Why Osborne’s housing subsidies feel right out of the 1970s

 
Allister Heath
IT is all too easy to make comparisons between the behaviour of current politicians and those of their historic predecessors. But basic economic errors seem ingrained in the nature of those in positions of power, and keep happening in almost cyclical fashion, albeit always in superficially very different circumstances.

I have previously compared George Osborne to Lord (Anthony) Barber, the 1970s Tory chancellor, during Sir Edward Heath’s premiership. Barber, like Osborne today, failed to liberate the economy and take radical action to boost its supply-side (in those days, the problems were crippling tax rates and militant trade unions; these days, the issues are different but no less severe, and include regulation, tax and spending). Barber’s errors helped turn Heath’s administration into one of the worst in modern history; it took until the 1980s before the economy was rebooted.

Wednesday’s Budget has further reinforced the parallels between the two chancellors: Barber will be remembered most vividly for fuelling an eponymous boom by botching the deregulation of credit and ignoring the money supply, and encouraging an army of lenders to fuel a demented commercial property bubble. The crash, when it came, was horrific. The secondary banking crisis, as it became known, involved massive intervention by the Bank of England and a collapse in the stock market. Given the restrictive nature of today’s procyclical increases in the amount of capital and liquidity banks have to hold, we are not facing an overall credit boom, despite quantitative easing.

But we are likely to end up with a localised bubble in property, thanks to the chancellor’s short-sighted help to buy scheme, which will guarantee and part-finance vast numbers of mortgages, including perhaps – and despite the coalition’s stated intention – some second home buyers.

Fathom Consulting, the economics outfit, is spot on when it decries this as a return to sub-prime lending, a point this newspaper also made forcefully in yesterday’s edition. There are perfectly good reasons why banks now sometimes (but not always) require a relatively large deposit before lending. They remain encumbered with legacy mortgages made in the bubble years which they know full well could turn into bad debt come another crisis. In most parts of the country, house prices are only sustainable at today’s levels with the current ultra-loose monetary policy, which means that higher rates could trigger substantial price falls and push many loans under water. Many buy to let investors have turned into stereotypical zombies, and will default if rates eventually shoot up.

Perhaps most depressingly of all, one of the key reasons why the government and the Office for Budget Responsibility keep making excessively optimistic predictions is that they assume that private consumption, some of it at least fuelled by increased debt, is about to recover strongly. The OBR is still expecting a return to consumer spending growth of 2 per cent or more over the next few years – but given that inflation remains very high, and pay rises keep falling, thus cutting real wages, the only answer is more debt. That is exactly what Osborne’s help to buy project is there to deliver: for all the chancellor’s talk of cutting public sector debt (though of course it is increasing at a very fast rate), he is working on the worst possible way to boost the private household sector’s debt to compensate. By 2015, after the election, the country will be facing a housing bubble, excessively high inflation, a massive deficit and the need to cut spending even more heavily. What a mess.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath