Is there anyone left who thinks the Government’s Help to Buy scheme is a good idea? This week’s Spectator splashes on the risks of this property bubble wheeze.
Merryn Somerset Webb warns that the scheme, which underwrites mortgages, will lead to rising house prices. She argues that ‘if anyone other than the government manipulated a market to this extent, it would be illegal’:
The latest is the one that worries even the king of stimulus himself, Sir Mervyn King. It’s called Help To Buy, Osborne’s latest market-distorting scheme that effectively forces the already overcommitted taxpayer to underwrite £12 billion of mortgage lending to people who haven’t got an adequate deposit of their own, or who lack the income to have a go at producing one and who therefore shouldn’t really qualify for a mortgage at all.
Still, however Sir Mervyn feels about it, most people think the scheme will work as long as borrowers are persuaded that it is possible for house prices to keep rising — as they usually do. The Centre for Economics and Business Research predicts that prices will surpass their pre-crisis peak next year, while Knight Frank has just put out a survey noting that Londoners’ expectations of the value of their houses have hit a record high. Even this is unlikely to be the end of it: as one enthusiastic building society chief keen on ‘even more initiatives’ wrote last week, ‘There’s no shortage of ways government could step in.’
It all sounds so stupid, doesn’t it? Why would you want to obstruct so completely the free operation of a vital market? It comes down to what Sir Mervyn calls the paradox of policy, whereby ‘policy measures that are desirable in the short term appear diametrically opposite to those needed in the long term.’ We need to move away from attempting to create an economic recovery out of consumption, and work on increasing investment in productive areas. Ideally, by cutting our debt and pushing up exports. But until that happens we must work to avoid total misery by supporting the bits of the economy we used to rely on — hence the low interest rates designed to save our banks (which couldn’t cope with a property crash and need to rebuild their balance sheets) and stop consumption collapsing (would you be able to afford to go out to dinner if your mortgage rate was 8 per cent?).
You can read the full piece here. But the Spectator wasn’t alone in criticising the scheme this week. One of the few statements not veiled in obfuscatory language in the International Monetary Fund’s verdict on the UK economy yesterday was on Help to Buy. The IMF’s concluding statement said:
The 2013 Budget announced a new scheme, Help To Buy, aimed at boosting activity in the housing market. This measure may temporarily help boost confidence in the housing market, but there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing. To mitigate this risk and engineer a supply response, the government should consider fiscal disincentives for holding land without development.
Housing starts still aren’t looking particularly encouraging, and as I reported earlier this month, those at the top of the Coalition have largely given up on any further attempts at reforming the planning system. So it isn’t looking very hopeful that there will be the ‘adequate supply response’ that the IMF is looking for. Coffee House also revealed in the autumn that Jake Berry had made very similar proposals to Number 10 about penalising landbanking, but ministers have been reluctant to take this on board so far. Perhaps now Berry is a member of the Prime Minister’s policy board, things will change.
Still, at least the real problems with the current mix of policies might only become apparent when the architects are long out of government. Which isn’t a very reassuring thought.
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