Politics

[Meenzer 15731]

http://www.theguardian.com/books/2013/aug/18/default-line-extract-faisal-islam-housing

 

 

Home ownership: how the property dream turned into a nightmare

In this exclusive extract from his book, The Default Line, the economics editor for Channel 4 News traces the origins of the housing bubble and argues that we're condemning a whole generation to paying absurd prices for what is a basic human need – and it doesn't have to be this way

Faisal Islam
The Observer, Sunday 18 August 2013

What is the most dangerous, toxic financial asset in the world?" This was the question put to me by the chief executive of a leading European bank. Anxious to display my superior knowledge of the darkest corners of the shadow banking system, I replied: "Credit-default swaps on super-senior tranches of asset-backed, security-collateralised debt obligations." I thought I had come up with a pretty pithy answer.

"No," he gently chided me. "The most dangerous financial product in the world," he paused a moment for effect, "is the mortgage."

The mortgage: from the Old French words mort and gage. Disputed translation: "death contract".

In the middle of the credit-crunch crisis of 2008 I met Esther Spick, then a 34-year-old single mum with two kids living in a maisonette in Surrey. It was the first home she'd owned, bought with an entirely inappropriate mortgage in 2005. She had been living on a council estate in Kingston, Surrey, working day and night to get a deposit to get a mortgage for her £235,000 maisonette. It had been sold – or mis-sold – to her during the boom by Northern Rock, and now the mortgage payments had rocketed by £500 per month. Faced with this, but determined to keep the keys to her home, she had been forced to hand her children over to their grandparents. She'd had to give up her local job and find higher-paid employment further afield. The result? Four hours' commuting per day.

"I don't want to have my home repossessed or for Northern Rock to say I haven't been making my payments," she told me. "I will do whatever I have to do, even if it means I have to get out and get a second job. I will definitely make these payments."

At that point, however, she was in negative equity – not surprising, given that she had been lent more than 100% of the value of her home. And her new mortgage was eating up two-thirds of her new take-home pay. "They lent me too much. It was a time when everything was wonderful. There was a great big property boom, the prices went through the roof. You were encouraged to go out and buy."

Now she had boxed up her children's teddy bears after a charging order arrived in the post. She had fallen behind on just three payments on the unsecured part of the loan. Northern Rock had taken her to court in Newcastle, 300 miles from her home.

A "death contract" indeed, and there was much to behold in its making.

In the decade from 1997 to 2007 house prices trebled. More than that, the home evolved into a multifaceted financial instrument, on top of its traditional role as an indicator of social prestige. Every stage of the house chain is still riven with conflicts of interest, poor data, and ultimately a tendency to fuel inflation.

Housing is the only basic human need for which rapid price rises are met with celebration rather than protest. The house trap stretches from the estate agents mediating house-selling, to the provision of mortgages to buyers, the supply of mortgage finance to the banks and building societies, the construction of house-price indices, the skewing of finance away from owner-occupiers towards landlords, the supply and construction. Homes were always castles, not just in England, but also across Europe and the US. But during the madness they evolved into cash machines, surrogate pensions, principal pensions, and even livelihoods. And in many places, this is still the case.

Let's go back to the foundations of what might be called the bubble machine. Rising house prices, to some degree, reflected underlying supply and demand in a competitive market. Greater increases in demand than in supply, and the prices went up, as in Britain. Large increases in supply over demand, as in the US, Spain and Ireland after the crisis, and prices go down. Simple enough.

Except, of course, this simple model is entirely misleading. The housing market is not really a market for houses. The housing market is driven principally by the availability of finance, mainly mortgage debt, but sometimes bonuses, inheritances, or hot money from abroad – London in particular has become the preferred residence of the world's wealthiest people, from Russian oligarchs to Arab oil sheikhs.

There are 27m dwellings in the UK. The short-term supply is basically fixed. The number of new homes built each year has not topped 150,000 since the crisis – that's less than 0.5% of the total stock. The amount of homes traded is around 900,000 per year, about 3% of the total stock. House prices set by the transaction of that 3% of homes determine property values, the solvency of banks, and the statistic that the UK property stock is worth £6 trillion.

The first thing to notice is that this is a highly illiquid market. Only a small proportion of the housing stock is actually being traded, or ever will be traded. On top of all this, transactions in the housing market are costly. Estate agents' fees in the UK can typically reach 3%, and as high as 6% in the US, with stamp duty on top of that. These are the crucial features of a housing market: thin trading and high transaction costs. It is a recipe for dysfunction, distortion and inefficiency.

