Graeme Leach: We need help to supply - not help to buy

Graeme Leach is Chief Economist at the Institute of Directors

The IoD has reacted strongly to the extension to the Help to Buy scheme, under which the Government will guarantee part of a home buyer’s mortgage on properties worth up to £600,000. In its press response, the IoD said that instead of trying to pump up prices, the Government should focus on radical reform of planning laws and reducing local authority charges on developers, to make it easier to build more homes.

So why did the IoD react so strongly? It’s basic economics that if you stimulate demand in a market that exhibits a very steep supply curve, the stimulus will impact more on prices than output. Yes, the Help to Buy scheme might increase the supply of properties a little, but those homebuyers will be paying more for their properties. The Government says that that there is plenty of evidence that supply will be very elastic to an increase in mortgage availability, so we can avoid a large price response. We beg to differ. Any increase in the flow (new builds) of housing is peanuts compared with the overall housing stock.