A thought on the Housing Benefit caps

Sometimes I read a "news" report and wonder whether I'm missing something. It's not uncommon for those who drink vast amounts to suffer forgetfulness and, over time, to lose their analytical powers. Perhaps I have reached that stage, but I don't think I have. I'm talking about the proposal to cap housing benefit and, in particular, about an article peddled by the BBC (here).

For the benefit of anyone who has missed the story or who is reading from beyond these shores I'd better lay the background. One welfare benefit payable in the UK is called Housing Benefit, it provides funds specifically to cover the cost of mortgage interest payments or rent. The proposal under discussion is that the amount payable towards rent should be capped. The cap will have four stages. Those renting a one-bedroomed property will be allowed no more than £250 a week, with up to £290 a week payable for a two-bed house or flat, £340 for three and £400 for four bedrooms (or more, or so I presume). These figures equate to annual rent of £13,000, £15,080, £17,680 and £20,800 respectively.

I am not the first to observe that these are large sums of money. To have £13,000 in your pocket after tax you have to earn something in the region of £18,000. On the assumption that someone renting for £13,000 also wishes to eat, water and clothe themselves at an additional cost of £100 a week, their annual pre-tax earnings would have to be in the region of £24,000. That is not far from annual average earnings. The payment of £20,800 in rent requires pre-tax earnings of around £27,000 before a single morsel of muesli has crossed the tenant's lips.

Housing benefit is paid out of taxes received by the Treasury. It is necessarily and inevitably the case that many employed taxpayers earn less than these sums and could not possibly pay that much in rent. Their taxes will be used to pay for other people to occupy homes they could not afford. It's an easy and, I think, lazy argument to say that the proposed caps are justified merely because many of those paying taxes could not afford even those sums in rent. That rather misses the point.

Someone who has been earning more than enough to pay rent of £13,000 or £20,800 a year might lose their job and be reliant on benefits until he or she finds another position. There is nothing essentially objectionable about them receiving benefits to help them keep their home until they find new work. If that work does not allow the payment of such a high rent they will have to move anyway but if it does they will resume paying the rent. In such a situation Housing Benefit provides a stop-gap relief pending the establishment of a new situation which, I would have thought, is what benefits are intended to do. That others have never been in the position to rent a property at such values is really neither here nor there. In this context Housing Benefit is akin to an insurance payment and those who rented at these figures necessarily earned more and paid more tax than those on lower incomes. Although Housing Benefit could be seen to come partly from those on lower incomes the reality is that those who previously paid their rent out of taxed income and claim the benefit while they are between jobs have already paid for it.

There is, of course, another group - those who have not had, do not have and have no reasonable prospect of ever having enough earned income to pay their rent and are habitually dependent on Housing Benefit. For this group the question "why should people with modest taxed incomes who cannot afford such rents pay so much towards their rent?" is more pertinent. Indeed it is hard to see any justification for such people to be subsidised out of tax to live in expensive areas. Harsh though it might sound in the modern world of holistic touchy-feely wibble, beggars can't be choosers. Or to put it less harshly, if you live on hand-outs you can have no complaint about the payer saying "sorry, we can only hand-out so much".

The BBC article I linked to above (this one) asserts that the majority of two-bedroomed properties in London will be too expensive for Housing Benefit claimants if a cap of £290 a week is introduced. This is where I wonder whether I'm losing my faculties. Landlords want the best return they can get but they know they have to pitch the rents they demand according to the ability of likely tenants to pay. Pitch it too high and there are no takers. More importantly, landlords know that the worst thing possible is what is known as a "void period" - a time when the property is empty and no one is paying rent. Say the desired rent is £300 a week, that is £15,600 a year. Four weeks without a tenant reduces the annual rent received to £14,400. If you have a tenant paying £300 a week through Housing Benefit and are told the benefit payable will be reduced to £290 a week, what would you do? Throw out the existing tenants - possibly incurring legal costs and risking a void period - or reduce the rent to £290 a week? No doubt some would choose the first course but reducing the rent would still bring in £15,080 a year, a tiny reduction accompanied by the certainty of payment.

Say your two-bedroomed property commands a rent of £500 a week rather than £300. It would have to be in a very smart part of town for that to be a true market rent. On being told your existing tenant will only pay £290 because he is on Housing Benefit and that is the limit, the question you have to ask is whether you will find a replacement tenant who will pay substantially more. In areas where £500 a week is a true market rent the answer is almost certainly that you will find a new tenant. It's tough luck on the existing tenant but you cannot avoid the fact that such a property is at the high end of the market and it cannot be justifiable for taxpayers to keep someone else there when they cannot pay the going rate and others could.

