A cheap mortgage that’s too good to be true?

Lots of respected economists believe that in this low growth, low demand and, notably, low borrowing cost era, there is an historic opportunity to stimulate the economy and improve the national infrastructure, productivity etc. at remarkably low cost. However, much of the debt-averse electorate tend to find the arguments of fiscal conservatives more intuitively appealing.  David McWilliams provides a simple yet powerful example of the case for borrowing to solve the housing problem.  It looks to me like he’s making a hard to refute point and most debt-averse voters would intuitively see why.  His rationale is that the government could, if they chose to, borrow on the bond markets very cheaply to build new houses.

Let’s assume that the total development costs for a 100 square metre house is £200,000 (crucially) excluding the cost of the land but including infrastructure.  The development costs of 1 million new homes would then be a cool £200,000,000,000 or £200 billion.  That’s a lot of debt – but we’d have a lot of assets too! There’s over £50 billion invested in Premium Bonds alone.

At current bond yields, approximately 2% for 20 year bonds, the debt repayment would be around £4,000,000,000 (£4 billion) per annum. For each house, that’s an annual repayment of £4,000 per annum or £334 per month or £77 per week.  That looks reasonable.   Income from sales and rents should easily service the debt.

The problems tend to come if you have to pay ‘market prices’ for the land. You’d need about 20,000 hectares of land.  To put this in perspective, there are over 1,600,000 hectares of land designated as Greenbelt.  Agricultural land is about £15,000 an acre and would add about £1,000 onto the cost of a house.  Not really an issue.  However, in central London since property prices are high, densities are getting higher and developers have been successful at arguing for lower levels of affordable housing provision, an acre can cost £10 million or much more.  So – the selling price of land depends on lots of variables – not least the terms of planning permission granted by, er, (local) government.  The government itself in its various guises owns lots of land (MoD, local authorities, NHS, schools, Transport for London etc.) – but often are statutorily required to obtain ‘best value’.

McWilliams argument is that the state can solve this perceived housing supply problem by using the historically low borrowing rates. In the UK, this would require a government will – which I’m pretty sure doesn’t exist.  There’s lots of vested interest in the status quo. The vested interests of land owners would also have to be addressed.  It would be a radical shift.


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