Imagine the entire UK stock of property was called Ladder Street, with 50 houses on either side of the road. Despite demand for two extra houses every year over the next decade or so, it in fact takes two years to build just one extra house. The result? Some of the extra demand will be met by converting houses into flats. But most of the demand will not be met at all. A house will be sold on Ladder Street only every four months. One house will remain empty. The end result is a long queue of people who will buy anything, old or new, good or bad, for sale on Ladder Street.

Now consider the price. In a market such as this, the buyer with the largest wallet wins the house and sets the price. At one time that would have been the buyer with the highest single salary, and who had saved the largest deposit. House prices would therefore rise roughly in line or slightly ahead of the rise in incomes. But imagine if the entire queue of prospective house purchasers is flooded with mortgage credit. At this point, the house price is set by the greatest optimist. Ladder Street's housing market has become a market, not for homes, but for mortgage credit. It is the availability and terms of credit that have come to determine property prices. Every sluice gate was unlocked, then left ajar, and eventually flung open to accommodate the tidal surge of credit.

Take, for example, the length of mortgage repayment, beyond a typical 25 years. Between 1993 and 2000 the average mortgage period remained exactly 22 years. Around 60% of mortgages were for 25 years, and, typically, less than 2% of mortgages were for periods longer than 25 years. By 2006, nearly a quarter of all mortgages are for longer than 25 years. Around a fifth are now for 30 years or more, meaning an average first-time buyer will still be repaying home loans into their 60s.

'If only we could afford a place of our own," says one dainty green extraterrestrial to another in the cartoon advertisement as they sit in a pink car parked in Lovers' Lane. "You can," exclaims the advert, "with a Together Mortgage." The Together Mortgage was launched by Northern Rock in 1999. In effect, it required of borrowers a negative deposit. Customers were able to borrow 125% of the value of a home: 95% as a secured mortgage, and 30% as an unsecured loan. This was the type of loan taken out by Esther Spick.

The Together Mortgage was part of what Adam Applegarth, former chief executive of Northern Rock, called his "virtuous circle strategy". This essentially turned what had been a solid northern English building society into a giant hedge fund, laser-guiding global flows of hot money into some of the most sensitive suburbs of Britain's property market. Although launched in 1999, it really took off as Northern Rock went into overdrive at the peak of the boom, doubling its lending every three years. Single borrowers were also offered multiples of as much as five times their annual salary to help keep pace with those borrowing off dual incomes. Competitors such as Abbey National and HBOS (Halifax Bank of Scotland) scrambled to get in on the game, also offering "five times" deals and zero deposits. "Credit has been democratised in this country. And that is a good thing," crowed one HBOS banker at the top of the market, less than three years before the bank collapsed.

Here is the lesson for those who claim that Britain's financial issues will be solved through the wonder of competition. There was no lack of competition as Britain's old building societies spiralled the depths of credit insanity. So competitive were they that, at the peak of the bubble, mortgages were being written at a loss, almost from inception.
Link to video: Faisal Islam on The Default Line

If you went out on any Friday night during the go-go years to the classier pubs and clubs of Newcastle, you'd find them heaving with American investment bankers. Now Newcastle has many charms, but it was not the pleasures of the Bigg Market entertainment quarter nor the games at St James's Park that had attracted the sharp-suited moneymen to the foggy northern corner of England. They'd come here to build Northern Rock's factory of mortgage credit.

At the start of the boom Northern Rock faced a challenge of funding its mortgages. It was an ex-building society with no more than 75 branches and a low credit rating. "You're Northern Rock, you don't have a great rating. Until securitisation. Whatever you say, it gave Northern Rock a level playing field," said one member of its team. New rules allowed banks to shift mortgages written after 1995 off their books, without having to tell their customers, into "sidepots", based in tax havens – a process called securitisation. Securitisation allowed for mortgages to be sliced up and repackaged so that good loans were mixed with riskier ones. The sidepot, formally known as a Master Trust, received the regular mortgage payments from randomly selected homeowners. It attracted flows of hot money from the global financial markets into Britain's already bubbly property market. The banks did not need to rely on money raised from ordinary savers to lend to housebuyers. The peak of the bubble saw a remarkable race between the banks to reduce the amount of capital put aside to support losses on these mortgages. The first wave of securitisation more than halved the capital, thereby enabling ever more lending. Alliance & Leicester set the benchmark. Instead of £4 of the value of every £100 of a mortgage loan book being kept back, A&L got it down to £1.40. In turn, the Rock enlisted Lehman Brothers to help further engineer away credit risk, getting the capital set aside to below £1 in every £100. With this measure, the team at Northern Rock was again top dog among the feral pack of soon-to-be-bust securitisers. Cheap funding was locked in from US charities, lenders in Africa, and Asian investors impressed by the Newcastle United shirts for mortgage borrowers, such as Esther, taking out huge loans.