And that really is the point I want to make today. The Housing Benefit rent caps will only result in existing tenants having to move if others are willing to occupy the same properties and pay a higher rent out of post-tax income. That situation will prevail in some instances. There is no denying that existing tenants who are required to move will find it upsetting. Regrettable though that is, the caps are at high figures and there is only so much taxpayers should be required to pay towards the housing costs of others.

Lurking behind all of this is a state of affairs that arises whenever government subsidises anything. If the subsidy does not have a limit people will milk it for all they can. How many two-bedroomed flats for which Housing Benefit currently pays £350 a week would actually command that figure in the open market? Landlords of benefit claimants pitch the rent at the highest figure they think will be paid in Housing Benefit. The same rent might not be achieved from renters paying from earned post-tax income. If they thought they could get more from non-benefit claimants they would do so, indeed they would be mad not to do so. In real life they know there is nothing to be gained from pitching benefit claimers' rent below open market rent so it can only be the same or higher. I'll give you one guess which is the more likely.

But there's more. The Chief Executive of the political lobbying group Shelter is reported to have claimed that "tens of thousands of households could be forced from the centre" of London. Shelter started as a genuine charity finding practical solutions for the homeless. The mere fact that it has a Chief Executive means it has outgrown its charitable functon and has become a business. It is in the business of justifying its own existence in order to keep its Chief Executive and such other salaried staff as it might have in their comfortable positions, which means its first function is now lobbying. So let's look at his proposition.

Tens of thousands of households could be forced from central London, he opines. OK, let's assume that happens. How, in the real world, can it happen? The properties they occupied will still exist and the landlords of those properties will still want to have tenants. Chucking out a tenant is only a good idea if you get a replacement. A tenant who pays minimal rent and trashes the furniture but still provides a small overall profit is better than no tenant at all. It is a necessary part of the Chief Executive's argument that tens of thousands of potential tenants are currently prevented from renting because benefit claimants are hogging the properties. On what possible basis can it be right that those tens of thousands should be excluded when they are able and willing to pay but cannot do so because taxpayers (including the prospective tenants) are keeping others in those properties? It is not a one sided coin. Existing tenants will only be ousted if currently frustrated potential tenants are waiting to take their place and pay, from their own post-tax resources, for the privilege. Why is he not lobbying for these excluded unfortunates to realise their dream?

Will "tens of thousands of households" be displaced? Of course not. But even if they were, tens of thousands of other households will take their place and pay for something they desire and can afford but presently cannot attain.

How crunchy is your mortgage?

An interesting little snippet emerged from a BBC website report on the plummeting pound. It says "UK mortgage lending fell by 30% in 2008 to the lowest level since 2002". Such a statistic would mean nothing if it referred to numbers of transactions, so I infer it means the total value of mortgage loans made in 2008. I wonder whether I am right in finding this neither surprising nor particularly worrying.

The housing market started to turn south in 2007. Prices were being squeezed in the summer of that year and took a noticeable downturn from late summer. Three consequences seem inevitable once prices are being forced down. First, a number of potential sellers are not prepared to drop their price; secondly, a number of potential buyers decide to wait to see how much further prices fall and, thirdly, the total value of sales is likely to fall. The first two factors reduce the number of transactions below what it would otherwise have been and the third is a consequence of not only lower volume of sales but also lower prices on each transaction. When you then add-in further caution caused by the threat of an impending recession and the attached uncertainty about employment you have yet further downward pressure on both volume of sales and individual prices.

It is only once these factors have come into play that a shortage of credit has any effect. If, as we are constantly told, loans are very hard to come by the number of buyers able to finance a purchase will necessarily be reduced. And yet, despite all these downward pressures, the total value of mortgage loans given in 2008 dropped by only thirty percent compared to 2007. That does not suggest to me that mortgage loans are like hens' teeth. Perhaps what was being evidenced was far less a credit crunch than a decline caused primarily by the inevitable bursting of a price bubble.

The house price pushmi-pullyu

Let me take you back, a long way back to before I was born. My parents were ordinary working people earning low to average wages but through a few years of scrimping and saving they were able to buy a small house for cash. It was in a poor state of repair and they spent every spare moment and every spare penny making it habitable prior to their marriage (yes, I knew it would surprise you to learn my parents were married).

