The first stage of the scheme involved government funded equity loans of up to 20% of the value of a property, with the borrower providing 5% and commercial lenders the remaining 75%. The second phase will see government guaranteeing up to £130 billion of high loan-to-value mortgages (typically 95% LTV).
These proposals have attracted criticism from a wide range of quarters, including many economists of all persuasions, and bodies such as the IMF. The common, and justified, warning is that these measures will not address the problem of a lack of affordable housing and high housing costs but will instead inflate yet another housing bubble, particularly in London and the South-East.
The reason for this chorus of criticism is straightforward. When the rhetoric is stripped away the basic purpose of the policy is to ‘help’ people who do not qualify for mortgages under the stricter affordability criteria brought in after the financial crisis to still get mortgages; or in other words, to help people to get into debt to buy houses that they cannot afford. Since it was precisely this kind of thing that triggered the crisis in the first place, and the widespread encouragement of excessive borrowing to fund house buying has left us with a mountain of debt that is now a severe drag on the economy this seems perverse to say the least.
The other main point of criticism is that this kind of policy, which boosts demand for housing funded by credit, does nothing to address the real underlying problem in housing, which is shortage of supply. Quite simply we are not building enough houses and have not been doing so for many years. Most estimates agree that the UK needs to build about 400,000 new homes a year to meet demand. Last year there were only 98,280 registered new starts and although there has been an increase this year, the level is still well short of what is needed. The UK has the lowest number of housing starts in Europe with even France managing more. This problem is not new but goes back many years to before the financial crisis when even at the peak of a boom we were only building about half of the number of new homes that were needed.
One common explanation is the hoarding of land or planning permissions by builders. Indeed there are about 400,000 planning permissions for houses that have not been used. However even if they were all acted on at once this would still only meet one year’s needed building. Housing planning permissions are in a sense the key raw material for home builders and it does not make sense for any business to use up its entire stock of raw material before getting any more in place. The real problem is restrictive planning laws which make the process of getting planning permission difficult, costly and above all slow, while discouraging the building of the kind of hoses for which demand is highest and instead encouraging the construction of flats. This will continue until and unless the planning laws are reformed (and this is equally the case if we were to go for massive public housing building as this would also require a change in the regime).
Given these supply side constraints the effect of boosting demand through schemes like Help to Buy will simply be to drive up prices. This may be good news for those who already own their own homes and will feel richer as a result (something not far from the Chancellor’s thought I suspect) but will not help anyone else or even existing homeowners in the long run. A revived upsurge in house prices is the almost certain result of this policy, particularly in the South-East and London where there already signs that this is happening. Since 1970 the UK has had three major housing bubbles: each one has caused enormous damage to the financial system when it ended and left many people worse off or trapped by unpayable debt. Moreover each bubble has been bigger and had worse effects than the preceding one. Quite simply, we cannot afford another one. The policy of Help to Buy, of encouraging people to take on debt they cannot afford in order to boost demand and lead to a rise in house prices is improvident, reckless and wrong.
This article originally appeared in The Backbencher.