marylsommers: Bank of England calls for less owner occupation. The Treasury wants more?

Wednesday, November 23, 2011

Bank of England calls for less owner occupation. The Treasury wants more?

MPC rate-setter David Miles wants fewer owner-occupiers to increase labour mobility. But the Treasury wants to reflate the housing bubble

Britain is on course for a lower level of owner occupation ? and that would be no bad thing. So said David Miles, one of the nine members of the Bank of England's monetary policy committee in a speech in York today.

This came just 24 hours after the Treasury announced that it would be spending �400m to kickstart private-sector housebuilding and provide a mortgage indemnity scheme so that those buying new-built homes can get a home loan worth 95% of the property's value.

So, we have Threadneedle Street saying that it would be a good idea were housing to play a less prominent part in the economy and we have the Treasury doing its best, within its limited means, to reflate the property market. Clearly, this is one of the occasions when the left hand doesn't know what the right hand is doing.

Miles makes a good argument. He notes that first-time buyers currently have to find a bigger deposit when they are buying a homes, and admits that this causes "transitional problems" ? particularly for homebuilders. But in the longer term, a smaller owner-occupied sector and a larger private rented sector would increase labour mobility, make the economy more stable and make it easier for the Bank of England to calibrate interest-rate policy.

The government, by contrast, seems to have abandoned the idea of rebalancing the economy in favour of a policy designed to suck up to the baby-boomer generation by underpinning house prices, while throwing a bone to the housebuilding lobby. It is pandering to the blatantly erroneous belief that rising asset prices are a good thing for the economy while falling house prices are a national disaster.

Here's the reality. Britain has had three bouts of rapid house-price inflation in the past 40 years, and all of them have been followed by painful busts. There has been no improvement in the country's underlying economic performance since the journey into bubble land began in the early 1970s; on the contrary, growth rates are slower, the manufacturing base has shrivelled and the trade gap has ballooned.

The winners in this game have been the middle-aged and the elderly, who have seen the price of their assets rocket; the losers have been the young and the less well-off. There has been inter-generational larceny on a grand scale, and at the end of it Britain is a shrunken state pitifully dependent on the churning of real estate.

Albert Edwards, one of the City's most mordant commentators, made a good point in this respect today. Writing a note for Soci�t� G�n�rale, Edwards notes that the past 30 years has seen the better-off grab an ever-bigger slice of the national economic cake. Real incomes for those on middle and lower incomes have stagnated, creating two problems: slower growth, because the rich tend to save more and consume less of any increase in income; and political unhappiness among great swaths of the electorate at stagnating living standards.

Rising house prices are a convenient ? and cynical ? way of squaring the circle, Edwards says. What's more he blames the Bank of England and the US Federal Reserve for allowing the asset-price booms to run unchecked. "Did central banks, in creating housing bubbles, help distract middle-class attention from this re-distributive policy by allowing them to keep consuming via equity extraction?

"The emergence of extreme inequality might never otherwise have been tolerated by the electorate. And now the bubbles have burst, along with central banks' credibility, what now?"

The answer to that is sadly simple, Albert. Have another bubble.

Larry Elliott