In today's money they probably earned around £35,000 a year between them and their little house would sell for around £250,000, call it £125,000 if in the same state of disrepair as when they bought it. It doesn't take a genius to work out that saving £125,000 when you earn £35,000 would take more than three and a half years even if you lived entirely for free. In practical terms it would be virtually impossible for a young couple on such earnings to buy that run down property for cash today. They could save hard to provide a deposit but would need to borrow a substantial sum which, in all likelihood, would be repaid over 25 years. Say they borrowed £100,000 at 6% interest, the interest alone would cost about one fifth of their post-tax income. It goes without saying that if they were not paying a mortgage they would probably be paying rent so whether they buy or not a large chunk of income would go in housing costs. Compare it to my parents' situation - buying a home for cash relieved them of a huge financial burden year after year. They still had to count every penny but they did so knowing that their home was secure. In due course that house was left to me and my siblings and provided us with a little additional security.

When I was old enough to understand a little about these things I was very much affected by my parents' decision. I remember how proud they both were to be home owners when previous generations had rented or lived in agricultural tied cottages. Outright ownership allowed them to plan their family knowing my mother would be able to stay at home with the children. Short periods of unemployment did not put the family home at risk. And, perhaps most importantly, they were not beholden to anyone, their home was theirs and no one had a claim on it.

Today house prices in Britain are falling fast and many people are already finding that their home is worth less than the loan(s) they have secured on it. This is not a practical problem for those who are still in work and able to pay the mortgage unless they have to move. It is, however, a very real practical problem for those who lose their jobs or have to take a cut in income and find themselves unable to keep up the repayments. For them there is no escape, the bank wants its money and the house cannot deliver that money. Bankruptcy or a long-term debt hanging around their necks is a nasty price to pay for the collapse of prices over which they had no control.

In Monday's crisis budget the Chancellor announced that banks will not be able to take court proceedings for possession for a period of three months after default. Like so much coming from the present government it sounds very nice and humane, it sounds as though they are helping people in trouble, but in fact it makes no difference and might even do some harm. The practicalities of litigation mean that a three month delay between default and starting proceedings in the County Court is all but guaranteed. If you start a claim before exploring all other practical ways of resolving the problem the court will stamp on your neck with a heavy boot. A case brought prematurely will either be adjourned for a month or two to allow other avenues of resolution to be explored (and the bank will be disqualified from claiming its legal costs) or it will be dismissed. No sensible bank would risk wasting legal fees or having a case struck-out by launching a claim until it could show the judge that there was no other option.

Where the Chancellor's move could cause harm is in those cases where the householder knows his position is hopeless and wants to keep losses to a minimum. In theory he could just hand over the keys and agree to the bank taking possession and selling the house. The sooner it is sold the more is likely to be achieved at auction because the market is falling and a further month's delay could reduce the attainable price by several thousand pounds. But there is a problem in the homeowner doing that because he would be making himself homeless voluntarily. That would put him way down the pecking order if he needs to seek housing from the council. For years this situation has been catered for by banks taking proceedings quickly and the homeowner not contesting the claim for possession. A Court Order is obtained which allows the bank to sell and proves that the homeowner has been forced to give up possession and has not made himself homeless voluntarily. There is no scope for the Court saying proceedings are premature because they are anything but, they are taken quickly for the benefit of both parties. If the three-month time limit is applied strictly it could cost some householders dear.

Maintaining house prices at their inflated levels will protect those who can no longer afford their mortgages and will allow people to move house without incurring a heavy loss. Some argue that the government should be taking steps to keep prices at 2007 rates for this reason. They suggest that the banks should be forced to lend for house purchase as they have over the last eight or nine years because that will sustain prices and prevent negative equity. To my mind they live in a dangerous fantasy world. I have blathered-on before about how artificially inflated house prices caused by reckless lending are the cause of the whole sorry mess we currently face. America did it through the Community Reinvestment Act which forced banks to lend with little regard to the ability of borrowers to repay and the UK banks did it through voluntarily lending up to 125% of the market value of a property with only the borrower's word that he had the means to repay the loan. This resulted in a huge inflation of property prices above their true value, to seek to keep this bubble in place is to prolong the misery because one day the truth must be faced and the longer it is put off the harsher that truth will be.

