July 16, 2008 | posted by Michael Baxter in House prices |

“Strange days indeed,” said John Lennon once. Yesterday saw two new ideas for government intervention to prop up the housing market.

The Council of Mortgage Lenders wants to see the Bank of England provide guarantees for mortgage-backed securities and covered bonds.

Meanwhile, housing Minister Caroline Flint wants to see a scheme introduced to help would be first-time buyers save up for a deposit. The idea is this: the government will provide the funding so that families on a total income of less than £60,000 can rent for two or three years at a discounted rate, and then be able to buy the property at the end of that period.

Both ideas are interesting, but is it not the case they miss the point?

The scheme to help first-time buyers could equally be seen as a scheme to help buy-to-let investors. Presumably, if rent is subsidised, market forces will push it up.

CML’s Director General Michael Coogan said of his organisation’s idea for the Bank of England to guarantee mortgages and some bonds: “There is a window of opportunity here for the Government and the Bank of England to break the logjam in the housing and mortgage markets and underpin confidence in the financial system. The single biggest issue in the housing market that the authorities need to address is the lack of available funding to support new mortgage lending.”

CML insists its scheme would entail markets still taking the credit risk, as mortgage backed securities will still be sold in the market-place.

But whichever way you look at, the two schemes would amount to the government taking action to try and keep house prices up. The CML schemes would entail the government underwriting the value of property. Caroline Flint’s scheme entails a subsidy.

This begs the question, why didn’t the government take action to stop house prices from reaching such unsustainable levels in the first place? Of course, if it had taken action, organizations such as the CML, and the property industry, who no doubt are celebrating Caroline Flint’s plan, would have lambasted the government for getting in the way of market forces.

Then again, market forces are only a good thing when they benefit you. The market may be good for banks and investors when house prices are going up. But when they are falling, all of a sudden they are bad. So how can you justify such an uneven response to government intervention. Well, John Lennon summed it all up pretty well when he sang, “Nobody told me there’d be days like these.”