Coffee House

Cameron’s sub-prime thinking

12 March 2012

You’d think the American sub-prime crisis would have taught
politicians the world over not to try to rig the housing market. But no, David Cameron is back on it today — about how to ‘unblock’ the system so the debt geyser starts to gush
again. ‘The problem today is that you have lenders who aren’t lending, so builders can’t build and buyers can’t buy,’ says the Prime Minister. ‘It needs the
government to step in, and help unblock the market.’ The idea that lenders may not lend because they feel the housing market may fall, and people may be unable to repay, is instantly
dismissed. He speaks as if debt is the solution, and unavailability of debt is a self-evident problem. He "">proposes using the debt-dependent government to lend
its borrowed money to new debtors to buy houses of a value of up to £500,000.

You can see the appeal, to Tories at least. In her brilliant book, Anatomy of Thatcherism,
Shirley Letwin described how home ownership and buying council houses formed the moral backbone of the Thatcher revolution. Once you became a property-owner, you saw the world in a different light
— and so (in her famous phrase) ‘vigorous virtues’ were encouraged, and Britain shifted a little to the right. This was a success from which the right never really recovered. In
America (where Karl Rove would regularly cite Letwin’s book) the Bush administration also ensured state-backed mortgage companies helped the low-paid achieve their dream of home ownership.
Fannie and Freddie were the weapons of choice. Sub-prime loans were born, and we know how that movie ends.

It seems rude to point it out, but in Britain real house prices have been plunging — as the below graph shows.


Yet we hear very little about this. Why? Perhaps because housing is doing fine in London, where policymakers (along with national journalists) live and work. The capital is, however, quite unique.
Its property market is flush with money from Europeans, looking to move their assets into something that’ll hold its value when the Euro crumbles. The year before last, it was the Greeks who
had doubled their spending on London property. Now, it’s the Italians who are preparing for the comeback of a debased lira. According to "">Knight Frank, Italian buyers poured in almost half a billion quid into the London
property market last year. The politicians who live in London (especially its more upmarket neighbourhoods) could be forgiven for thinking that the market is still booming and the ‘housing
ladder’ is alive, well and living in Primrose Hill. Here, from Citi, is a graph showing how optimism in the London property market surpasses that of the UK:

I suspect the phrase ‘property ladder’ has no direct translation into Japanese. When their asset bubble burst in 1990, property prices hit levels to which they still haven’t
returned: anyone who bought a house in those days will be unlikely to live to see their money back. The ‘property ladder’ isn’t a Jacob’s Ladder — it’s more like
snakes and ladders. It’s not for politicians to nudge people on to that investment: property can go down, as well as up.

But more than anything else, it’s sobering to see just how few lessons of the American sub-prime crisis have been learned.

  • Simon Stephenson.

    Philip747 : 6.45pm

    I never take any “news” without a pinch of salt, so I’m sure if I’d ever watched Fox News this would have been the same.

    I’ve read The Big Short, and was very impressed by it. Certainly, when big money is to be made, every shyster in the country will be looking to get in on the act. It is, however, the job of politicians and regulators to anticipate this, and to put in place obstacles to the success of such selfish and socially harmful behaviour. The Clinton and Blair administrations, far from creating obstacles, appeared to do all in their power to give a carte blanche to the deviousness and dishonesties that characterise such behaviour – hardly surprising, I suppose, considering the degree to which their own electoral appeal was based on the same deviousness and dishonesty. In fact – they created a situation where if you weren’t prepared to go to the extremities of rent-seeking and acquisition of the wealth of others, you would be eliminated from the chase, and replaced by people who were. Plenty of room for crooks and con-men in Clinton/Blair’s Brave New World, but none for humble wealth-creators.

  • Philip747

    Simon you should never believe Fox news. Try googling “community reinvestment act subprime crisis”, or read The big Short.

  • Simon Stephenson.


    “The American sub-prime crisis was created by the wicked bankers –who made profits out of dealing in derivatives, bundling mortgages into collateralised debt obligations, and selling them to suckers.”

    Er …. so the Community Reinvestment Act, and in particular the wide-ranging extension of its coverage under President Clinton, had no effect on the banks decisions to lend money to people who couldn’t afford to repay? The banks abandonment of hundreds of years of prudence in lending was in no way a forced response to political interference? Collateralisation was just a sneaky way to allow banks to make crappy loans, and in no way a desperate response to the political short-sightedness that forced them to make crappy loans in the first place?

  • Simon Stephenson.

    daniel maris : 1.17pm

    So, is supply constant? As prices creep further and further above the cost of new construction, will no one realise that there are profits to be made?