As my regular reader will know, I am a simple fellow who is more interested in practicalities than theories. I want everyone to enjoy the security and pride my parents enjoyed from owning their own home and not being burdened by rent or repayments of a massive loan. It allowed them to have more of their limited income available for their own use and gave them peace of mind. To me, it is ridiculous that young couples on modest incomes in 2008 should be excluded from giving themselves security for the future. It was possible seventy, sixty, fifty and forty years ago, then again fifteen years ago after the last massive property crash. Although there will be casualties along the way, the benefit of a whole generation being able to get on the property ladder when they thought it would be impossible or oppressively expensive is of such value to the country as a whole that a continuation of the current downward move of prices should not be stifled.

There is no way to keep everyone happy. Either prices are artificially pushed up to protect those who currently own or they are pulled down to their real underlying value to allow future generations to benefit. To my mind the pullyu end of the antelope must be favoured over the pushmi.

What's wrong with falling house prices?

One of my shallowest joys of the last few years has been the smug feeling that FatBigot Towers has increased in value by thousands of pounds every month. I bought FatBigot Towers in 1993 when the market in London was completely flat following a huge crash in 1989-1991, last year it was valued at more than three-and-a-half times what I paid fourteen years before. Had it followed the Consumer Price Index the increase would have been somewhere between 50% and 55%. The balance is made up of genuine house price inflation and hot air.

Genuine house inflation exists just as genuine inflation exists in the price of eggs and steak. As the population increases so demand for housing increases, supply does not necessarily increase at the same rate. Even without a shift of attitude in favour of buying rather than renting, an increase of demand over supply will force prices up. The bubble comes from adding unsustainable demand. Giving loans to people who cannot afford to repay them created the unsustainable demand that sent UK house prices to artificially high levels. If part of the demand is unsustainable, so is the price rise caused by that extra demand.

A frequent target of the slobbering left is the so-called "buy-to-let" market. This comprises people who buy houses or flats as a business venture rather than as a home. Tony and Cherie Blair did it in Bristol and many thousands did it all over the country. Being the Blairs, they could not resist the temptation to involve a crook in the process, but the underlying transaction was no different to what has happened for generations. There is and always has been a demand for rental property. Students, immigrant workers, young couples saving to buy their own property and many more categories of people want to rent a flat or house. That flat or house must, by definition, belong to someone else - their landlord - and the landlord must acquire it somehow. Where demand for rental properties is high it is a sensible business proposition to buy suitable houses or flats and rent them out for a profit. It is no different from any other business, you put in some capital, buy an asset and utilise it to make a return.

The problem with the buy-to-let market is that many have been tempted to buy properties in the hope of making capital gains rather than income. Even if the rent pays less than the repayments on the loan you took out to buy the property, if the property itself increases in value by £10,000 a year you are laughing. A profit from the rent plus a capital gain is even more attractive. At a time of apparently increasing house prices many were drawn into the market in the hunt for a quick capital gain thereby creating even greater demand for the limited stock of housing for sale and forcing prices higher still. The part of this market representing genuine long-term investment was genuine demand, the speculative part was false demand and added to the bubble.

No one really knows how much hot air the house price bubble contains. Some suggest average prices at their peak were double true value but most commentators I have read suggest a figure for the artificial increase in value of somewhere between 30% and 40%. This represents an awful lot of money, £60,000 or £80,000 of a property currently valued at £200,000, but it is not really a loss at all because the £60,000 or £80,000 was fictitious, it represented an artificial value above true value. For those of us who have no intention to sell and no debts secured on our properties there really is no loss, except to our level of self-satisfaction. Unfortunately the loss is real for many and a problem in waiting for others.

A statistic I find very interesting is that the average rate of house price increases in the UK over the last five years is roughly equivalent to the probable size of the bubble - they have increased 30-40% and the bubble is about the same proportion of current prices. Since the bubble itself formed over the last 12 years or so (starting in mid to the late 1990s once the economy was put on a sound footing after the ERM debacle), a part of house prices has been artificial for over a decade. Everyone who bought a house or flat during that period paid over the odds. This might seem to make the problem seem much larger than it is.

