Are we headed for another subprime crisis?

Before we started pretending that government deficit caused the global financial crisis, it was widely recognised that it was caused by irresponsible bank lending. Rocketing house prices fuelled a lending bubble that was, in effect, little more than a legitimised Ponzi scheme. Banks could afford to lend to people who couldn’t really afford mortgages, because the rapidly increasing price of the house was enough to cover their losses in the event that the borrower couldn’t repay. Everyone needs shelter, and so for as long as prices went up, and banks could attract new customers, the gravy train could go on.

Like any Ponzi scheme, however, it all came down eventually. While economists and traders had been egging each other on, convincing themselves that sub-prime mortgages were safe as (excuse the pun) houses, the system quietly mounted in size. Banks plunged themselves further into debt to be able to lend even more money for buying houses, blind to the possibility of failure. A little wobble in the US housing market suddenly turned everything sour, as the entire financial sector suddenly remembered that prices could go down as well as up.

The rest is history, though that history has since been revised. As house prices plunged, and the government felt compelled to rescue the financial sector, economic uncertainty (as well as a healthy dose of reality) depressed demand, shrinking the economy. Since then, we’ve gone through some largely unnecessary cuts to a depressingly partisan range of government services. The economy has “rebounded” largely on the back of free-flowing credit from the once-again-booming London housing market.

There have been several recent changes to housing in the UK. Two in particular almost seem designed to repeat the mistakes of 2007-08. The first is the extension of right-to-buy, the second is the ending of secure tenancies. Together, these funnel people into home ownership, whether they can afford it or not. As secure tenancies end and the private housing market continues to hurtle away from reality at startling pace, council tenants are confronted with a choice: scrape together the cash to buy the place, or submit to the insecure, overpriced world of private renting.

This is incredibly expensive, given that public money is subsidising each purchase, and doesn’t benefit those most in need of support with housing. Tellingly, however, it does benefit mortgage lenders. Lots of nice, insecure borrowers who can be charged high rates of interest and then have their more-valuable home sold on in the case that they do default. Lots of low-income borrowers funnelled towards home ownership during a period of booming house prices; something sounds familiar.

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