Wednesday, 2 October 2013

Initial thoughts on Help to Buy

The Tories have announced that they will be bringing forward the second part of the Help to Buy Scheme – the means by which the state will guarantee 15% of the deposit on a mortgage. The Government claim that this will help people who can't save for a deposit to get onto the housing ladder – almost everyone else says it is a cynical (or reckless) attempt to create a housing bubble and put up house prices. Anything that helps young people who want to get onto the housing market and out of the private rented sector has potential to do some good, but ultimately this is a short termist policy which does not tackle the issue of undersupply.
On top of a new housing bubble there are other issues that should make the Government stop and think. The new Governor of the Bank of England has stated that interest rates will not rise until unemployment is below 7% - the flipside being that they will probably rise when it does get to that level. A credit-loaded housing market, plus potentially higher interest rates could expose the fact that many people may not actually be able to afford to repay their mortgages. At the logic extreme, this means defaults and a large cost to the exchequer.
So when interest rates rise, either prices need to fall or incomes need to increase. Based on this Government's record to date, I am not optimistic about an increase in household income. 
There is one to the problem of young people's home ownership – and one decision that Labour have been calling on the Government to make for a long time, and it is very simple: build more houses. The Government is using £12bn to underwrite mortgages – but for the £11bn infrastructure boost that the IMF has recommended we could build 400,000 new houses and create hundreds of thousands of jobs and apprenticeships. The answer to the high cost of houses is to reduce the cost of houses through increased supply, not to put off this long term problem by short-term credit-funding access to mortgages. 
The question of supply is important in itself with regards to access to mortgages. In the past, schemes which were aimed at helping people buy houses were by and large tied to the building of a new home, so the supply issue was addressed alongside the exaggerated demand created by the scheme. In this instance, there is no link to increasing supply, simply artificial demand which will simply push up prices and prevent people from getting on the ladder.
It is also quite clear that the majority of this guarantee money will end up in London and the home counties. A quick glance at current average house price heatmap on Prime Location shows a gigantic disparity between London (average price £491,000 – predicted in the Evening Standard to rise to £500,000 by the end of the year) and Lancashire (£141,000 - £157,000 depending where).
Hyndburn has serious housing problems – undersupply of quality homes, and this policy does nothing for that. I hope it does indeed benefit people in the constituency, but Government could really make a difference and this is not the way to address the need in the housing market. 
And how does the Government propose to put a check on any bubble that might be formed? By giving the Bank of England the power of an 'emergency brake' on the bubble. I agree with the caution written about in the FT this week – it is not straightforwardly simple to assume that the Bank of England will be comfortable saying that the elected Government has caused an 'emergency'. Moreover questions remain about what they could actually do, which would be reducing the £600,000 house price limit, or increasing the fees which are paid to the Government in exchange for the 15% guarantee. 
It speaks volumes about this Government that their response to a living standards issue that comes from high prices is to take an action that will ultimately put prices up further, rather than taking action to get prices down. A Government that decried national debt and boom-time policies has failed to get the national debt under control and now wants to create a credit-fuelled debt bubble.