X marks the spot


23 November, 2017

UK Govt scrap stamp duty for first time buyers

Let me give an example of critical thought in action.

As the title suggests, the UK government is helping first time buyers by scrapping stamp duty on houses up to £300,000

So, no need for critical thought. or is there?

Stamp duty is just a fee you have to give the govt for no real reason when you buy a home in the UK. Now first time buyers have no need to pay it but is this helpful?

A first order analysis says yes but let us go deeper. Imagine a young couple able to afford a £600 a month mortgage on a £100,000 home. Imagine interest rates for first time buyers were govt subsidised and the young couple only had to pay £300 a month. A first order analysis tells us that the govt is helping the young couple. However, the sellers now realise that the couple can actually afford to pay £200,000 and so the house is now twice as expensive.

This second order analysis tells us that the unintended consequences of making house buying easier for first time buyers is to increase the price of the least expensive housing. Which is the opposite of what the government said they were doing. Likewise, anyone selling for £300,000 or less who does not increase the price will find selling easier. All the govt interference has achieved is to make selling easier or transfer more wealth to the sellers from the buyers.

At this point we can laugh at govt incompetence or continue our analysis and deepen our understanding. To actually make house buying easier for new buyers the govt needs to INCREASE interest rates. This sounds bizarre unless we have actually understood the previous paragraphs. Each time house buying is made easier, house prices rise.

Let us imagine a massive increase in interest rates, the couple can still afford £600 each month but this only buys a £50,000 home. House prices then definitely do not rise, they fall. Imagine how easy it is saving for a deposit when interest rates are high. Imagine how easy house buying is when house prices STOP rising. This is a third order analysis.

We can then summarise what the govt is actually doing, not helping buyers but sellers.

This is how society works. Govt gets to pick winners and losers. So, would you care to take a guess at who advised our govt that this was a great idea to help first time buyers / good youth vote winning strategy. Well, as a seasoned critical thinker I can tell you it was bank sector lobbying. I mean, it wasn't the oil and gas lobbyist was it? I know that this is the realm of conspiracy theorist but it is obvious once you apply critical thought. Why would the banking sector want this new policy?

We have already done the heavy lifting, high interest rates would help first time buyers but crush house prices. That would not encourage people to take out second and third mortgages on their homes. Many people would struggle to pay high interest rates, so defaults would spike. The banks have done their sums and this is their best current strategy for squeezing more wealth out of us. Let us keep the analysis going.

Whilst banks can make money by making home buying easier, they will. Eventually, this strategy will no longer yield as much wealth as allowing interest rates to rise. I think you know what happens then. Yes, interest rates start to climb upwards, slowly at first. A gentle rise, not enough to cause too much critical thought by the masses. As the defaults start, the bank lobbyist will spin a new tale about careful lending and talk at length about increased risks. Interest payments will continue to rise slowly. You can perhaps imagine the rest. If not, time will reveal it all to you anyway.

Now, to be able to critically think you don't need a high IQ. You need to have a calm and well disciplined mind. Which is what book one of my trilogy helps you develop.

I hope that helps with your understanding of the 'real world' and where we are in this current financial cycle. Critical thought could prove to be a highly valuable skill. Well worth the effort to acquire.

You are welcome