'Help to Buy' may look and feel sub-prime, but is it?

Daniel Cowdrill

Much of the recent criticism of the Government’s ‘Help to Buy’ scheme is informed by the collapse of the sub-prime market in the United States. The comparison has been made between this and the National Homeowner Strategy launched by the Clinton administration.

Whilst ‘Help to Buy’ looks and feels like sub-prime, is it? The new scheme still requires buyers to put down a deposit, and as a Financial Times piece points out, whilst there is a positive correlation between the Loan to Deposit Value (LDV) and defaults, the significant increase in default rates occurs at or above 100% LDV. 

In addition to a 5% deposit, people will not be able to access the scheme if their credit history does not meet the Financial Conduct Authority’s ‘impaired credit’ standards. A Treasury spokesman added, “borrowers must also be able to afford the mortgages, with income verification and stress testing as set out in the FCA’s mortgage market review.” 

Furthermore, whilst house prices are expensive relative to incomes, they are undervalued relative to rent, a trend confirmed in the first quarter of 2013. Simon Ward, Chief Economist at Henderson Global, points out that rental yield reached a low in 2007 indicating that house prices were overvalued. Yields have since rose strongly reflecting falling house prices since 2008. This leaves room for an upward adjustment in prices.

Concerns that prices will soar due to a lack of supply may also be over-stated. We saw many developers buy land during the recession which they are now building on. House construction reached its highest level since 2010 in June. The latest Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) signalled “a solid increase in construction employment levels and the strongest degree of positive sentiment about future output since May 2010.” The index jumped to 57 from 51.0 in June, where a figure above 50 indicates expansion.

All things considered, ‘Help to Buy’ need not lead to an unsustainable bubble. Lenders are also operating in a risk averse market making them less likely to repeat the same mistakes; no one is talking about 100% plus mortgages anymore. Lightening, as the saying goes, rarely strikes twice.

In the wake of the sub-prime collapse in the U.S, there is understandable caution about government sponsored attempts to help people on to the property ladder. But perhaps it is a risk we can take if it helps those for whom high rents make it almost impossible to save a 10% deposit.

Growth, expectations, and confidence are all on the rise


Daniel Cowdrill

It’s all about confidence.

The importance of ‘confidence’ in economics was articulated in The General Theory by John Maynard Keynes. He set out what he termed the ‘marginal efficiency of investment’, or the expected return on investments. As it is difficult for individuals to rationally calculate future returns, ‘confidence’ becomes a key factor in investment decisions.

In the debate that raged over austerity, it was argued that reducing public spending when the economy was fragile would damage confidence. In an interview, the economist Paul Krugman predicted that austerity would fail to instill confidence and condemn the economy to an “endless slump”.

A string of positive economic results, culminating in a 0.6% expansion in second quarter GDP, has made the arguments of critics like Krugman less plausible. They perhaps failed to take full account of the context surrounding the Coalition’s deficit reduction plan.

In May 2010 the UK was running a public sector borrowing requirement of over 11% of GDP. This was an unprecedented figure and part of rising defictis across the West. Bond yields rose dramatically across the Euro zone with financial bailouts being sought by Greece, Ireland, Portugal, and the economies of Spain and Italy facing significant pressure. 

The Government was therefore right to secure the medium-term trajectory of the public finances to increase confidence in the near term. To do this the other way round, to try to build confidence before consolidating the public finances, would have been like building on quick sand. Fortunately, it also placed the UK ahead of the curve in Europe.

When Moody’s and Fitch downgraded the UK’s triple A, Osborne was widely criticised for placing too much emphasis on defending it. However, we arguably retained the Triple A long enough to make its eventual loss less damaging. It should be noted that we still retain three As with one of the major credit agencies.

Businesses have therefore enjoyed a relatively benign environment in which low interest rates have stimulated growth, and in which the main banks have had time to improve their capital positions. It has also given the Government some latitude in terms of the scale of cuts, and in terms of the public debt target which has been postponed without unnerving the markets. 