    I appreciate that there are planning considerations to be taken into account, but the assumption of your argument is that there will always be a constraint on supply such as to cause an everlasting surplus of demand over supply. This assumption needs justification, I think.

  • michael

    Chasing stamp duty? Gorge is probably nagging.

  • Philip747

    This scheme seems calculated to provide a modest stimulus to the house-building industry – why would anyone be against that? In fact it is a very old idea, dusted down and refreshed. In the last century, building societies, who provided most mortgages, could not, by law, lend more than 80% of valuation, without taking additional security. This was normally provided by an insurance company in the form of a mortgage guarantee policy, at a modest premium. Here the government is providing the guarantee, which should provide an economic stimulus at little or no cost.

  • Philip747

    There seems to be a lot of knee-jerk knocking going on here, which is hard to understand. The American sub-prime crisis was created by the wicked bankers –who made profits out of dealing in derivatives, bundling mortgages into collateralised debt obligations, and selling them to suckers.

  • daniel maris

    Simon S. –

    I think the speculative inflows are only part of the story. The increased demand resulting from annual immigration PLUS above average fertility rates for established immigrant communities in London is what explains most of the increase.

    The demand for housing is rising very steeply and is likely to continue on that path in my view.

  • michael

    Thing is… The Italians are going to shift their wealth back to Italy after devaluation.
    -There’s nothing like a combination of cheap prices and insider knowledge.
    The same applies to the Greeks and any one else canny enough to get pally with one or two who know their way round their respective investment opportunities.
    London needs to be wary of these potentially huge capital outflows. -Or get in on the act.

  • Simon Stephenson.

    daniel maris : 11.39pm

    I’m not calling for house prices to fall 15% – 20%, I’m saying that there remains in current prices an element of the unrealistic expectations that caused them to rise so much during the false euphoria that was the Brown boom. If you see London and the South-East as a special case, just re-read the article to see how much these are currently being affected by speculative inflows from abroad. The moment the bubble bursts, these speculative flows will reverse.

    The equilibrium level for house prices is well below current levels.

  • Frothy

    “Here, from Citi, is a graph showing how optimism in the London property market surpasses that of the UK”

    And pessimisim too. All I can see from the graph is that London prices are more volatile upwards and downwards, but that they’re broadly in line with the UK housing market.

    I think your broader point about the London housing market (and indeed the London economy), and its disporportionate influence on piolicy formers holds. But the graph doesn’t add to your case.

    A small point. But have i missed something Fraser?

  • Roddy Robertson

    Fraser your article indeed points to the massive problems of the Uk
    LONDON ,our politicians cannot look or legislate beyond it.
    It is the real subsidy junkie of the UK.
    we have scotland about to secede ,Northern Ireland is looking for a similar referendum.
    Wales will not be far behind ,and only yesterday Manchester began to growl about “fiscal autonomy and Federalism from London.
    Problem is ,all those in the Westminster bubble like your goodself poo poo any talk of reform of our out of date and undemocratic Westminster.
    The MSM and political class living in the Westminster bubble literally cannot see the wood for the trees.
    Reducing the n8umber of MPs by a few and promising (as they have for over 100 years) to reform the abomination that is the unelected second chamber wont cut it.
    We need trure Federalism and we need it now ,otherwise these islands will break into several parts.

  • Verity

    The headline would be stronger if you left off the “thinking”.

  • Kennybhoy

    Maister Nelson!

    Completely off topic.

    Accidentaly caught your gig on “The Agenda”. You really do need to change your tailor! lol

    But seriously…

    How come the Speccie Australia has an article about Mark Steyn but we don’t…?

    The cartoonist might as weel have replaced the transvestite polis and Mad Mullah with you lot!



  • Steve

    Your home is not an asset , it does not generate an income and when you sell it ,any “profit” you make is swallowed up by the fact not only has your property increased in “value” but so have the others and in particular the New home you now have to buy.

  • daniel maris

    Can’t help but guffaw at those here calling for house prices to fall by 15% or 20% or whatever.

    Don’t they realise there are an extra 500,000 people coming into the country every year and most of them are locating in London and the south east. Meanwhile, people are living longer and staying healthy into their 70s and early 80s and we have so much divorce that there are many more single households before. Put it all together and you have huge pressure on housing in the London area. Prices ain’t going down.

  • Toxteth O’Grady

    You voted for him Fraser old boy…

  • Frank Sutton

    Bad enough that the fact of easy credit inflating property prices and fueling disaster wasn’t spotted by the economic titans in charge when it was going on – ridiculous that CMD has learnt nothing

  • Alan Radfield

    Those £500k houses will all be worth £2m in a few years (in devalued £ you understand) – and then, Bang! they’re paying Mansion Tax.