Say you bought a flat for £100,000 in 2000, its true value might have been somewhere between £99,000 and £98,000. General inflation since 2000 would make it worth something like £160,000 today so a nominal deficit on purchase has been lost in the mists of time, all the more so since genuine house price inflation has run ahead of general inflation. Say you bought the same flat for £120,000 in 2003 and the bubble element was £10,000, the asset you bought for £120,000 is still worth a minimum of £160,000 today. That it might have been valued at more than £240,000 last month does not mean you have lost £80,000; in fact you have lost nothing, whatever value someone gave it does not change the fact that its true value is around £160,000, a minimum capital gain of £40,000. Of course you have had to pay the mortgage and maintain the property, but you had to live somewhere and you haven't paid rent to anyone. And, most importantly, there is no loss or gain at all unless you sell.

It is probably true that no one who bought more than five years ago will suffer a substantial loss through the bubble bursting. Those who have bought since then will only suffer a real loss if they are forced to sell. One of the factors creating the bubble was the willingness of some banks, building societies and other lenders to make advances to people without the means to repay. Those people are the most likely to suffer a loss because the properties they own are the ones most likely to have to be sold, either voluntarily to cut their losses or following repossession. Despite the risk the lenders took many of these loans perform well, the borrowers want to keep their house and make sacrifices to pay the mortgage. Defaults are higher than historic averages but they are still just a minority.

There is, however, another class of losers - those who used their homes as security for additional borrowing. So bulbous has the credit bubble grown that second mortgages have been taken out at record levels over recent years. A second mortgage is simply a loan secured against a property which already has another loan secured against it. They were taken out for home improvements, cars, holidays and all sorts of treats, the loans were at higher rates of interest than the existing mortgage and seemed a good idea at the time. As recession hits many people in this position will find that the combination of the repayments of the mortgage and the repayments on the additional loan are unaffordable.

We must then add those who were relying on the value of their home to fund retirement. Their flat in London is worth £750,000, their ideal country cottage is £175,000, costs of sale and a few refurbishments of the retirement idyll leave them £500,000 in the bank in addition to their existing retirement funds; all is rosy. A sale price of £100,000 less than could have been achieved at the peak of the market will make a big difference, but it is not a loss it is simply a gain of £100,000 less than would have been achieved at the peak.

As house prices fall back towards their true level many will suffer a loss on paper. For some it will be a true loss as the value of their home falls below the value of loans secured on it, but for the vast majority the loss will simply remove an artificial profit which should never have existed in the first place. Even for those with "negative equity" in their houses and flats, that only turns into a loss if they have to sell. The looming recession will cause many people to suffer real losses as they lose their jobs and are forced to sell, but I would venture to suggest that the problem is nowhere near as great as some would suggest. For the vast majority the loss will be only on paper and will be wiped out by general inflation in years to come.

How not to lend money

I am told that the British fondness for owning your own home is not shared by much of Europe. More fool them, say I. In fact I go further, save for those who need to move frequently because of their work there is no sense in renting long-term because you get nothing in return. This does not mean, however, that it makes sense to expand home ownership at all costs because such an approach results in the gullible and the over-optimistic being at the mercy of spivs and blackmarketeers. I am not talking of counterfeit cigarettes being sold as genuine duty frees, nor of World War II nylon stockings, I am talking of greedy shysters pretending to be banks. To explain my point it is necessary to go back about 20 years.

The housing market last peaked in 1989. The economy had improved structurally throughout the 1980s and legislation was brought in allowing long-term tenants of local authorities to buy their homes at discounted prices. Both these factors contributed to house prices rising but they could only do so if the prospective buyers could raise the money. The government announced that it was to end a tax concession known as MIRAS (mortgage interest relief at source), this allowed people to claim part of the interest on their mortgage against tax. MIRAS had been scaled back for some years and in 1989 it was to go completely. In the time leading up to abolition people were falling over themselves to get on the housing ladder so they could benefit from the last few months of this tax break. Again, they could only do so if they could raise the money.

August 1989 came and went, the economy took a bit of a downturn, unemployment rose, the newly unemployed could not pay their mortgages, some existing borrowers could not afford their mortgages without the tax break and the housing market started to falter. It moved downwards at different rates in different parts of the country and by 1992 it was stagnant. Prices were reduced by between thirty and fifty percent depending upon where in the country the property was situated.

I have mentioned some of the reasons why this slump happened but I have left out one of the most important. Banks, building societies and finance companies were falling over each other to lend money to anyone who walked through the door. They thought prices would keep on rising and that lending to someone who cannot repay would not be a problem because the property could be repossessed and sold in a rising market thereby giving the lender absolute security. Not all lenders were so foolish but a lot of new finance companies had entered the home mortgage market and were keen to get a share of the bounty. A new form of home loan finance was devised.