It is a little known fact that the Great Depression in Britain was not as bad as it was in the United States. In fact, after a period of austerity, Britain enjoyed steady growth through the 1930s. In 1934, Neville Chamberlain was able to tell the Commons, “We have now finished the story of Bleak House and are sitting down this afternoon to enjoy the first chapter of Great Expectations.” 

It is premature to say the same, but for now we have rising expectations and renewed confidence. This in itself, is no mean feat.

Executive pay argument is a distraction and not based on reality

Daniel Cowdrill 11.15am

Both David Cameron and Edward Miliband competed over the weekend to sound tough on executive pay. They both criticised what they see as ‘excessive’ pay at the UK’s biggest companies.
We were told that executives are on a ‘merry-go-round’, where remuneration committee members sitting on each other’s boards, ‘pat each other’s backs, and hand each other pay rises’.
A range of policies are now being proposed to combat this percieved corruption, such as making pay rewards legally subject to shareholder votes.
However, the definition of the problem bears no resemblance to reality. Research by Manifest shows that only 5 per cent of FTSE 100 directors sit on another FTSE 100 board, and of these only twenty directors sit on another company’s renumeration committee.
As Robert Peston has said, there is ‘no practical mechanism for executives of different companies to pay lavish amounts to each other by sitting on each other’s boards, in the way that Mr Cameron seems to believe is rife.’
Furthermore the idea of executive pay being accountable to shareholders, nice as it sounds, isn’t that simple. With globalised capital investors are more transient. Their interest may only last a few days or even a single morning. Longer term investors tend to be ‘sleeping’ investors, more interested in the value of the company rather than the parochial matter of individual pay agreements.
A small investor may hold shares in twenty companies listed in London; a big investor in many more companies across the world. They are hardly likely to have the time or the inclination to pour over the pay deals of every single executive.
In the unlikely event that executive pay becomes so unwieldy that it affects company productivity, I wouldn’t mess about leading a campaign against the board of directors. Quite simply, I’d sell my shares.
However, this misguided perception of cronyism and the equally misguided response of our political leaders is not my main concern. My concern is that the sheer political effort being expended on the issue is a distraction from declining social mobility and entrenched educational underperformance.
In his second principle of justice, John Rawls argued that social and economic inequalities are fine as long as they satisfy two conditions: first, that positions and offices are open to all under conditions of fair equality of opportunity; and second, that inequalities are to the greatest benefit of the least advantaged members of society.’
I broadly agree with this principle, yet it is evident that the tax collected from blue-chip companies and their executives, which must amount to tens of billions of pounds, is not being spent effectively on education and training. It is vital that young people are equipped with the tools to compete in the global market place.
Only seven other OECD countries spend more than the UK per pupil (approximately £54,000), yet the UK is falling down the respected PISA survey. In 2010, the UK was ranked 25th for reading, 28th for maths and 16th for science. In 2006, when 57 countries were included in the study, it was placed 17th, 24th and 14th.
Significantly, the UK has a greater variation in reading standards attributed to class differences than almost every other country in the OECD. The proportion of students from poor homes who achieve higher than expected scores is lower in the UK than across the OECD on average. Just 24% as against an OECD average of 31%.
Furthermore, the UK is one of only a few countries where richer pupils have more teachers than poorer ones. Only in Israel, Slovenia, Turkey and the US is this also the case.
We would be better advised to spend the same political effort on driving education and training for millions of young people rather than on a misguided war against the pay of a small minority of executives.

Choose your battles wisely, Edward

Daniel Cowdrill 10.47am

The Tories’ election defeat in 1830 ended some forty years of dominance. What was left of the Tory party in Parliament came to be led by the former Home Secretary, Robert Peel.

Peel’s preferred strategy was, as far as possible, to support Whig measures. He resisted the temptation to enter into opportunistic alliances to inflict embarrassing defeats on the government. Instead, where appropriate, he would support it and allow its nominal supporters to attack instead.

Peel’s aim was to break-down gradually from within the government’s majority. It worked. After significant gains in 1835 and 1837, in 1841 the Conservatives won a majority of 70.

Opposition exercised judiciously is the best choice out of a bare arsenal for opposition leaders. It takes judgement, discipline, and quite often a long spell out of government.

