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Currency Watch: A house, my kingdom for a house

This week the UK government came out with a new plan to try and get the housing market going, a plan that speaks directly to its support base of voters.

As the old phrase goes, “an Englishman’s home is his castle” and we Brits have the highest level of property ownership in the EU.

Buying a house has become a preoccupation for many years. Savings put aside from the first months of anybody’s working career are seen as the seeds that will eventually flourish into that most delicious of fruits – a deposit for your first home.

The plan includes a mortgage guarantee scheme, alongside further funding for developments currently on the ground, while also bringing forward government land sales for homebuilding. Obviously the most divisive measure will be the mortgage guarantee scheme.

This is a plan that would eventually see the government pay between 10% and 20% of the mortgage outstanding and resale value, in the event that the borrower defaults on the loan.

This transfers risk from the lender to the government and, according to the plans, it will free up more bank funding to the housing sector. It’s called leverage and it exactly what got us into trouble in the first place.

One commentator has labelled this latest plan as the housing equivalent of “trying to cure a hangover by having another bottle of wine”, and I cannot think of a more perfect analogy.

The average first time buyer does not want to see a recovery in the housing market, in the same way that someone without a stock portfolio doesn’t really “give a monkey’s” about the FTSE recovering or the AIM hitting new highs.

A lack of assets creates a lack of interest. The last thing that a first time buyer needs is to hear that Nationwide or the Halifax are talking about rising prices. Bubbles burst for a reason and that is because they are unstable.

Supporters will say that the plans will help reduce the widening generational housing gap and plans to make sure that those who want to buy a house can (within reason) are laudable.

However, it could be argued that this plan is a populist vote-grabber, designed to help the squeezed middle and nothing to do with helping anything other than the Coalition’s dwindling kudos levels. We can only wait and see.

While we wait to see how this latest attempt to revive the UK’s economy pans out, a new report has gone some way to explaining how and why sterling has remained under the pump this year.

The Bank of England’s systemic risk survey revealed that confidence in the UK’s financial system is at its lowest level since 2008.

The euro debt crisis and the threat of another global downturn topped the list as the reasons why some 55% of influential business leaders fear the threat of another “high impact” event in the next six months. Reasons to be cheerful are not easy to find at the moment.

Jeremy Cook is chief economist at World First foreign exchange

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