Would long-term fixed rate mortgages improve our housing market?

 

RYAN BOURNE | COMMENT

State-backed, long mortgages at fixed rates are not the answer

The latest idea to stimulate demand in the housing market would involve government support to encourage long-term fixed-rate low-deposit mortgages

Ryan Bourne

Thursday January 04 2024, 12.01am, The Times

Share

Save

Our government will go to truly remarkable lengths to avoid allowing significantly more housebuilding to increase homeownership. The latest idea to stimulate demand instead would see government support (read: subsidies) to encourage long-term fixed-rate low-deposit mortgages, as seen in the United States. This policy, from the Conservatives’ 2019 manifesto, lost appeal as interest and mortgage rates soared, but now, with rates falling again, it’s being discussed as a potential election vote-winner for young families.

The government’s logic is straightforward: 30-year fixed-rate mortgages safeguard holders against rising interest rates while allowing them to benefit from any house price inflation. Consequently, a government guarantee for these mortgages (implicit or explicit) could reduce the bite of regulatory “stress tests” — assessments of a borrower’s ability to withstand higher mortgage rates — thus expanding affordable mortgage access to more families with lower deposits.

I didn’t have to travel far to find an expert sceptical of this idea. Mark Calabria, my Cato Institute colleague, previously was director of the US Federal Housing Finance Agency, the regulator for Fannie Mae, Freddie Mac and other federal home loan banks. When asked about the wisdom of the British government wading into state-backed long-term mortgages, he grimaced, before highlighting three truths that the Tories must bear in mind.

First, interest rate risk will always exist. Government-backed 30-year fixed-rate mortgages simply aim to make mortgage holders bear less of it and lenders more. In the United States, mortgage holders can refinance to capitalise on lower rates, yet remain insulated as rates rise. The catch? Surging interest rates cause substantial financial losses for mortgage providers. Households, as taxpayers, then often become exposed to massive contingent liabilities through bailouts and crises (see, for example, the 1980s’ American “savings and loan crisis”).

Next, government-backed long-term fixed-rate mortgages make macroeconomic stabilisation policy more difficult. Typically, mortgage rates fall in a spending downturn and rise when the economy overheats. This acts as an automatic stabiliser for the broader economy. Falling rates boost mortgage holders’ disposable incomes when aggregate demand is too low and rising rates reduce their income when demand is too high. Long-term fixed-rate mortgages obviously weaken this mechanism, making the Bank of England’s job at stabilising spending more difficult.

Which brings us to the distributional implications. The Conservatives want to help people they think could afford mortgage payments but who would struggle with deposits. In general, though, homeownership and having a mortgage are positively correlated with income. So this would subsidise the relatively lifetime-affluent, paid for by taxes or risks also borne by poorer households. The costs of monetary tightening, in particular, inevitably would fall more heavily under this policy on interest-rate-sensitive sectors, such as construction.

At the moment, the American property market is suffering from people being unwilling to move, precisely because more than 70 per cent of mortgages have 30-year fixed rates and new mortgage rates are much higher than most mortgage holders enjoy at the moment. Sales of existing homes have fallen by more than 15 per cent this past year to their lowest level in a decade. That, of course, harms first-time buyers who could otherwise afford properties, the very people the Conservatives say they want to help.

Prioritising long-term mortgages over housebuilding does not address the problem of housing supply

MATT CARDY/GETTY IMAGES

Although a government-backed 30-year mortgage clearly would be attractive to many homebuyers, then, it risks exacerbating Britain’s broader housing market dysfunction. Even outside proponents, such as the Centre for Policy Studies think tank, concede that without increasing the housing supply through planning reform, easier mortgage finance would mainly inflate house prices rather than homeownership rates.

Indeed, mortgage providers are at liberty to offer long-term fixed rates already, and some do. But the reason they are uncommon is these inherent risks. Paying for those risks should be the responsibility of the mortgage holder, not British taxpayers as part of an electoral giveaway.

Ryan Bourne is R Evan Scharf chair for the public understanding of economics at the Cato Institute

I can foresee an industrial policy question in Paper 2 in 2024

 This article has some good elements for you to consider - should government intervene? Is it operating joined-up policy, or is it pulling in different directions to achieve different objectives? Plenty to mull over:

Britain’s new gigafactory is our entry into the global league of the EV revolution

Rishi Sunak must now ensure cheap power to meet the voracious energy needs of lithium battery plants

AMBROSE EVANS-PRITCHARD20 July 2023 • 7:15pm

Bad industrial policy is to waste public money propping up declining companies that can no longer compete on world markets. That is a bottomless pit.