The advantages are numerous. It shows that the Opposition party is a disciplined force and likely to conduct government business in an apropriate manner. It also prevents the Opposition from becoming background noise. By predictably opposing everything you become a fixture in the game rather than a player.

Edward Miliband has made his choice: headlines, rather than credibility. Officially, the Labour party remains implacably opposed to the coalition government’s spending reductions, 80 per cent of which would have taken place were Labour still in office. Mr Miliband continues to attack each ‘cut’ without proposing any of his own.

Another example is David Cameron’s veto at last month’s EU summit. Agree or disagree, the Prime Minister made a decision. Edward Miliband, contrastingly, argued that it was a bad deal for Britain, that the Prime Minister had put party before country. Yet Edward refused to answer whether he would have signed up to the treaty himself.

It is a self perpetuating spiral. The less credible Edward becomes the more he and his colleagues resort to cheap shots and gimmicks. It is not the stuff great opposition parties are made of.

Edward Miliband is also unfortunate. David Cameron looks, sounds and acts like a statesman. And his “big, open and comprehensive offer” to the Liberal Democrats appeared to position him above party politics.

Examine the two leaders’ personal ratings. Mr Cameron has remained consistently the most popular. By the end of 2011 his personal approval was approximately 25 points ahead of Mr Miliband’s, with the gap widening. Even voting intention as we head towards the peak of the public spending cuts is edging in favour of the Conservatives.

After Sir Robert Peel’s death, William Gladstone observed from Peel’s handling of opposition that he had matured into a ‘profound statesman’. People are likely to say the same about David Cameron in years to come, but not the younger Miliband.

Why atheists can agree with Mr Cameron too

Daniel Cowdrill 6.01am

David Cameron’s speech at Christ Church to commemorate 400 years since the publication of the King James Bible was a commendable attempt by the Prime Minister to engage with faith in a way that predecessors have tried to avoid.

Mr Cameron makes an interesting point that in politics, as in political history, faith is important.

A study into Margaret Thatcher, for example, would be incomplete without reference to the fact that she listened dutifully to her father, a Methodist lay preacher, every week of her childhood (and a fascinating new book on ‘God and Mrs Thatcher’ is due in 2012). Indeed, future studies of Cameron will also be incomplete without reference to his upbringing next to a parish church where both his parents volunteered.

David Cameron’s thesis is that the realisation that God created man in his own image was a ‘game-changer’ for human civilisation. When each individual has a common power above them, and when every individual is of equal and infinite importance, created in the very image of God, it created an irrepressible foundation for human dignity and the basis for Christian values such as responsibility, charity, compassion, tolerance, humility, self-sacrifice, love, and the common good.

As an atheist I think these are all virtues, but I approach them from a different angle. The German philospher Ludwig Feuerbach disagreed with the idea that God created man in his own image, but that man created God in his own image. God is the outward projection of the wise, moral, and sympathetic being that man can only aspire to be.

It is the reverse of the 'Creation of Adam', the centre of Michelangelo’s ceiling at the Sistine Chapel. God and Adam hold their hands out towards each another, one passively the other forcefully, poised on the brink of creation. Feuerbach would see it differently. He might point to the obvious fact that although God and Adam reach towards eachother they don’t actually touch. Adam gazes longingly into the sky at a vision of godliness, a projection of his own good qualities.

Where I diverge with Feuerbach, however, is in Part Two of Feuerbach’s ‘Essence of Christianity’, published in 1842. He suggests that the Chrisitian belief in salvation makes us more tolerant of vice than we would otherwise be. In other words, we don’t have to stand-up to bad people because they’ll get their comupance when they arrive at the pearly gates.

However, this seems to jar with the good intentions of so many faith based groups. David Cameron is correct to point to the tremendous work that faith charities and churches do here in the UK and abroad to uphold human dignity and rights, and to their role in the social fabric.

While as an atheist I cannot accept the creation of man by God, as a human being I can agree with the virtues that spring from Christianity. They are, in the end, human qualities.

While the Euro remains on life support, it’s business as usual for the City

Daniel Cowdrill 10.04am

Listening to David Cameron’s opponents during the weekend, you would think his veto signals the end of civilisation - or at least the UK’s participation in it.

