In the FT, Martin Wolf nails it on support for house prices, ending with:
"A deregulated and dynamic housing supply could spell financial and political Armageddon. The victims of this vile system are the young and upwardly mobile, who are either unable to buy at all or are trapped in a lifetime of debt serfdom. The political genius of the scheme is that it appears to help these hapless victims, while in fact helping the usual suspects: banks, homeowners, Nimbys and, if it creates another housing boom, the government.
Ministers also pretends the guarantees are a purely temporary arrangement. Nothing is less likely: it is the temporary that endures. The government has increased its commitment to frighteningly expensive housing. It is a trap from which the UK may not now escape."
While the government insists on urgently rolling out increased measures to prop up prices, something feels wrong. As in, there's something we're not being told. The urgency itself doesn't match up to the reasons shunted into the limelight. (Really? Politicians care about helping out a generation who just missed out? Yeah right.)
To me it feels like there's a real need to keep house prices propped up for some other purpose. Given the amount of leverage banks are placing on their capital, and the risk of that capital disappearing, it makes sense that there's a certain "repayment momentum" that needs to happen - i.e. cashing in all that future debt that borrowing is based on.
I admit I'm probably biased by being in the middle of reading Planet Ponzi by Mitch Feierstein. But growth through debt (or "investment" if you like) clearly requires money to come from somewhere. So if future costs are going up faster than money coming in, you need to get more money in. That can be done by either getting more sources of value, or by making those sources more valuable in themselves.
In the case of house prices, are both of these being done at the same time?
My guess is that banks have bet on house prices going up, as a source of payback. That translates into loans to builders, and loans to buyers. To keep the prices going up, the builders need to get their money back. To do that, people need to want the houses being built.
Negative equity and unsold property are both a form of devaluation. And if your business model depends on future growth, then devaluation doesn't offer less profit, it undercuts your entire method for making money.
The sceptic paranoid in me says state-owned banks like HBOS are involved in a vicious circle of betting on property, and pumping cash into that property. Good luck with that.