The imputed £500 million subsidy to build Tata’s gigafactory for battery cells is nothing of the kind. 

It is laying the infrastructure base for a rising industry, akin to building a road or installing fast broadband. It also heads off the risk of punitive tariffs on EV exports to Europe due to local content rules in the Brexit trade deal.

Britain needs 100 gigawatts (GW) of battery capacity by 2030 and double again by 2040. The 40 GW Tata plant in Somerset, and Nissan’s 7.5 GW expansion in Sunderland, take us only a quarter of the way.

Simon Moores, head of Benchmark Minerals Intelligence, told Parliament’s battery hearings that it would require £5bn of state funding to draw in the necessary £15bn of private investment. 

“Traditional economic models do not work in this. This is a brand new industrial revolution,” he said.

Without the Tata plant as a downpayment, and the ecosystem that comes with it, the UK would have lost its footing altogether in the global switch to EVs, with little to replace the existing 200,000 jobs in combustion engines and linked supply chains. 

“Embedded manufacturing that we have now would drift away, model by model,” said Jeff Pratt from the UK Battery Industrialisation Centre.

The UK slid down the protectionist slope in the 1970s trying to save Coventry’s car industry. The unhappy saga ended in the nationalisation of British Leyland amid strikes, ‘Friday afternoon’ lemons, and a shipwreck of debts. 

The British Motor Corporation, Rootes, Standard-Triumph and Vauxhall had together been the world’s biggest exporters of cars as recently as the 1950s. The industry employed 5pc of the UK’s workforce. One can understand why successive governments could not bear to let it wither away. 

The carmakers thought Britain’s accession to the European Community would revive export sales by enabling longer production runs. Instead it was the coup de grace. It took fifteen years of hard slog and Japanese reinvention to come back from near death.

The British Leyland error today would be to scrap the UK’s sales ban on petrol and diesel cars in 2030 and try to hang on to the old order, inevitably at some point with public money and in defiance of market forces. 

That would be a certain recipe for national economic ruin, quite apart from the immense damage to the UK’s moral reputation.

“Ten years ago it wasn’t clear whether electrification would win or not. Today it is absolutely as clear as death and taxes that the auto industry is going electric,” said Andy Palmer, former chief executive of Aston Martin.

There is no turning the clock back. 

Global sales of EVs have risen 58pc over the last year. China is on track to reach eight million in 2023. Sales in Europe have risen 66pc, increasing the EV share from 10.7 to 15.1pc, despite Volkswagen bungling its pricing policy. 

New emissions standards in the US are forcing a step-change and so is the $7,500 EV tax credit under the Inflation Reduction Act. The first million EV sales took 60 months, the second took 17 months, the third took six months.

The trajectory is following the classic S-Curve of disruptive technology. The US think tank RMI thinks EV sales will reach 90pc in China and 70pc worldwide by 2030. “It’s exponential, global, and this decade,” it said.

British chemists were pioneers of lithium-ion batteries. The UK had every chance of leading as EVs took off. 

But somewhere between 2017 and early 2023, the British government dropped the ball. It pushed through the most aggressive fossil car ban in the OECD bloc without taking steps to secure strategic minerals as China launched a global land grab, and without nurturing the EV supply chain. 

“We laid down the law but we have not followed through with what UK industry needs to do to get there,” said Jeremy Wrathall, founder of Cornish Lithium.

Westminster seemed to think business could do it all alone. The EU and the US made the same mistake, but twigged earlier to the danger. 

The Tata deal comes in the nick of time and starts to close the gap. It is also a shot in the arm for a much-maligned UK economy that is not doing as badly as the global nomenklatura proclaims.

In January, EV exports to Europe will require 50-60pc of local or EU content for batteries to avoid tariffs. The terms will tighten further in 2027. 

Neither side is ready but Brussels is still playing tough, calculating that it is sufficiently far ahead with 30 gigafactory projects (some will fail) that it could peel away Britain’s EV industry in much the same way as it has tried to peel away chunks of the City. 

The Tata deal levels the playing field. 

Furthermore, it disproves the defeatist myth that the UK is too small to compete with the alleged hand-outs of the EU’s green deal. 