And it was not just Northern Rock that strayed from the path of rectitude and probity. At Mortgages 4 You, based in Newbury, John Apicella admits he was not entirely exacting in checking the incomes of his clients. Mortgage brokers such as Mr Apicella were the driving force behind the banks' desire to supply credit, and the desperation of ordinary Britons to afford a property. In 2007, two-thirds of mortgages (three-quarters of first-time buyer loans) were sold through brokers in Britain's high streets and on the internet. In the past, prospective homeowners had been required to save for months or sometimes years before their local bank manager would even to agree to talk to them about a mortgage. In the boom, that first filter of the credit process was outsourced to a lightly regulated industry with opaque professional standards: the mortgage brokers. The result of this? Self-certification mortgages.

Mr Apicella is quoted in documents published by the regulators, the Financial Services Authority. When he started working in the mortgage industry he was advised to "just put any income down". "I was guilty of all that because that's the way I was trained," he said. "That's what the industry did." The whole of the industry took the same view on self-certification mortgages. He said it was not his responsibility to assess mortgage affordability. "It's up to the client to see whether they can afford it," he told me. "I can't sit in judgment and say you can or can't afford it."

When regulators eventually began to investigate certain mortgage brokers, they discovered they were using some innovative ways to up the income stated by mortgage applicants. At one broker in Colwyn Bay, this meant Tipp-Ex, and the mysterious restating of a £30,000 salary as £130,000.

Up until 2007, there were almost no actual checks on the activities of more than 7,000 mortgage brokers responsible for the majority of new mortgages. This industry grew rapidly during the boom, lured by typical incentives of £500-£1,000 on each mortgage signed. Most brokers were small one-adviser shops advising on fewer than 100 mortgages a year. Of the few hundred that have been investigated, more than 100 have conducted their mortgage broking in a way that warranted a prohibition, and 35 were fined. The time to be cracking down was surely as the bubble was inflating, not after it popped.

The credit feeding frenzy in suburban Britain during this time was feeding off itself. But one innovation casts a particularly long shadow. Increasing multiples, decreasing deposits, allowing self-certification and stretching the term of a mortgage are all rather tame compared with never actually expecting the repayment of mortgage debt. That was the strategy behind "interest-only" mortgages.

Interest-only deals boomed from 2002 to 2007, providing another fillip to the housing market. By 2007 a third of all mortgage sales were interest-only. And for the first months of 2008, the majority of new mortgage lending was interest-only. It had briefly become the norm. The FSA, which waved through what should have remained a niche product into the mass market, warned in late 2012 of a "ticking timebomb". By May 2013, the Financial Conduct Authority, which took over the FSA's old premises, restated this "wake-up call". Martin Wheatley, the Financial Conduct Authority's chief executive, told me: "The big concern is the 10% that as of today could get to the end of their mortgage and simply have nothing to repay the loan with."

The rapid growth of the buy-to-let (BTL) market brings together all the elements fuelling house prices. For a start, BTL changed the British housing dream from owning your own property into owning other people's property too. Many expected the credit crunch and recession to put paid to BTL. But the cult of the amateur landlord prospered in the crisis. Property values have held, rents have surged, and there have only been a piddling number of repossessions. After the new coalition government slashed planning red tape, mortgage volumes have ballooned.

A year after the crash, the old names in BTL lending were back in the game. At the National Landlord Show in Kensington in 2010, well-heeled amateur landlords leafed their way through cheap housing for sale in poorer northern English cities. "Eviction popcorn" was being distributed by a law firm promoting its ability to turf out troublesome tenants. Estate agents explained that few locals could obtain a mortgage to buy a £120,000 house. BTL mortgages, however, were priced on the basis of likely rent received.

Young first-time buyers such as Naomi Jacobs in Newcastle finds herself more in a property nightmare than a property dream.

"I'd love to buy a little house now," she told me. She wants to have a family, and as the family gets bigger so she'd want a bigger house. That is the dream. Naomi is a science graduate, a science graduate with a job. But she can't get a mortgage. She blames the buy-to-letters. "The smaller flats that first-time buyers would want are ideal for them to rent out," she sighs. "But that's the way it is these days. It's slightly cruel when you think about it."

This cruelty has state backing. Buy-to-let received a backdoor bailout from the Labour government. Lending was supported in the immediate aftermath of the crisis. The buy-to-let mortgage book of Bradford & Bingley remains in state hands, as does a substantial proportion of Northern Rock's. Under the coalition, the Bank of England subsidises funding for British banks' buy-to-let lending. Bank loan officers argue that regulatory restrictions incentivise the granting of loans to landlords above first-time buyers. The coalition's Help to Buy scheme, as currently constituted, is actually Help to Sell new-build houses – and this was reflected in the share prices of the housebuilders. Predictably, in the absence of large-scale planning reform,it will simply inflate house prices still further.

