but wouldn't it lead to moral hazard on the side of the banks? At least if it's practiced routinely.
Kj, actually now I think about it, we can get rid of the moral hazard for the banks by doing this...
Let's say home 'worth' £150,000 and mortgage is £170,000. Council buys home quite legitimately for £150,000, bank gets £150,000. Council rents it back to tenant for something reasonable, like £5,000 a year (enough to cover council's interest charge of 0.5% and maintenance costs).
The tenant cheerfully declares himself bankrupt, as he has little to lose (except his chains). Or if we are playing fantasy government, we can just declare all mortgage lending to be "non-recourse" so the former owner is not liable personally for the £20,000.
Bank writes off the £20,000 (and hopefully claws it back from the idiot mortgage officer who approved the loan).
Sorted.
MW: It's certainly better for the one in nequity, as opposed to being chucked out.
I'm a little conflicted to having non-recourse, or at least banning personal liability for secured debt, for moral hazard reasons. In theory, it's a nice thought that you can't enslave someone, but OTOH, who would extend even the smallest credit to someone without security?
How do they do it in the US? Do they have non-recourse for cars and houses, but everything else, including telephone bills, you're liable for until bancruptcy?
"To eliminate the moral hazard, why not just give people the option of handing the keys to the council?"
M, but that would change the fine, upstanding owner occupier into a scummy council tenant. You can't consign someone to the ranks of the damned like that!
Kj, we can have different rules for "personal lending (unsecured)" where you are liable up to £10,000 or something, and "lending secured on land and buildings" which is no personal liability more than the house is worth.
B, but you are in the same house with better security of tenure and smaller expenses. You don't even need to tell the neighbours, you just change the direct debit from your bank account.
MW: - or no more personal liability on secured lending other than worth + £10.000
Time for a YPP press release on a new policy to help struggling young home-owners?
Kj, that's a good compromise.
D, yes it is, but nobody will take notice of it.
"You don't even need to tell the neighbours, "
True, but it would only be a matter of time before you were outed and became a social pariah.
Well there you have the solution for moral hazard Bayard. Those who are willing to pay with beig shunned from middle-classdom when council officially owns their house, can do so, those who don't, can continue to pay no matter how deep in nequity they are. Successfull application of price discrimination through revealed preferences.
I think the problem with negative equity is more political. Negative equity can cause a political party to lose lots of elections. Ask John Major.
B, I refer you to Kj's excellent riposte. If people are prepared to pay for something, then let them.
LF, sure, but it is quicker and cheaper to write off the unsecured element that it is to try and pump up house prices again.
Nobody is prepared to pay for something they think they can get someone else to pay for. Anyway, as I have said before, these borrowers in nequity are simply a human shield for those who really stand to lose, the lenders. Of course , if the government thought they could get away with simply "writing off" the nequity by giving the banks public money, they would probably do it, but they would awake the wrath of the Envious. And anyway, it is not nequity that loses the goverment elections, it's the people feeling that they have got "poorer" and you can only address that by pumping up house prices. This is only the first skirmish in a campaign of ever more blatant vote-buying in the run-up to the next election.
B, yes, politically, that is a fair summary. But that is just politics, if you actually look at the numbers, that is the worst way of doing it.
"that is the worst way of doing it."
Doen't that just tend to be the case, when politics are involved?
B, yes of course, you know that even better than I do.
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