One of their scare stories is that the City of London is worse-off than before the EU summit. In reality, however, it is in much the same position.

The sticking point was the financial transaction tax (FTT). This is a tax on every sale or purchase of stocks and bonds or other financial products by banks. On these pages, Craig has dismissed a FTT as an unhelpful ‘soundbite tax’, while Alex described it as ‘misguided’. Elsewhere, Sir John Major has labelled it a ‘heat-seeking missile aimed at the City of London’.

As 75 per cent of the EU’s financial services industry is located within the City of London the burden of this tax would fall disproportionately on the UK economy and the two million people who are employed in financial services in this country.

Unfortunately, France was not willing to listen to British demands. President Sarkozy’s refusal to concede led to a fiscal ‘pact’ rather than the fiscal union the markets had desired. What is set to be agreed over the coming months without the UK is unlikely to be enough to stop the deterioration of the European debt crisis, and President Sarkozy won’t be so ‘heartened’ if (or when?) France’s credit rating is downgraded.

However, beyond all this the fundamentals remain the same for the City. The UK remains part of a single market that allows the (reasonably) free movement of people, capital and services across a trading block of 500 million people. The City will continue to benefit from the single market - Mr Cameron’s veto does nothing to alter this.

To be sure, it could be argued that the new 17+ euro block will foist regulations on the City when Qualified Majority Voting (QMV) is introduced in 2014. But these are future deals that are yet to be negotiated and agreed. When the time comes there is no reason why Britain can’t win support and obstruct the worst that might come our way.

In any case, there are some people who believe that had the UK not vetoed the new treaty the French would be less determined to impose other regulations on the City. This thinking is deluded. French dirigiste tendencies have been strengthened by a financial crisis that many in France perceive as the fault of speculators in the City of London. This isn’t going to change no matter how much sovereignty we sign away.

Furthermore, access to the single market is not the only thing that attracts business to the City. In the 1980s the ‘Big Bang’ attracted financial services to London from all over the globe, not just Europe.

The UK’s competitive regulatory and tax framework continues to attract financial services to these shores. We are also near the main European continent and, of course, we speak English. Even the EU tends to deliberate great matters in English - now the global lingua franca (such irony might be lost on the French).

The City will live to fight another day. The euro, on the other hand, may not.

Theresa May’s shrill and misleading attack on the Human Rights Act

Daniel Cowdrill 6.10am

As Sir John Major pointed out on the Andrew Marr Show on Sunday, the European Union has to change. There is a need for greater fiscal union, and this invokes important questions about our own future in Britain.

However, the debate over our relationship with the rest of the EU must not be conflated with the debate over human rights. The European Convention on Human Rights (ECHR) is a separate treaty enforced by a separate institution.

In May 1949, Britain became a founding signatory of the Treaty of London, which established the Council of Europe. Membership is open to all European nations that are committed to fundamental rights and freedoms enshrined in the Convention articles. The Council of Europe is an achievement that Britain should be proud of.

Sixty years on, it is disappointing to hear a Conservative Home Secretary demand that the Human Rights Act “must go”, as Theresa May has done. The Act gives a legal basis to the Convention within the UK. When put on the stop, David Cameorn has supported Mrs May, reaffirming the Conservative party’s manifesto commitment to repeal the Act and replace it with a British Bill of Rights.

This is the kind of populist pledge that parties are prone to make in opposition. It is not something for responsible governments. One suspects that despite the Prime Minister’s support for his Home Secretary’s comments, ultimately he is not prepared to repeal the Human Rights Act.

Mr Cameron, conveniently enough, blames the Lib Dems for making him go slowly on the issue. The truth is that any replacement of the Human Rights Act would be along broadly similar lines and likely to allow for the same judgements that so offend the likes of the Daily Mail. It is a waste of government time and effort and certainly not worth the internal coalition fight it would create.

Certainly, there has been what one might call ‘human rights inflation’ since the Convention articles were introduced into domestic law but scrapping the Act entirely would be throwing the baby out with the bathwater. It is the judiciary’s interpretation of those rights - sometimes going far beyond the rulings passed down from Strasbourg - that is at fault.

