Relocation inflation

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The ferment over the US subprime mortgage market, which has been helping to make the money markets so unsteady in recent weeks, tends to ignore one aspect: people are so desperate to obtain decent housing they will take on debt they are simply incapable of ever paying back.

The subprime market was aimed at those sections of US society who were too poor to gain mortgage credit any other way. They were people who lived on benefits, or very low wages, and who often had a bad credit rating. Suddenly a few years ago they were promised a dream home bought on credit with very few questions asked.

They weren't told very much either - that when interest rates went up, they would be unable to pay the substantial loans they had taken out not only for a roof over their heads, but for new kitchens, bathrooms, furniture and all the other things needed to make a house a home.

Now many subprime borrowers are defaulting, losing house, home and any possibility of somewhere decent to live in the future as the already high rates go higher. A very high proportion of these borrowers are black Americans.

An obvious question might be, why would lenders take the risk? Except it isn't that big a risk to them. They can repossess houses and either sell them at a relatively small loss or sit on them until property prices rise again. In any case, interest rates on these higher risk mortgages tend to be higher than low risk mortgages.

As so often, the poor pay more for goods because they are poor. A large mortgage company has recently withdrawn all its offers on such mortgages, declaring it will relaunch them with higher fees and interest rates in order to protect itself against default.

Indeed, a correspondent in the Financial Times recently shed some light on how credit for the poor works. He worked at a cosmetic surgery centre in California, where working class women wanting plastic surgery would take out loans for operations.

Two women tried for such loans but a check showed their documents were forged. The women complained, saying they had used this identification to buy two cars and a house in the last week.

The clinic's checks were more stringent than the mortgage companies' - as the writer said, "perhaps because you can't repossess cosmetic surgery".

The mortgage companies are in a win-win situation for most of the time, extracting high rates of interest in good times and holding on to houses as security in bad times.

In Britain too the companies throw money at anyone with a house to secure against a loan. My bank was promising no fees to anyone taking out a mortgage in the hope it can win custom from other banks.

When the music stops and house prices stop spiralling upwards (as has already happened in the US and parts of Britain) then the repossessions come rolling in, as they did in the late 1980s. The profits of the big finance companies will be dented but not wiped out by such a crash.

The banks are, of course, culpable, but they are not alone. Governments have adopted policies which allow house prices to spiral. Indeed, in general rising house prices are seen as a good thing, and whole television programmes are devoted to how we can increase the value of our houses.

Failure to build new council housing and the drive to sell off existing council housing, plus the right to buy policy which has removed so much stock from the market, have helped create a terrible inflation which benefits only a relatively small minority. Everyone is expected to throw themselves onto the mercy of the housing market, a market which simply cannot deliver.

I was struck during the recent by-election in Shadwell, an area of east London with some of the poorest housing but also an increasing amount of wealthy "gated communities" in the shadow of the City of London, by how much housing is the key issue and how unaffordable "affordable" housing is. In London now £100,000 will buy only a part share in a very ordinary small flat. How affordable is that?

During the last GLA campaign I argued that all new housing in London should be affordable - we already have plenty of unaffordable. The situation today is even worse than it was three years ago. New blocks of flats are built on every piece of waste land. Many remain empty, since even without tenants house price inflation guarantees return on investment.

Continuing on the path we are now on is just creating a new class of buy-to-let landlords, while millions remain without hope that they can ever live anywhere decent.


Lindsey German is the author of Material Girls published by Bookmarks Publications