Historically purchasers were required to put down a deposit (usually at least twenty percent of the purchase price) and were lent a maximum of two-and-a-half times their annual income. These figures did not arise by accident, they were the result of banks and building societies analysing risk. Insurance companies do not just pick the amount to charge as a premium out of thin air, they make calculations according to perceived risk. Banks and building societies were doing the same thing. They knew from experience that prices cannot keep going up forever, that repossession usually leads to the property being sold at less than the best possible price, that they would have to continue to pay interest on the money they had borrowed in order to be able to lend it to their customer, that repossession and sale incurs expenses and that their best chance of being paid came from the customer being able to afford the repayments. They also knew that borrowers are often over optimistic about their futures and wanted to borrow as much as they could in the expectation that their income will rise so any initial hardship would soon be overcome. Responsible lenders have to look after their own interests by maximising the chance of being repaid in full, this required them to build in a cushion of equity to guard against the risks of repossession and to impose a limit on the amount advanced in order to guard against the risk of the borrower's circumstances not improving. A beneficial side-effect is that lending in this way also prevents the customer from over-extending himself.

The new lenders were not so cautious. They were prepared to offer deals unavailable from banks and building societies in order to get a foot in the market. A greater proportion of value was lent and higher multiples were applied to customer's incomes. Many of the established lenders felt it necessary to follow this pattern for fear of being excluded from the market. Eventually loans were offered at more than the purchase price (so that the borrower without any savings could afford legal costs, Stamp Duty, new carpets and a washing machine) and no checks were done to ascertain whether the borrower could afford the repayments. In some instances the only assurance the lender required about the ability to repay was the borrower's own word that he could afford it, they did not require his income to be disclosed or, if they did, they allowed the borrower to state his income without producing supporting proof.

Not surprisingly the ready availability of money allowed full rein to the British desire for home ownership and demand for houses and flats increased. Prices were pushed up, and as the lenders relaxed their requirements a little the number of potential buyers increased and an inevitable bubble formed. House prices were not a real reflection of the value of properties in a market because the market had been skewed, demand in a market requires affordability and by making huge sums available to people who did not have means to repay there was a pretense of affordability, a pretense of demand. The bubble burst in 1989-1992 and prices fell back to something like their true level.

The reckless lenders were hit very hard by this because they had to repossess properties in vast numbers and sell them in a falling market. Many were never heard of again, some were bought-out by reputable banks and a very few survived the storm because they had made a lot of good lending and only a little reckless lending.

The absolute bottom of the market came in about 1992 and lasted for a couple of years. By then the economy was recovering and lending practices had improved. As the economy appeared to be doing well over the next ten and more years lenders with no eye on the past reintroduced the sort of foolish lending which had bankrupted many of their predecessors. Prices rocketed again and a lot of the increase was false for exactly the reasons it was false in the 1980s, it was based on false demand fuelled by reckless lending. We are now seeing a fall in the prices of houses and flats and only time will tell how large the fall will become.

The lenders sometimes seek to defend themselves by saying they have only reacted to their customers' demands, but that is nonsense. These lenders are not (or, more exactly, should not be) Mr Loanshark with his bag of cash and boys with baseball bats to "persuade" defaulters of the error of their ways, they are companies with obligations to their shareholders to run the business with a view to profit. Finance companies do not just magic money out of thin air, they have to borrow it. Their profit comes from borrowing at one rate and lending at a higher rate. There will always be cases in which the borrower cannot repay because of changed circumstances and any losses in such cases are factored into the margin between the cost of borrowing and the receipts from lending. But to have lending policies which increase the risk of default bites into the margin even more and leaves the lender exposed to collapse if the housing market takes a downturn.

Mr & Mrs Young-Borrower with no savings and a joint income of £30,000 before tax can only afford to repay a certain amount. Lending them £150,000 involves a substantial risk they will not be able to keep up with the repayments. It is bad business because it exposes the lender to unreasonable risks. It is bad policy because it builds exaggerated hopes in the Young-Borrowers, they might be able to cope but if they cannot their lives will be ruined.