The main example of this ‘inflation’ is the extension of deportation restrictions on the grounds of the Article 8 ‘right to family life’. These judgements are the product of English courts. They are not stipulated by European courts. The only restriction that Strasbourg case law places on the deportation of foreign criminals is on the grounds of the Article 3 right to freedom from torture.

The Home Secretary is tasked with the maintenance of public safety. However, she would be better advised to aim her fire at the judiciary, who have perhaps been to deferent to their own assumptions about how Strasbour would rule on the same case.

A good argument can be made that the judiciary has failed to use the margin of appreciation permitted under the Convention to apply human rights with the correct sense of proportion.

Instead, the Home Secretary has opted for a shrill and misleading attack on the Human Rights Act itself, so sweeping over all the good work done in resolving miscarriages of justice.

This wrong-headed assault on the Human Rights Act is an unfortunate hangover from opposition politics and the Government should take the first possible opportunity to abandon it.

Follow Daniel on Twitter @danielcowdrill

A Reply to Charles Moore…

Daniel Cowdrill 6.40am

The collapse of the banking system and the recent phone-hacking scandal have led some to question the wisdom of market forces.  In a now famous piece in the Telegraph, Charles Moore considers whether the Left were right all along about the free market being a ‘set-up’ designed to benefit only the rich. After recent events, ‘Everything is different now’ - but is it?

 In the post-war period the Conservative party was haunted by the memory of the ‘hungry thirties’ - a period of mass unemployment. This was compounded by election defeat in 1945, viewed by many on the Right as a delayed verdict on their economic policies during the wars.

Across public policy, but especially with the nationalised industries, industrial relations, and economic management, the Conservative party ceded ground to the left. Churchill focused his fading energies on establishing his position as an international statesman. The grand old man was not prepared to risk his reputation over a battle with the unions, and every effort was made to avoid confrontation. Tories fond of State planning, like Harold Macmillan, sidelined before the war yet profoundly affected by his time as a MP in the industrial north-east, were now promoted.

But had things really changed that much? As Andrew Roberts has argued, instead of treating the 1945 election as the freak result it was, Tory politicians were emasculated by it. They drew the false conclusion that it represented a turning tide which they were unable to hold back, even if they had wanted to.

There is a danger of the same happening again. Most Conservatives still believe that spontaneity is preferable to state direction, and that variation and competition lead not just to higher productivity but to a richer society. I assume that Charles Moore still believes these things. What disappoints me is his willingness to buy into a left-of-centre narrative of recent events.  We need to beware the false conclusion that confidence in the free market has collapsed.

 Some of those who benefited the most have certainly abused their power. Rupert Murdoch, once the heroic defender of a free press versus union intimidation, has presided over (unknowingly or not) allegedly corrupt and illegal practices at some of his newspaper titles. Bankers made reckless investments tied to the US subprime market. Some of our largest banks have been humbled. These are indelible stains on capitalism’s record but the lessons of the post-war period stand.

Between the end of the Second World War and 1980 the British economy was in relative decline. Harold Macmillan’s claim that we had ‘never had it so good’ and Harold Wilson’s ‘technological revolution’ belied lacklustre productivity, rising inflation, and deteriorating industrial relations. Mrs Thatcher’s governments changed course and Britain began to gain some lost ground.

Relatively unfettered markets and a relatively light, normative tax regime are a source of much higher growth and technical innovation than nationalised industries and are more compatible with democratic values than centralised bureaucracies.  The free movement of capital allows for the more efficient allocation of resources in an economy.  This allows for more entrepreneurship, innovation and job creation.  In a globalised market, those economies that are uncompetitive and protectionist will spiral into high unemployment and low growth, leading to sovereign debt difficulties, as Southern Europe is discovering today and Latin America discovered a decade ago.

In the 1970s, a new generation of economically liberal Conservatives made a vigorous case for de-regulated markets. As the economy struggles to adjust to recent hardships, this is the worst possible time to cede ground to the Left and thus allow the state and not the market to direct the economy.

Read more on this subject:

'I'm starting to think Charles Moore might be right, but not quite', by NIk Darlington (25 July)

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