House prices and the Euro
Freedom Today, June 18th 2003
If you weren't wild about the idea of the Euro before Gordon Brown published the results of his five tests, I doubt if you've become a fan since. The unloved Euro now comes with an added poison pill - the threat of higher Stamp duties and Capital Gains tax on your main residence. It's like promising continuous driving rain for your take it or leave it government offer of a winter holiday in Skegness.
The Chancellor has realised at last that the UK housing market is very different from the continental model. More of us own our own homes. Mortgages are cheaper because our market is more competitive. Most people opt for flexible borrowing linked to the market rate of interest. Gordon remembers the devastating impact linking the pound to the other European currencies had on house prices ten years ago and has come to the wrong conclusion.
This time he is thinking of sandbagging the housing market before we join up - doing the Euro's dirty work for it. Last time it took membership of the ERM to turn housing dreams into the nightmare of negative equity. He's right that our different housing market is an impediment to going in, but wrong to try to make our market like the continent's. Why should we want an inflexible, stodgy, expensive housing market where your main investment often lets you down?
I find there is a simple rule of regulation that usually works. Regulators achieve the opposite of what they intend. Every new Regulator and regulation should come with a government wealth warning. Regulation can seriously damage your assets.
It certainly proved true with Pensions. The UK could boast proudly at the end of the 1990s that we had more invested for our old age than all the rest of Europe put together. Our pension funds were a success story. Trustees were meeting to decide whether to put benefits up or cut contributions. Usually they ended up doing both, so big were the surpluses. At the same time government put in new Pensions Regulators, to bolt the stable door after the Maxwell pensions scam.
A few years later, and our pension funds have been laid waste. Most funds are short of money. Trustees are meeting to discuss cutting benefits, increasing contributions or winding schemes up. They usually end up with some combination of all three. Many pension funds are worth more than the companies supporting them, but not big enough to extend pension promises for the future to present employees.
The Regulator has failed to do anything about this dramatic decline for one very good reason. The main threat to pension funds came from government. No regulator can stand up to ministers, as he gets his job from that source. Government took five thousand million pounds a year out of the funds without so much as a boo from the Pension guardians. It made Mr Maxwell look like the patron saint of pension investors in comparison.
It proved equally true of insurance promises given by Equitable Life. Regulators stood by and watched the company make all sorts of offers. When it was finally revealed that the company had promised too much, the Regulator and courts succeeded in making a bad position worse, by offering contradictory instructions to the hapless company on what it should do and which customers if any it should protect. Regulators ensured an even slower resolution, and even bigger lawyers bills to erode the inadequate sums in the company.
It will prove equally true of the housing market, if Gordon Brown is serious about regulating it with higher taxes. He has already hiked Stamp duty to a swingeing 4% of the value of the dearer homes, putting people off moving and helping ossify the upper end of the market. Top house prices in the south-east suffered a sharp fall over the last year. If he combines higher Stamp duties with Capital Gains tax he could bring the market to a crisis quite quickly. Hasn't he learnt from his bitter experience with the mobile phone companies? He plundered £22,000 million from them in licence fees for them to stay in business and turned runaway successes into near bankrupt companies.
All those budding socialists who think stopping house prices would be good news should understand just how crucial the housing market is to our economic wellbeing. People borrow extra money against the security of their home to spend on a holiday or a new car. Rising house prices are crucial to economic confidence. If Gordon is really keen to make our market as dull as the German one he will get more unemployment and less spending to go with the collapse. It's not easy having a little less inflation - it's very easy tipping it over from exuberance to gloom, just as he did to telecoms shares three years ago.
Customers need competition and choice from a vigorous private sector to bring us good pensions, and great homes. The more Gordon messes with both, the poorer we will become and the more dependent on the state. Then we would be ready to join the continent, polishing our begging bowl and accepting more politicians and more bureaucrats to regulate our lives. Why trade in our freedom for that?