The Commission does not have real money, and whatever it has must be spread across 27 states. The vast headline sums are aspirational, mostly reliant on national governments and on leveraging private investment. 

Spain lost the bidding war with Britain for the Tata factory, even with EU funds.

The UK has the advanced chemical and engineering companies, and top-notch universities, needed to sustain a world-class EV industry. The British Geological Survey says it has Europe’s biggest lithium deposit near St Austell.

Cornish Lithium thinks it can extract large amounts of lithium from geothermal brine with a zero carbon footprint and at competitive cost. 

Lithium start-ups are sprouting up in the north. They may struggle to match the costs of Chilean lithium from the Atacama – mostly locked up already in long-term contracts with Asian buyers – but they could eliminate the geopolitical supply risk.

The missing link is cheap power. Lithium battery plants have voracious energy needs. “It is our greatest competitive disadvantage,” said Konstanze Scharring from the UK car lobby (SMMT).

It ought to be an urgent national priority to roll out cheap wind power as fast as possible, each watt replacing a watt of imported gas. 

Yet the Government’s overshore expansion has hit a wall. Some 5 GW of agreed wind farms are blocked because the Chancellor imposed a 45pc windfall tax on renewable companies just as they were struggling with a 30-40pc surge in turbine costs. 

Vattenfall this week cancelled the 1.3 GW Norfolk Boreas array. “It simply doesn’t make sense to continue the project,” said chief executive Anna Borg

Unlike the oil and gas industry, wind companies were denied a tax deduction against fresh investment. Which bright spark in the Treasury thought it a good idea to reduce the future supply of energy in the middle of an energy crisis? 

Rishi Sunak has redeemed himself this week with the Tata coup. At least the UK has a fighting chance of saving its car industry. Now he must convince the world that he has a credible plan to slash energy costs. Without cheap power he can kiss goodbye to everything else.

Industrial strategies, subsidies and comparative advantage:

 

Subsidies and protection for manufacturing will harm the world economy

Reshaping the world’s supply chains comes at a great cost

image: satoshi kambayashi

Jul 13th 2023

Politicians have always been captivated by manufacturing, but rarely has their desire to make things been as zealous as it is today. In the West they are doling out enormous subsidies to manufacturers, especially chipmakers and those behind green technologies, such as batteries. They say they are fighting climate change, enhancing national security and correcting for four decades of globalisation during which workers suffered and growth slowed. In the emerging world, governments hope that subsidies can secure a foothold in supply chains as worried Westerners move production out of China.

Listen to this story.

 Enjoy more audio and podcasts on iOS or Android.

The sums being spent are vast, and growing. Since they were signed into law, the estimated ten-year cost of America’s green subsidies has risen by at least two-thirds, and is likely to pass $1trn. The Biden administration has also expanded the eligibility for chipmaking subsidies. In June Germany increased its handout to Intel to build a chip plant, from €6.8bn ($7.6bn) to €9.9bn. India’s central government is subsidising a Micron factory in Gujarat to “assemble and test” chips, spending an amount equal to a quarter of its annual budget for higher education. Eventually, Britain’s opposition Labour Party wants to lavish £28bn ($36bn) a year on green handouts which, as a share of gdp, would be nearly ten times more than America’s.

An industrial arms race is under way. America welcomes it, saying the world needs green technologies and a diversified supply of chips. It is true that an ocean of public money is bound to accelerate the green transition and reshape supply chains in ways that should increase the security of democracies. Alas, the accompanying economic benefits being promised are an illusion. As we report this week, governments that subsidise and protect manufacturing are more likely to harm their economies than help them.

In ideal conditions, promoting manufacturing can add to innovation and growth. Towards the end of the 20th century South Korea and Taiwan caught up with the West thanks to the careful promotion of manufacturing exports. In industries like planemaking the enormous costs of entry and uncertain future demand can justify support for new firms, as when Europe backed Airbus in the 1970s. Likewise, targeted help can boost national security.

But today’s schemes are likely either to fail or to prove needlessly costly. Countries subsidising chips and batteries are not pursuing catch-up growth but fighting over cutting-edge technology. The market for electric vehicles and batteries is unlikely to become an Airbus-Boeing style duopoly. In the 1980s protectionists argued that Japan would dominate the strategically vital semiconductor industry, owing to its subsidised mastery of memory-chip making. It did not turn out that way.

