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Experts warn that UK property prices could crash if the government’s latest house buying incentive scheme is introduced. We offer an alternative remedy for the malaise of sluggish first time home buying.

First what is the government offering? In next week’s UK Budget, a GBP1bn scheme to allow first-time buyers, blanked out of the UK property market by stratospheric house prices, to get subsidised home purchaes.

The idea is to offer the new property capitalists a 95% mortgage, so that in parts of the UK as little as GBP10,000deposit can buy you access to a GBP200,000 home. The government and homebuilders will pick up the rest of the risk. Sounds great. But there are pitfalls.

Experts have warned that such schemes and previous lax lending policies of banks are what caused property crashes. These crashes start in the first-time sector, the weakest rung of the property ladder, and then, like contagion have a domino effect on other prices of real estate.

People get homes repossessed and they lose GBP10,000 plus all the mortgage payments they managed to make as we headed for a slow motion car crash scenario.

The dynamics are also a worry. First time buyers tend to be young couples and while in the past you could rely on their incomes to grow quickly as they get promoted or hop employers, today, the recession has made most people reluctant to take on too many risks and just accept low-paying jobs. So the chances of income acceleration are severely reduced – while the risk that UK base rates will be raised from 300-year historic lows in the next 2-3 years is great. When it happens the crash could follow.

Britain’s love affair with property buying is so far not shared to the same extent in the eurozone, and that is one thing to be thankful for. But a crash in the UK will have an impact on the neighbouring eurozone economy. So it has to be averted.

Now an alternative solution

The government has listened to complaints that first-time buyers can no longer afford to pay up to 30% in a down payment for a property they want to buy. Some, however, might say that this barrier is useful because it prevents poorer and unstable credits (first time buyers) from getting onto the property ladder.

But what is for sure is that we should not live in the mindset of “high property prices are good” and somehow we have to hoist people higher up the ladder to reach the porch. No!

The idea I will explain below is one that has been on my mind for a long while, because it stems from the concerns we all have about how protracted and expensive the bailout of the eurozone has become and how bankers appear to have been saved but are again offering themselves generous bonuses and rewards.

We know that assets have been inflated during the credit crunch. A brilliant National Public Radio report in about 2008 explained to US radio listeners how the credit crunch began. The main takeaway was: it took 300 years for the world’s money supply to reach USD35tn. That was between 1700 and 2000. It is all the cash in China, as well as Anglo-Saxon economies, and China’s BRIC colleagues, and Europe, and Africa and Latam. Yes, the whole show.

But it took just another SIX years, from 2000 to 2006 for the money supply to double again, to USD70tn! That was the year before the Credit Crunch of 2007 from which the sovereign debt crisis and world recession have stemmed.

German Bund futures leapt in volumes in that time. When I worked as a Bunds correspondent at Reuters in London, in 2001 daily volumes of Bund futures were 650,000 lots a day. Those leapt above 2.4m a day on many occasions in 2004-2007. Thereafter, volumes slipped back to….650,000 lots. In other words, the crisis has helped return us to the “natural” level of Bund trading. What puzzles me is why no one cared to ask how this rise into millions was possible. No regulator appears to have got on top of it. And indeed the UK’s Financial Services Authority market regulation chief and now overall boss, Hector Sants, admitted to the Financial Times in 2004 that “we have never really regulated the bond market.”

So the asset bubble was born.

If we accept this, then there is only one way to credably deal with the largesse which seems to justify high bankers’ salaries, burgeoning MPs pay, fat cat payoffs, and rocketing property prices. We need to accept an across the board 33% cut in the value of ALL of our assets. Everything. Nothing will benefit or lose out, nor cause distortions because it will be relative. 33% off all prices, property prices, wages, and so on.

We will be better able to compete against China’s economic powerhouse. And we will be able to reduce the excesses.

But before you howl about this unpalatable idea, I have some good news. It is not only assets which must be cut by 33%. Debt piles too!

So, the debt of Greece, of the UK and your mortgages will also be cut by 33%. The benefit of this is that we can sooner arrest the wayward problems of spirralling debt. Anyone who gambled by placing current and future earnings into a link with some investment will no doubt suffer as the equation will not work well for them. But we are not here to reward speculators. By definition they live life at the extremes and they choose to gamble. We don’t have to reward them and we don’t have to feel pity when they would not feel pity if an opportunity to profit at our exchequer’s cost availed itself.

But we muist change our attitudes to wealth and the overall amount that we have. It is only fuelling the debt which has the potential of consuming it.

Sobering stuff intended to stimulate discussion. So I invite you to respond and I thank you for your attention.

George Matlock