  • In2minds

    Dave Bush is right, the buy-to-let folk have a lot to answer for. Two years ago I sold the old family home, 6 bids in 5 weeks, 4 of them BTL. The new owner was so happy despite putting in a bid I knew was way over the real value. They were happy again when the new tenant was prepared to pay a ridiculously high rent. However, the smile was wiped off their face when the police raided the place as the tenants had trashed it and were using the property as a cannabis factory! It happens a lot I’m told.

  • Magnolia

    Pre-horrible budget give away.
    Houses may go down in value as well as up and past performance is no guarantee to future value.
    House prices follow the real economy and that’s volatile at the moment to say the least.

  • Archimedes

    This is silly to be doing this now. QE has helped gently deflate the housing bubble but it’s not complete until earnings start to fill the inflation gap. Once that happens the economy will be recovering and the market will be secure, so the deposits will come down anyway. It’s reckless to be artificially increasing demand at this point when UK pensions are so heavily dependant on the housing market. We’ll have to pay for this in five years time when we start seeing earnings increases but the housing market has already moved onwards and upwards outpacing the means of demand.

  • Kevin Warsh II

    I was cut off before finishing my correction to your sub-prime nonsense.
    The Bush administration issued a series of warnings about mortgage standards in the period 2003-2005, carefully documented when problems arose later. Not least from my non-de-plume, then a presidential advisor. Of course, there may have been a certain cynicism involved, one suspects. As soon as a Democrat bigmouth (eg Barney Frank) sounded off about the administration hounding the poor out of home ownership, the subject would be quietly dropped. It was, one might feel, as if the administration was preparing an alibi should things go wrong, while happy to go along with the party. The real enthusiast for home ownership was actually Alan Greenspan.

  • Kevin Warsh

    Monkwits really have to get the sub-prime crisis sorted out. Freddie Mac abd Fannie Mae never offered sub-prime mortgages, at least not intentionally. They specifically could not purchase sub-prime mortgages. Sub-prime mortgages were provided by a combination of small, poorly capitalised, American firms backed by Wall Street chancers such as Lehman together with foreign banks trying to get into the closed American market.

  • Ralph Musgrave

    This problem is more general than Cameron’s ignorance about economics. We had a credit crunch caused by excessive and irresponsible borrowing, and the reaction of the economically illiterate authorities the world over was . . . . wait for it . . . to cut interest rates and implement QE so as to encourage more borrowing.

    Advocates of Modern Monetary Theory have the answer to this, but not many others have.

  • Simon Stephenson.

    The reality is that between 2002 and 2007 there was government-sponsored speculation in house prices, that was exacerbated by modern communication methods whereby the bad news of reality is drowned out by the absurd over-optimism that is broadcast by those currently in power. The result is that immediately pre-credit crunch we ended up with a level of house prices that was way above the equilibrium that would exist in a non-speculative market. Since then there has been some adjustment, but nowhere near enough. There is another 15%-20% downward adjustment that must be made, but politicians are desperate, at any cost, for this not to happen on their watch. Hence the present mob’s frenetic efforts to re-inflate the bubble.

  • Dave bush

    Anyone trying to buy into housing is gazumped by the ‘buy-to-letters’. Sort these out by taxing them a whole lot more. We are storing up so much trouble for the future with a whole generation unable to buy houses. Just wait until the retirement bulge of these people when they can no longer afford to pay exorbitant rents.

  • Rhoda Klapp

    “Expensive housing helps only those at the top of the tree – the already overindulged, , under taxed, subsidised on the buses, gold plated pensioned, never had to fight in a war, lucky beyond all measure, baby boomers (I speak as one).”

    So, it’s a moral thing. Anyone who really deserves it may have it, but not somebody who ticks too many of the boxes above. How very LibDem. How about the ones who saved for years, went without, had their pensions stolen, got stuffed into secondary moderns and comprehensives, didn’t go to uni, worked hard for what they’ve got? I am not one, but I think they may have the houses they earned.

  • Edward McLaughlin

    The Tories cannot bide the realisation that their bonkers strategy for national wealth generation – sitting on ‘assets’ and fat arses, rather than going to work and making things to sell – has gone terminally tits up.

    Trouble is, the young people who should be trained and skilled-up to do the job, are all victim survivors of an educational regime which has pumelled into them, the mindset which can only tick boxes and which is unable to appreciate the need to grasp and shape physical things.

  • paulg

    The flaw in your argument is no greek,Italians europeans are flocking to fukiyama to buy a flat.

    Japan has a declining and static population, no wonder the housing market doesn’t move over there.

    Our situation is a bit different.

