Sam Bowman: The trouble with Help to Buy? It's a demand-side solution to a supply-side problem
Britain is in the grip of a housing crisis. House prices may have fallen a bit since 2008, but so have incomes. In many parts of the country prices are rising steadily, particularly in London, where house prices have risen by 3.5% over the past year. And over the past fifty years house prices have risen well above inflation: Shelter has pointed out that if grocery prices had risen at the same rate, the price of a whole chicken at Tesco would now be £51.
To address this, the government has launched the 'Help to Buy' scheme. This consists of an 'equity loan' for home buyers, where the taxpayer will lend up to 20 per cent of the value of a newly-built home interest-free for five years, and a mortgage guarantee scheme, which offers banks insurance on mortgages they make with loan-to-value ratios of 80 per cent or above – in other words, where buyers have made a deposit of less than 20 per cent of the value of the house.
Help to Buy is fundamentally a demand-side solution to a supply-side problem. Britain's housing has risen in price so significantly because of planning restrictions that prevent supply from rising to meet demand. Since Help to Buy does nothing to make it easier to build new houses, it will have a negligible impact on the availability of houses. The extra money made available by the scheme will just drive overall house prices upwards.
It is well-established that central government grants to local government, such as in educational spending, transport infrastructure, and rent assistance programs “capitalize fully into house prices, irrespective of whether the local government would use them to provide additional/better local public services or cut taxes.”
Any house buyer who does not qualify for or avail of the Help to Buy scheme will be a net loser in this, as will renters, who skew poorer than the overall population already. Poor people (who are typically landless) are the biggest losers from the UK's current planning system as it stands, and, of the problems with Help to Buy, offering taxpayer-backed loans to buyers of homes worth as much as £600,000 has to stand out as one of the most bizarre. The scheme is redistributive in any case, but supporting the purchase of houses worth this much means that it could end up being a transfer of wealth to the middle classes, from both the rich and the poor.
The government's loans risk taxpayer money on terms that no private financial institution would agree to. At best, the scheme is a gamble on the property market that ministers have no place risking taxpayers' money on. At worst, there is a very real danger that the scheme may prove to be loss-making for taxpayers.
The mortgage guarantee aspect of Help to Buy has echoes of Fannie Mae and Freddie Mac, the government-backed mortgage securitisers which helped the emergence of a boom in borrowing by 'subprime' lenders who could not be relied upon to pay their mortgages. By guaranteeing up to £130bn worth of borrowing, Help to Buy's mortgage guarantee socialises the risk between bank and borrower, with the taxpayer on the hook if something goes wrong.
The most frustrating thing about Help to Buy is that it is a non-solution to a very real problem. House prices must fall for the cost of living to return to a tolerable point. That cannot happen unless more houses are built, and the most sensible way to do that is to liberalise planning laws to allow the private sector to meet demand for housing. There is no shortage of land in Britain – less than 5 per cent of the country is built on – but there is significant political opposition to relaxing planning laws and allowing house prices to fall. Eventually, the government will have to choose between protecting the value of homeowners' assets and making housing affordable for renters and house buyers.
The Secretary of State for Planning, Nick Boles, appears to recognise the importance of planning reform, but other ministers speak privately of having 'done planning' with the National Planning Policy Framework last year, which streamlined legislation but did very little to make construction easier. If Help to Buy and similar policies are implemented so the governmentcan avoid the hard choices around planning reform, then taxpayers, renters and house buyers alike all have a turbulent couple of years ahead.