There’s a lot of anger around about the UK Government’s proposed extension of Right to Buy to housing association tenants. But it hasn’t been focused on what seems to me to be the worst aspect of the deal.
Many people have pointed out that it will do nothing to address the housing shortage, which of course it won’t, since the government’s promise to replace each home sold with a new council home has proven empty so far, and covenants without the sword are but words.
Nor will selling homes to their occupants help to bring down house prices. I have elsewhere advocated a housing buffer stock policy to stabilise prices, but it only works when what is sold out of the buffer stock provides a cheap alternative for those shopping on the market, not those who were already comfortably housed.
Of course R2B fulfills the dreams of hard working families (HWFs – the politician’s favourite term) to own their own homes – a precious few of them. You know what else HWFs dream about? Having a decent full-time job. Having a reliable income. Getting off the council house waiting list. No help from the government on any of those fronts, so we might question its pose as the Fairy Godmother for low income earners.
What is R2B really about? Remember that for an HWF to ‘own’ its home it has to go into debt (if a family could afford to pay cash for its home it would be fabulously wealthy and thus have no need to be HW). And if the HWF decides to cash in by selling dear the home it bought cheap, the next buyer has to go into much more debt. This policy is about getting people into more debt.
It’s not hard to see why the government should want to do this. A collapse in private debt is what drove the recent recession. You can see this pretty clearly in this chart prepared by Neil Wilson:
The good times were that big fat private debt bubble blowing up into 2007. The recession and sluggish growth after the crash is all the deleveraging, which the comparatively small increase in public sector debt does little to mitigate.
To get the economy moving again the government needs to get somebody borrowing again. Right now the government itself is doing the borrowing (and could help more by borrowing more). But they hate this. The government’s debt levels are held to be unsustainable, despite the fact that the government (as somebody nicely put it to me once) never retires, pays its debts with its own liabilities, and can choose its own income level. Much better to get low income households into debt. With wages that have hardly budged in a decade, an uncertain labour market, a looming cost of living crisis, and an increase in everyday expenses brought on by the continuing withdrawal of public services, households are, the government reckon, perfectly placed to be taking on more debt.
This is not about the dreams of HWFs. It’s about the only place in the economy that the government can get some releveraging happening, or at least thinks it can. The corporate and financial sector are still deleveraging and this doesn’t look like it’s going to change any time soon (again from Neil W):
That leaves only the household sector. Hence all this Help to Buy, Right to Buy, Gun to Your Head to Buy, Buy, BUY YOU MISERABLE PEASANTS! GET THE FUCK INTO DEBT!
Of course it’s nice for the elect among the HWFs to own their own homes. Even nicer if you’re the bank issuing the mortgages. If the home is in a prized location, you barely have to underwrite the loan; even if the buyers have no income at all they’ll make a killing when they sell off. When you issue the mortgage to the next buyers, again you’ll barely have to underwrite it; they’ll make a killing when they sell off. Also, low income earners are a default risk, even buying with a subsidy (which also confuses base pricing), so you can have the usual bonanza with default insurance, secondary market speculation, etc. And if you foreclose – imagine! You might get a piece of London property, ‘the world’s new reserve currency’. An absolute windfall for the FIRE sector when the market crashes again – isn’t it interesting how many Conservative politicians end up with cushy jobs in that sector after their career in the ‘party for working people’?
The deal also provides a nice excuse for the government not to do anything about underemployment and capital underutilisation, nor to do anything about stagnant wages and rising living costs. It’s a repeat of Thatcher’s great council house flog, the motto for which was, as Michael Hudson notes, ‘Sorry you lost your job – I hope you made a killing on your house!’ He points out that a flat worth £20,000 when Thatcher became Prime Minister is worth £350,000 now – seventeen times as much. The average wage (not adjusting for inflation) moved from around £6,000 to £26,000 at the time Hudson was writing – only four times as much. In other words, the flat went from being a place for lower earners to live to being a place for the wealthy to live – or buy to let. Early buyers made a killing. As for the other HWFs… so much for their dreams.
Here (from This is Money) is how average weekly earnings have moved relative to house prices since 2002 (taking 2002 levels of both as 100):
The private sector simply can’t afford its homes out of its real income. People can only pay for homes by selling them on at a higher price, to other people who can’t afford them. It’s great if you’re lucky enough to get an opportunity to buy early. But look hard at that chart and you’re looking at what’s wrong with capitalism. Hyman Minsky’s beautifully simple explanation of the fundamental disease of capitalism, as diagnosed by Keynes, is that it runs on two sets of prices: the prices of current output (which determine wages) and the prices of capital assets (including houses/land). These are determined in different markets, and capitalism contains no mechanism for keeping them in line. Minsky saw the role of government as being to correct for this failure. For the current UK government, it is to exacerbate it.
But never mind the theory; think of it at the human level. It’s great for HWFs to make a killing on their homes even as their wages stagnate. But as more and more ex-social housing gets absorbed into the bubble this government is so desperate to reflate, more and more HWFs will be priced out of the market in the areas near where they work. They’ll have to take two trains and three buses to get to work. But the trains will be cancelled all the time, because when they were flogged off the buyers lost most of their capital to the sharkish financial intermediaries who underwrote the deal, leaving little left over for making the trains actually go. So the HWFs will turn up to work late a few times. Their employers, who are suffering from weak demand since potential customers are spending all their money paying off debt, are looking to lay off staff anyway. They will fire the breadwinners of the HWFs. And what will we say to them then? Sorry you lost your job – I hope you make a killing on your… oh wait, you don’t have one, and you never will.