Well That Makes Sense

23 September 2012 Last updated at 13:19 ET

Lib Dem conference: Pension funds could back mortgages – Clegg

By Justin Parkinson Political reporter, BBC News, in Brighton

Housing Many young people are struggling to get on to the housing ladder

Nick Clegg has said parents should be able to use their pension schemes to help their children buy a first home.

Under the Liberal Democrats’ plans, a future lump sum pension payout would be used to guarantee the mortgage.

The party says the extra security could result in making homes more attainable, as it could mean young people having to save up for a smaller deposit.

Mr Clegg said the plan could help many “desperate” young people, but the Saga group questioned its viability.

The size of deposits has risen in recent years, as banks have becoming less willing to issue mortgages.

Meanwhile, the number of young people asking for help from families, in the shape of cash sums has increased.

‘Not happened before’

The Lib Dems say their scheme would help those with pension payouts due, but who lack large savings.

Mr Clegg told BBC One’s Andrew Marr Show: ” We are going to work out ways in which parents and grandparents who want to help their children and grandchildren buy a property of their own.

“We are going to allow those parents and grandparents to act as a guarantee if you like so their youngsters…can take out a deposit and buy a home. It is a pension from property scheme.”

Liberal Democrat sources said around 250,000 people had a pension pot of £40,000, with a lump sum element of around a quarter – £10,000 – which could be used as a guarantee.

They estimate that 5% of those with a suitable lump sum would take advantage of the scheme, meaning 12,500 people could potentially benefit.

The parent’s lump sum would be at risk if the child defaulted on the mortgage repayments, but the rest of the pension would be unaffected.

But Ros Altmann, the director general of Saga – which represents the over-50s – said borrowing money against the expectation of a future lump sum was dangerous.

Otto Thoresen, director general of the Association of British Insurers, said: “We would want to look closely at the detail of the ‘pension for property’ scheme announced today by Nick Clegg.

“Pensions are designed to mature into a decent retirement income, not for other purposes.

“Any scheme which uses pensions as a guarantee must ensure that it does not inadvertently make the saver worse off when they retire.”

I’m sorry, but this has to be the stupidest idea of the day. Let us start with the fundamentals. Young people (any many not so young) cannot afford to buy houses because they are overvalued; the UK average house price is £238,638 (http://bbc.in/QxbsMM) while the median salary for a UK full time worker is £26,244 (http://bit.ly/QxbIvl), a multiple of 9.1 times.

It was long considered sensible to lend a maximum of 80% of the value of a house (I’ve checked my memory by referring to “Bankers’ Lending Techniques”, the standard text book for Chartered Institute of Bankers exams in the 1990s) and the normal multiple of income was the higher of 3 times the higher income and 1 times the lower income or 2.5 times the combined income. Based on a couple both earning the median income, this would imply a house valued at £164,025 and a deposit of £32,805. Now I don’t believe that I’m being overly pessimistic to think that incomes are not going to rise significantly anytime soon, so this makes house overvalued by over 30% on this basis.

So, the suggested solution is to encourage people to borrow too much to buy a fundamentally overvalued asset, and in order to protect the lender (who realises that this is a bad loan waiting to happen), we get the borrower’s parents to put their pension on the line instead. Rather than accepting that house prices are overvalued on any sensible measure, the Government continues to suggest policies that tinker at the edges because they fear to tell the millions of Express and Mail readers and all those watchers of property porn TV shows that they have been duped by a classic bubble, (not unlike the buyers of tulip bulbs in 17th century Amsterdam). They fear that they will not be re-elected unless the false prosperity of rising house prices can be delivered, and this is a fear that they share with the Labour Party, despite this fear being based on mass delusion. House price appreciation adds no economic value; building houses creates economic value, improving houses creates economic value, but just sitting back and hoping for them to rise in value adds nothing.

Nick

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