  • MajorFrustration

    So another scheme which gives the tax payer the opportunity to prop up the Banks – we will inish up with all the crap mortgages – now where have i heard that before. Dave next time round you just aint got a chance. Bye

  • Matthew Tysoe

    a home should be a place to live that you can call your own, NOT a ladder

  • Molly

    When will these buffoons realise that the way you help first time buyers is by facilitating a steady house price fall, so that they become more affordable. Cheaper houses help EVERYONE trying to climb the housing ladder. Simple. Expensive housing helps only those at the top of the tree – the already overindulged, , under taxed, subsidised on the buses, gold plated pensioned, never had to fight in a war, lucky beyond all measure, baby boomers (I speak as one).

    The latest scheme is a subsidy for the building industry which will make it generally harder for people to buy their first houses as it will prop up prices – or, if it fails because prices still fall, leave the taxpayer (our children) with the bill. This plan is stupid beyond expression

  • MilkSnatcher

    Kittler – right on!

    Another example of not-joined-up thinking. This “policy” has been thought up form the political standpoint – to appeal to “working families”/”the squeezed middle”/[substitute focus group name here] – the group just above the low earners to be taken out of tax.

    But, introduce a mansion tax, and hey presto, downward pressure on house prices which will ripple down the ladder and do even more damage to new buyers.

    This seems like a scheme to subsidise the construction industry whilst getting round teh State Aid rules.

    Surely every other industry is now going to queue up and ask for the same treatment. Come on Cameron, why not make payday loans from the Government so people can buy food and mobile phone top-ups?

  • perdix

    The government is not lending any money, it is guaranteeing parts of some loans.

  • daniel maris

    Have you fallen out of love with Oor Dave?

    Incidentally, housing isn’t “doing well” in London. It’s doing cr*p. And that’s why the prices are so high, because there’s not enough housing to go around. And why’s that? Because of your beloved mass immigration that you’re so attached to.

    People in London on frozen pay, facing increased contributions and losing child benefits are now having to fork out a much larger part of their disposable income on housing as prices and rents rise.

    Of course it’s not so bad if you are on housing benefit and it’s not so bad if you’ve just been given a huge bankers’ bonuse by one of our nationalised banks – but if you are in the middle, then it’s hurting.


    Frazer Nelson reminds me of the BBC. Criticizes all The Coalitions policies. FN should become Political Correspondent for the BBC. Love the Spectator but thinking of canceling my order.

  • London Calling

    Q. Does this look like a ladder?…

    A. Does this look like a snake?…



    SKI SLOPES …:)

  • Andy Carpark

    Graphs! Graphs!

  • Russell

    As far as I can gather, the government will not be borrowing any money for this ‘project’, it will only be providing a guarantee for 5% of the deposit.
    For anyone to be eligible for the scheme, they have to proceed with a rigorous mortgage application (no self certified incomes considered) satisfying the lender that they have sufficient income to accomodate not only the initial interest rate, but significantly higher interest rates.
    Hopefully it will get a few thousand ‘takers’ and generate some growth for suppliers of white goods/furniture/carpets etc. and keep a few builders (carpenters/electricians/bricklayers/plasterers etc.) employed.

  • Martin Beecroft

    Absolutely right!

    Cameron for one certainly hasn’t learnt the lesson of the American sub-prime disaster and the consequent banking crisis and economic collapse. House in the UK is a ‘market’ and the fact that lenders are not lending and low paid can’t afford to save deposits simply shows that house prices are still far too high and demand too low. All that when interest rates are at their lowest ever. Imagine the result of this ridiculous campaign once interests start rising again, as surely they must.

    Cameron is fuelling the next economic and housing crisis before we have even got out of the current one.

  • Kittler

    A sub-Prime Minister.

  • strapworld

    And if Slippery believes that he will get the same result as Mrs T, as the article suggests, may I remind him of two distinct qualities she had which he doesn’t

    LEADERSHIP and actually being a CONSERVATIVE.

  • whatawaste

    This coalition resembles the last months of Gordon Brown’s premiership by the day. the say something, anything by the PM, deputy PM or Cable just to grab a headline whilst lacking any coherent strategy. It is not Thatcherism, New Labourism but instead it is Fudgism and at that, making it up on the day, every day. Desperately sad for what was once a great country…

  • TrevorsDen

    Is Cameron suggesting we lend to the dirt poor with no money to repay?

    Thought not, so your comparison is facile.

  • Kevin

    “London, where policymakers (along with national journalists) live and work.”

    There probably lies the reason for the new policy. On top of near-zero interest rates and QE, here is what looks like yet another rapacious transfer of wealth designed to prop up the insane London housing market.

    No wonder the Government and Opposition are pro-abortion. It helps people afford their taxes.

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