Help To Buy was essentially a way to subsidise risky, high loan-to-value mortgages. Suppose you wanted to buy a house worth £200,000, but the bank was only willing to lend you £150,000. You could raise no more than £10,000 in savings yourself, so that would still leave you £40,000 short. Under Help To Buy, the government would step in, and lend you those £40,000.
Housing market wonks hated it right from the start, and for good reason. It is clear that in a market in which supply is extremely inelastic, demand-side subsidies can only push up the price. Suppose a football stadium can accommodate 10,000 people, and for a popular event, the stadium is fully sold out, at a ticket price of £100. Plenty more people would have been prepared to pay a substantial amount, but just not quite so much.
Now suppose the government wanted to help a particular group of people to see this event, say, first-time viewers, or young viewers. It therefore gives them a voucher of £20, which they can only use for the purchase of a ticket. This means that somebody whose previous maximum willingness to pay was, say, £90 will now be prepared to pay up to £110. Those people will bid up the ticket price. In this way, they will elbow their way into the stadium. But since the total number of seats has not increased, they can only do so by crowding out somebody else, namely those whose maximum willingness to pay for a ticket is greater than £100, but lower than the new ticket price. It will change the composition of the audience, and if that is the only aim, fair enough. But it cannot increase overall attendance. If that is the aim, you need to build an extension, to increase the stadium’s capacity.
The British housing market is not quite like that – we do build the odd house every now and then – but it is not far off. House prices have increased by a factor of 2.7 since 1995, yet housebuilding levels have barely budged. They are the lowest in Western Europe, and have been for a long time.
So when the first empirical assessments of Help To Buy came out, and found that it had indeed increased house prices, most critics did not even bother to crow “Told you so!”. It was just too obvious that this would be the case.
This week, the Resolution Foundation’s proposal for a Citizen’s Inheritance was received much more sympathetically than Osborne’s Help To Buy programme. It should not. It will have pretty much the same effect. It is an attempt to solve a supply-side problem through a demand-side subsidy. Which means that it is doomed to fail.
The Citizen’s Inheritance is a one-off payment of £10,000 which, if it becomes a reality, every young person will receive on their 25th birthday. It is a universal, not a means-tested payment. But it is a conditional payment, which recipients will only be able to spend on housing, education, a pension plan, or on setting up a business. Once fully rolled out, it will cost about £7bn per annum. It will be funded by a new lifetime receipts tax, which is similar to inheritance tax, except that it also applies to transfers from living people.
Not every recipient would spend their Citizen’s Inheritance towards saving for a deposit, but it is safe to say that a fair few would spend at least a part of it on that. To the extent that this is the case, it will have the same effect as Help To Buy: it will push up house prices. It will change the composition of house buyers, and it may even increase the rate of homeownership by giving existing homeowners an additional incentive to downsize. But it will not address the overall problem of housing affordability.
The proposal gained traction, because it is, at least in this form, a novel and eye-catching idea. Yet another report on how bad Britain’s housing shortage is would not have gained a fraction of the coverage, because the fact that Britain has a housing shortage is not exactly news. Most of us sort of know that by now, and we are bored of hearing about it.
But unfortunately, it remains true. The solutions that would work – planning liberalisation, rolling back or ideally abolishing green belt protection, easing height restrictions, using the tax system to compensate communities for the downsides of development – sound boring by now, because many of us have heard them so many times. But they are the right solutions. There is no way around them. And unless we finally implement them, the topic will continue to bore us.
- ‘The housing crisis: a briefing‘ by Kristian Niemietz
- ‘The key to affordable housing‘ by Kristian Niemietz
- ‘Here’s how we solve Britain’s housing crisis‘ – IEA podcast