TERRY SMITH: Why don't politicians get it? House prices need to fall

The world is in the grip of a major financial and economic crisis. We are in the midst of the UK party conference season, and I suppose you might naively have hoped for some insight into our leading politicians’ thinking about how to address the UK’s problems.

Instead we have had a litany of half-baked ideas based upon misconceptions about economics and class warfare.

Nick Clegg's idea to allow parents to lend part of their lump sum from pension entitlements to their children to buy property is downright dangerous, says Terry Smith


Two ideas put forward illustrate this point. Lib Dem leader Nick Clegg, apart from proposing a so-called ‘mansion tax’ (many of you may wonder why you would be paying this as you almost certainly don’t live in a mansion) came up with the idea that we should allow parents and grandparents to use part of their lump sum from pension entitlements to pay the deposit on their children’s property purchases.


Since you can already give the cash you can take out of your pension as a tax-free lump sum to whom so ever you choose, I take it his actual idea is to allow pension savers to lend some portion of the assets in their pension fund to their offspring as a mortgage, or invest in a portion of the equity in their property.

Most in the UK who are not beneficiaries of the public sector pensions funded by the taxpayer have inadequate pension provision and encouraging them to use part of it to give their children a stake in what are almost certainly still overpriced houses is downright dangerous.

This misplaced obsession with the housing market was also evident in the proposals put forward by shadow chancellor Ed Balls.

He said Labour would introduce a programme to build 100,000 houses using the proceeds of the 4G licence auction to fund to the programme.

At the same time he talked about reintroducing the Stamp Duty holiday for property purchases under £250,000 that Alastair Darling introduced for two years in 2010.

This is surely intended to encourage more people to buy houses. How will that make them more affordable? These two policies point in opposite directions, but then I would hardly accuse Balls of economic competence.

Politicians of all persuasions need to learn one simple lesson on housing: in order to make it more affordable, prices have to fall.

UK residential property is still valued way above any long-term measure of value to incomes, which is exactly why young people and first-time buyers cannot afford it.

Property will not come down in value to an affordable level if they keep introducing incentives to purchase it and ways to divert our pensions into it.

In other respects Balls’ performance this week was much worse than Clegg’s. His criticism of the Government’s record on the economy ignores the mis-management of the last Labour government, of which he was a leading member and the leading supporter of Gordon Brown.

He continually tries to lay the blame for the debt and deficit that Labour left as a legacy on the financial crisis.

The key question for Balls and any other member of that government is: Why did you spend more than revenues during an economic boom for five years before the crisis (from 2002-07) and leave the country in the worst possible condition for dealing with the crisis?

As for his proposals for dealing with the deficit, he says that Labour would undertake a public spending review.

He still can’t bring himself even to say the necessary words: that public spending would be cut.

Balls is not a man who could be trusted with the public finances.

  • Terry Smith is chief executive of Tullett Prebon and Fundsmith

House prices need to fall, why don't politicians understand that, asks Terry Smith

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