Remarkably, through the credit bubble the likes of Northern Rock and Bradford & Bingley boasted to investors that Britain's "very limited" rate of housebuilding supported their doomed strategies. Successive governments delivered that help. The deal for Britain's young has transpired as follows: pay taxes, pay high rents and endure the sharpest points of austerity in order to help support a housing system that is delivering wildly expensive houses, or none at all, and to help bail out the failed banks that were built on that system.

Are we going to load the burden of adjustment from a decade-long bubble on to people who happen to have been born in the 1980s and 1990s? Progressive voices keen to redistribute through benefits have said very little about the overarching negative redistribution caused by the trebling of house prices. All political parties claim to want to foster "social mobility", yet it seems that where you live will be determined more now by where your parents lived.

The recent history of property in Britain is wrapped up in notions of freedom and the social mobility of owner-occupation and right-to-buy. Yet right now, Britain faces a return to a more traditional relationship with the land, in which property is the principal agent for holding back opportunity for all. There are other options, as stable house prices, large high-quality flats and secure rental tenure have delivered in Germany, for example. The property ladder was a one-off opportunity for a lucky generation-and-a-half. Now we are back to a kind of neo-feudalism, in which your quality of life depends on who your parents are, and what they owned.

[Meenzer 15731]

http://www.channel4.com/news/ukips-godfrey-bloom-biffs-michael-crick

 

The state of this country man.

[Christmas Tree 4847]

Quality! How politics should be

[The Fish 10972]

Seriously, fuck this country

[ewerk 31221]

It's been a good day for him

 

http://news.sky.com/story/1144453/ukip-mep-godfrey-bloom-calls-women-sluts

 

Edit: Actually it comes just before the racist comments.

Edited September 20, 2013 by ewerk

[The Fish 10972]

Fuck. This. Country.

[Meenzer 15731]

I know actual people - some of them with largely functional brains - who intend to vote UKIP next time round. It's amazing.

[The Fish 10972]

I spoke with a friend about politics a couple of days ago, she agreed with every liberal, socialist point I made, but is still going to vote Tory at the next election.

 

Fuck. This. Country.

[Park Life 71]

Keep an eye on the American markets next 2-3 weeks.

[The Fish 10972]

Keep an eye on the American markets next 2-3 weeks.

but stay out of African Shopping centres...

[Meenzer 15731]

but stay out of African Shopping centres...

Scorpios and bank clerks will be celebrating toooo-oooooooo

[Monroe Transfer 0]

 

"i think it's because some people lack a grammar school education and don't understand the difference between slut and slag"

 

aye that's it

 

It's like those two (him and her) are a comedy duo.

[Christmas Tree 4847]

Canny question time tonight. Nice to see the self satisfied Will Self having a rough ride.

 

 

[Monkeys Fist 43097]

Are you for real?

He had Gove swallowing the bait every time.

[Christmas Tree 4847]

Are you for real?

He had Gove swallowing the bait every time.

Not at all. He was made to look a fool by all the panelists and the audience agreed with the other panelists.

[CleeToonFan 1]

Was Self on Question Time? It was filmed at my Uni and he's my lecturer for psychogeography in term 2 (fuck knows what it is or why I'm allowed to do it, just sounds easy enough like and he's decent craic).

[Monkeys Fist 43097]

He was mate, and he put in a sterling performance of winding up Gove and chums.

 

Which, of course, CT saw as completely the opposite

[CleeToonFan 1]

Good to hear. Was gonna apply to be in the audience but can't be arsed with that massive circlejerk

[Monkeys Fist 43097]

Speaking of jerking, how's your eye?

[CleeToonFan 1]

I jerked it too hard and it's seeping.

Oh, THAT eye? I look like David Haye tried swatting a fly near me.

[Monroe Transfer 0]

Will Self is great, surprised CT dislikes him tbh

[Christmas Tree 4847]

Will Self is great, surprised CT dislikes him tbh

I don't mind some of his ilk but when they tread into "I'm so much more intellectual than everyone else " territory, I find them frightfully dull.

[ewerk 31221]

In fairness, 95% of the population could justifiably make that claim to you.

[Howmanheyman 33883]

Tories once again demonising the unemployed by planning to make them work for their dole money. Hopefully they'll get kicked out and take their bedroom tax with them.

[Sonatine 11567]

Aye, and it gets worse when you read this.

 

http://www.theguardian.com/society/2013/sep/30/iain-duncan-smith-sick-disabled-benefits

 

 

Cunts, one and all.