Brown Should Buy Homes to Help Economy, Ex-BOE Officials Say

By Gonzalo Vina and Brian Swint

Jan. 9 (Bloomberg) -- Prime Minister Gordon Brown should buy homes on the verge of repossession to add money to the British economy and save families from being thrown out onto the street, two former Bank of England economists said.

The plan would cost about 50 billion pounds ($76 billion) over five years, Fathom Financial Consulting economists Shamik Dhar and Danny Gabay said in a report today. The program would also provide a new economic policy tool as the central bank’s interest rate approaches zero.

The Bank of England yesterday cut its benchmark rate to 1.5 percent, the lowest since the bank was founded in 1694, bringing it closer to the limits of conventional monetary policy. U.K. officials are considering other measures such as buying assets to pump money into the economy as the recession deepens and threatens to exacerbate the housing-market slump.

“The smart asset to buy would be housing directly,” Gabay said in an interview. “The ideal thing is to go at the core of the problem. This would bring forward the necessary correction. It would to a great extent put a bottom to it.”

The government would finance the program by selling bonds, which the Bank of England could buy up to expand the supply of money, Fathom said. The proposals are a more direct intervention in the housing market than measures planned by the U.S. Federal Reserve, which this week started buying up securities backed by mortgages after bringing the interest rate close to zero.

‘Social Landlord’

Brown’s government would become a “social landlord,” charging rent to families and saving them from eviction, Fathom said. The plan would also allow banks to benefit through the removal of outstanding bad debts as financial institutions worldwide nurse more than $1 trillion in losses and writedowns from the credit crisis.

House prices had the biggest drop since at least 1991 last year, declining 15.9 percent, Nationwide Building Society said Jan. 6. Banks are forcing potential buyers to raise down payments and are charging more for mortgages, pushing property prices down further.

The government should step in and “set a floor” under house prices, protecting taxpayers by paying below-market prices for houses and distressed homeowners by paying more than “vulture purchasers,” Fathom said.

“The average discount will probably be in the region of 10 percent to 20 percent below what asking prices are in the locality for similar properties,” the report said.

Fathom also suggested that that any shortfall owed to a bank, if the value of the homes were less than the original loan, should be repaid from a share of the rent collected by the government.

“The way people are talking about it now is to say: We have a big problem, let’s print money,” Gabay said. “But many bailouts haven’t had the desired effect. Investors are still fearful of potential losses. We’re trying to say: If we’re going to do it, how would it work?”

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.