It takes a very hard heart to blame Mr & Mrs Young-Borrower, they are told they can get on the property ladder and bend over backwards to do so because they see prices rising. When it comes to make the first repayment at the end of Month 1 they do so in the belief their property has increased in value by more than 1% in that month. They pay £1,000 but take comfort from news stories that they have made a capital gain in excess of £1,500. Without the market being skewed by reckless lending the true value of their property might be £100,000 and the true increase in value might be 2% a year not 1% a month. Suddenly their £1,000 a month expenditure looks distinctly unattractive.

The fault lies firmly with the lenders. I am not suggesting they owe a duty to potential borrowers, but they do owe a duty to their shareholders and that requires them only to lend against sound security - security both in the property itself and in the people who are obliged to repay the loan. Executing that duty diligently has the added benefit that it minimises the risk of a price bubble and, thereby, increases the number who can genuinely afford to buy. The real benefit of that is seen in the long-term. After 25 years Mr & Mrs Young-Borrower own their home outright, no mortgage to pay, no rent to pay and a substantial capital asset.

Housing and the underclass

I find it simply impossible to imagine what life must be like for the infant of a teenage single mother on a sink estate with little education, no family support, no marketable skills, no ambition, no drive, no money, no nothing. How is that child going to grow up? What chance is there is of its own future being anything other than a mirror image of its mother's life?

We hear idealists of the left tell us it is all about inequality. I have never understood how my winning the national lottery and thereby becoming a millionaire overnight would be to the detriment of anyone, nor have I understood how giving all my winnings to a Museum of Lightbulbs the next day would improve matters for anyone; yet each would have that effect if the mere fact of inequality is causative.

We also hear that the underclass need "support" through a vast army of social workers, advisers, and counsellors. If that cured the problem there would now be no problem. Yet the more "support" people are given the more they seem to need, not in every case but in so many that one has to ask whether the exercise is worthwhile.

One thing that seems to be a constant in the underclass is depressed and depressing housing, the "sink estates". There can be no better example of (possibly well-intentioned) socialist policies making things worse for everyone. It was claimed that these estates would give "the poor" modern housing they could be proud of and a strong sense of community. The theory was that "the poor" were victimised if they lived next door to the wealthy. The victimisation theory worked on many levels, the most often stated aspects were that poor people suffered a loss of dignity by seeing their neighbours enjoying a lifestyle they do not have themselves and the poor are always snubbed by the wealthy and made to feel worthless.

At heart it is all about the leftists' love-affair with social class, for them class is everything. Someone from humble roots who qualifies as an accountant and earns enough to buy a nice house and drive a nice car is a traitor to his class and must be denounced (unless he donates money to leftist causes in which case the only difference is that he will not be denounced to his face). Someone from a wealthy family who falls on hard times is not one of "the poor", he is a toff who has achieved his just desserts. Social mobility and the concept of a classless society are the last thing these people want to recognise because it destroys the very foundations of their beliefs.

Massive concrete estates built to accommodate the poor would be happy places, so the leftist theory goes, because everyone would be among their own class. Best of all would be to put them in a modern tower block with lifts. Not only would they live among their own class but they would have lifts which only the toffs had before. That's one in the eye for the enemy.

The reality, of course, was that bringing together the poorest people also increased the concentration of those who are poor because of their own unsociable behaviour. One yobbo in a terrace of 50 houses can only do so much harm and if he can be influenced by good examples there is a chance of changing his ways. Give him 40 yobbo neighbours and the power to wreak havoc is increased by far more than 40-fold, and the influences on him to change his ways are negligible.

Sink estates are self-perpetuating. Those unfortunate enough to be housed in them have their lives blighted by gangs of, frankly, scum. Some are able to escape but for those who cannot life can be a constant misery, prisoners in their own homes.

If we are to tackle the problem of the underclass our first priority must be to ensure that as few as possible join the group. Demolish the sink estates. Build new estates in small squares and closes with no more than 10 or 12 houses down each avenue or cul-de-sac. Build small houses with private gardens as well as flats. Spread the known trouble-makers as far and wide as possible and give the decent majority the chance of a decent life.

How will this help the child of the feckless teenage single mother? Nothing is guaranteed, but I suggest the mother will get more practical help from a houseproud matronly neighbour than she would from a dozen social workers and counsellors. In turn the child will have a chance of growing up surrounded by good influences.

Would it cost so much that it cannot be done? Quite possibly. Solving the mess left by socialist folly is always expensive and it takes time. We could aim at one estate a year to start with. I doubt that taxpayers' money would ever be better spent.