Duplicating production reduces specialisation, raising costs and hitting economic growth. Some analysts expect the price of a chip produced in Texas to be 30% higher than one made in Taiwan. The Biden administration is belatedly seeking ways to open up its electric-vehicle subsidies to carmakers from friendly countries. But most of the “Buy American” requirements are written into laws that may be all but impossible to amend. And they are being copied. A decade ago about 9,000 protectionist measures were in place worldwide, reckons Global Trade Alert, a charity. Today there are around 35,000.

European leaders think they must match America or face catastrophic deindustrialisation. They have forgotten the logic of comparative advantage, which guarantees that countries will always have something to export, no matter how many cheques foreign governments write or how productive their trading partners become. Denmark has no car industry to speak of, but gdp per person is 11% higher than in Germany. Even the benefits to workers are overstated, because manufacturing jobs no longer pay a premium over comparable service work.

The potential for the manufacturing obsession to backfire is enormous. The state of New York spent nearly $1bn building a solar-panel factory which Tesla pays $1 a year to rent. The idea was to create a manufacturing hub but the project has returned only 54 cents in benefits per dollar spent; according to the Wall Street Journal, the only new nearby business is a coffee shop. India’s attempt to boost its mobile-phone industry appears to have brought mainly low-value assembly work. The lesson from South Korea is that national champions must be exposed to global competition and allowed to fail. The temptation today will be to protect them, come what may.

America says it wants a “small yard and a high fence”. For national security, in particular, access to vital technologies is worth paying for. Yet unless policymakers are clear about the dangers of subsidies, the fenced-in yard will only get bigger. However well-intentioned those doling out money today, their successors are likely to be less focused and more lobbied. Governments are not wrong to pursue good jobs, the green transition or national security. But if they succumb to the manufacturing delusion, they will leave their countries worse off. 

SMRs - a rather muddled approach by UK government?

 

US firm agrees to sell 24 mini nuclear reactors to UK customers

The American company’s direct route to market negates the need for government subsidy

ByHoward Mustoe20 March 2023 • 6:55pm

Last Energy £100m modular units can output 20MW of electricity, enough to power 40,000 homes CREDIT: Last Energy

A US-based developer of small nuclear reactors has signed a deal to sell 24 of its power plants to UK customers, putting pressure on rival makers including Rolls-Royce.

Last Energy said the £100m modular units, which are two-thirds the size of a football pitch, can output 20MW of electricity, enough to power 40,000 homes. They will be deployed in 2026 with no government funding required.

Several companies are developing small, factory-made nuclear power plants. It is hoped that making smaller units will lead to lower prices through “economies of scale”, by spreading the cost of development over many units.

For heavy energy users with 24-hour operations like steel mills and data centres, nuclear power is attractive because it consistently provides power, compared to wind and solar generation.

Nuclear plants can also provide heat which can be used in many chemical and industrial processes like cement making. Last Energy’s design can output 60MW of thermal energy.

The US company still needs to win UK regulatory approval for its designs and secure suitable sites before the deals are finalised and customers pay up.

But it still expects its first plant to be delivering electricity in about three years.

Last Energy said it has sought no government funding and many of the components will be bought from existing suppliers.

Mike Reynolds, the firm’s UK boss, said: “Our private-sector led approach to delivering new nuclear power supports the wider Government efforts to promote growth and investment in the green industries of the future.”

The plants have been sold via power purchase agreements, which lock buyers into long-term energy contracts and mean that Last Energy can seek more funding for clearing the designs and eventually building them.

Rolls-Royce has ambitions to build a fleet of small module reactors in the UK CREDIT: Rolls-Royce

Dozens of other firms are vying to bring a large-scale nuclear plant design to market, including Rolls-Royce, GE-Hitachi and several smaller start-ups.

The UK is seen as a key market because of Britain’s long history with nuclear power and its favourable approach to foreign investment.

Last week, Jeremy Hunt unveiled a new government unit, Great British Nuclear, which aims to get nuclear projects off the ground, focusing on the development of small, modular reactors.

Last week the Government dealt a blow to the ambitions of Rolls, which wants to build a fleet of the reactors in the UK, by opening the process up to competition. The British engineer’s £1.8bn models generate 470MW of power.

While Rolls could press on with foreign or private orders, the move left executives at a loss to explain why the Government would part-fund development to the tune of £210m and then raise the prospect of not buying its models themselves.

Last Energy has shunned this process and gone directly to customers and investors to fund its smaller units, which with a smaller price tag can be afforded by a wider range of customers.