Socialism is a dirty word in many parts of the US, but as the FT reports, the government has turned its mortgage market into a giant nationalized enterprise on a par with China’s Red Army with over 90% of mortgages subsidized by the state and aided by so-called “progressive” or “redistributive” policies.
In the UK, the government have also become entwined with the housing market, albeit in different ways. Rates have also been slashed close to zero; tens of thousands are buying homes arm-in-arm with the state under ‘shared equity schemes’; and one-third of all mortgages come from the two state-controlled banks (Lloyds and RBS); very reminiscent of supposedly communist China, where most banks are majority-owned by the state with small public floats.
The BoE has (supposedly temporarily) pumped over GBP14bn into a scheme called “Funding for Lending” aimed at forcing down the price of business loans and mortgages; also reminiscent of the “short-term” rescue of Fannie and Freddie five years ago. In spite of all this government-sponsorship (or perhaps due to its bubble reflation), analysts argue, “we still have a market where pricing is not at a rational level.”
The question remains how can they avoid another crash if and when they withdraw support from the market? “It’s broadly accepted nowadays that China still lives under the banner of ‘communism’ despite capitalist markets playing an increasing role in society. In Britain and America – at least where the housing market is concerned – the reverse process seems to be taking place.”
Ironically, at the same time, China is trying to stall a bubble created by their own capitalism-driven shadow banking system by curving ownership and raising taxes on real estate.
Socialism is a dirty word in many parts of the US. After all, America is a global symbol of free markets, muscular capitalism and the small state. Yet somehow the government has turned its mortgage market into a giant nationalised enterprise on a par with China’s Red Army or Britain’s National Health Service.
US mortgage finance vehicle Fannie Mae, created by Franklin D Roosevelt to drag the US out of the Great Depression, underwrote around one in five mortgages during the 1940s. It was seen as the archetype of Keynesian intervention. Yet Roosevelt’s efforts have been eclipsed by those made by 21st-century governments around the world to pull their economies out of the post-credit crunch tailspin.
Today, in the US, almost nine out of 10 mortgages issued in the US are subsidised by the state … Housing, in other words, has become an arm of the state.
…[the FHA] is so integral to the market that without it prices could have fallen a further 25 per cent, according to Moody’s Analytics.
And at the same time the Federal Reserve is soaking up some $40bn of mortgage debt a month…
It is hard to dispute that if you own a residential property in any of the 50 states its value is being held up by the whim of politicians and central bankers.
…“The US doesn’t use the term socialist very much to describe policies like this, they use words like “progressive” or “redistribution”
This new status quo is not entirely the result of conscious decisions by the political classes. Washington was forced to prop up real estate when it realised it was so closely entwined with financial markets and their “too big to fail” banks that letting either collapse would be disastrous.
But attempts to send the two mortgage underwriters back into the private sector have withered on the vine.
…“There was momentum before the election but that has completely evaporated,”
Across the Atlantic, the tentacles of the state have also become entwined with the housing market, albeit in different ways. The British government would not set Soviet-style targets for tractor production or widget manufacturing. Housing is a different matter.
The central interest rate has been slashed to close to zero. Tens of thousands are buying homes arm-in-arm with the state under “shared equity schemes”. Most strikingly, one in three mortgages taken out in the UK are through two government-controlled banks.
Lloyds Banking Group and Royal Bank of Scotland remain in majority state ownership with little sign of progress on a mooted sell-off. Lloyds had 26.7 per cent of the mortgage market last year; RBS had 7.5 per cent.
This is reminiscent of supposedly communist China, where most banks are majority-owned by the state with small public floats.
“We still have a market where pricing is not at a rational level.”
Perhaps the interventions by the government have been, well, too successful?
“Is it just going to drive up house prices? By and large, in the short-run, the answer is, yes,”
…the move could create a new “housing bubble”, replicating the sub-prime crisis in the US.
The question goes to the heart of the dilemma faced by politicians on both sides of the Atlantic. How can they avoid another crash if and when they withdraw support from the market?
“But politicians will struggle to square the circle. It seems likely they will remain chained to policies that prop up the housing market, even as they keep paying lip service to first-time buyers who they cannot help en masse at the same time.
“It’s broadly accepted nowadays that China still lives under the banner of ‘communism’ despite capitalist markets playing an increasing role in society. In Britain and America – at least where the housing market is concerned – the reverse process seems to be taking place.”