A game for one to thirteen billion players

One of the more interesting announcements of George Osborne in the recent budget was the £130bn mortgage guarantee scheme, which does not even kick in until 2014, but which is already having an impact on housing activity in London.

Although prices are said to have "held up" in London, this has been a bit misleading. Most of the stability/improvement in house prices has stemmed from a fall-off in supply rather than strength of demand. Only in the centre has there been a benefit from increased demand. Turnover in terms of number of houses that change hands is nowhere near the turnover of 2000 to 2006.

The reasons for the fall in turnover are not complex. In a super-low interest rate environment, if you have an asset that can return you 5% a year, and you can raise money on that asset, it makes more sense to remortgage the property that you have (at less than 5%) and buy another property with the funds raised. So, basically, a lot of people are not selling to buy. They are holding, borrowing, and buying more.

If this situation continues in the long term I think that there is little doubt that, as the percentage of the population renting rather than owning increases, the law will change to increase security of tenure and this, eventually, will put a downward pressure on house prices, because the returns on the asset (i.e., rents) will become considerably less liquid.

However, in the short term, buying an extra property on borrowed funds makes much more sense than selling and buying.

Outside of London, this has been less of a factor, not least because fewer people have massive existing equity in their home, and also because the buy-to-let market is not so entrenched.

However, whichever way you look at it, George Osborne's decision to pump £130bn into this kind of market does not seem to make much sense. And the IMF has come to the same conclusion. It has effectively called the government's averred intention -- "to make the aspiration of home ownership a reality for as many households as possible" a load of bollocks. If you give subsidized loans to people to buy a stock that is not increasing sufficiently quickly, all that you do is push up the price of each unit of that stock, a point that the IMF makes. Mervyn King has said the same. Actually, everybody has said the same. It's not complicated.

The IMF has actually come up with a neat idea. IN the past the suggestion of a "land tax" has met with reasonable objections. But the IMF has tinkered with this, suggesting that the UK impose a "disincentive" tax. That would only be imposed on undeveloped land where the owner of the land has obtained planning permission.

This makes a l.ot of sense. The response of the Home Builders' Federation makes less sense. Stewart Baseley, executive chairman, claims that

"Generally when developers are holding permission land it is because the site is not viable or they are unable to secure development finance, so taxing it would make it less likely to be developed".

You can kind of see where he is coming from. If I own a piece of land, and I am on the verge of building on it, but then the government taxes me for not having built on it, then that might be the money that I need to do the building, so the building doesn't take place.

But a slightly deeper look shows that this logic is flawed. If the site is "not viable" (say, I would make a loss of £50,000 if I developed) then if I were threatened with a tax of £100,000 if I failed to develop, then it suddenly becomes in my interest to go ahead with the development, even at a loss. What Baseley confuses is cash flow with profit v loss. They are not the same thing.

Similarly, if I have planning permission, but can't get financing, then a threatened tax of £50,000 might make it financially sensible for me to sell it to someone who does have the financing. So, the "land tax" (as Baseley terms it) is certainly bad news for the owner of undeveloped land, but it does not make development less likely.

But, to return to the Osborne incentive, one which everyone states will not achieve what it claims to want to achieve.

What no-one seems to have spotted (or, at least, I have not seen it mentioned), is that there is every chance that Osborne is aware of this, that the government is aware of this. Their plan, as we head towards the 2015 election, is rather more subtle, and, potentially, rather more damaging.

Let us cast our mind back to the couple of years leading up to the 2005 election. These were (people thought at the time) "golden" years. Low inflation, high growth.

But the growth was something of an illusion. The "increased wealth" was not coming from real growth at all. It was coming from increased asset prices, caused by easy credit. In other words, we were far less rich than we thought, and we were spending money from the future.

This is something of an old argument. As Cameron and his government have said loudly and continue to say, we cannot carry on spending four pounds in cash for every three pounds that we produce.

And yet, the latest announcement by Osborne will, while the government publicly proclaims an opposite strategy, have just the effect that the "easy credit" from banks had in 2003-2005. Except that this time the money is coming from the public purse via the printing press, rather than from banks who naively assumed that one day they would get repaid. Eventually the banks went tits up, and the public purse bailed them out in retrospect. This time the government is bailing them out up front.

Why adopt a strategy so counter to the publicly proclaimed line of "austerity"?

Two reasons. The first is, of course, that Osborne can hardly say "right, election coming, fuck this austerity lark, here's lots of money that we can't afford but which might give us a chance of re-election". No, he has to maintain the veneer of "toughness", even though in actuality the only people suffering are likely to be Labour voters anyway.

Secondly, Osborne's previous plan -- to boost the economy through increased output (and increased exports) just hasn't worked. QE has only served to boost reserves, and has fed into increased equity prices, not increased activity. So, plan B (which is what this really is) is to get money into "real" people's pockets by adopting the strategy of 2003-2005: boost asset prices.

Of course, that won't do much for the balance of payments, and it possibly won't help in any attempt to keep down inflation. It certainly won't do much for the strength of sterling. But it might start another bubble in house prices, which will make the right people (as far as this government is concerned) feel better.

And that, I guess, is the plan. All this stuff about increasing the level of home ownership is fluff. The real plan is to make people feel wealthier, even though output will not have increased to justify that feeling. Yes, we are borrowing from the next generation once again.

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