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Help To Buy Risks Housing Bubble

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The flagship scheme may create more homeowners – but it will push up house prices as well, insists IoD chief economist Graeme Leach

With much fanfare George Osborne is pushing his Help to Buy policy, which aims to enable people to get onto the housing ladder with a five per cent deposit – thanks to a 15 per cent loan guarantee from the government.

What a nice chancellor, I hear you say. Well, hold on a minute. If something sounds too good to be true, then it usually is. Help to Buy will allow more people to become homeowners, but they will pay more for the privilege as well. The 15 per cent subsidy underwritten by government will become capitalised in house prices relatively quickly.

The IoD’s critique of Help to Buy is based on simple supply and demand. If you have a very steep supply curve – due to planning restrictions – and demand increases, most of the effect will be shown in rising prices, with less impact on higher output.

There are some very simple rules here. If the government stimulates housing demand, it will push up house prices – other things being equal. If the coalition stimulates supply, Help to Buy will have the opposite effect. Do we want a few people paying much more for houses, or many more people paying less?

Land can account for 30 to 40 per cent of the cost of a property. Across the country an acre of land with planning permission can range in price from £1m to £2 million, but an acre of agricultural land on the opposite side of the road could sell for less than £10,000. There can be few more stark examples of distorted markets.

In the UK, we live in the smallest, most densely populated and expensive properties in western Europe, with 90 per cent of the population making their homes on just nine per cent of the land.

Let’s be clear, the IoD is not suggesting concreting over the country. What we are saying is that you don’t have to do much to increase supply to have a significant impact on the price of land, and there’s enough unattractive green belt out there to avoid taking any risks with our green and pleasant land.

So we are faced with a clear choice. We can choose to add yet more distortion to the housing market through Help to Buy, or we can reduce the chance of a skewed market through ‘help to supply’.

The danger is that politicians and the electorate become hooked on Help to Buy and can’t let go. Articulate, vested interests then argue that withdrawal would endanger the housing market and risk a drop in house prices and negative equity. Hey presto, everyone is hooked on the subsidy drug and the more you subsidise, the harder it is to quit the habit.

We haven’t created a housing bubble yet, but Help to Buy risks one developing. And if the bubble bursts, what then? More subsidy?

Help to Buy is a classic example of a statist solution to a state-created problem. Will we ever learn?

http://www.iod.com/connect/economics/articles/help-to-buy-risks-housing-bubble?utm_source=twitter&utm_medium=social-media&utm_content=connect-article&utm_campaign=help-to-buy-risks-housing-bubble

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How can HTB risk a bubble when the last bubble is still there ( in most parts of the country ).

What HTB risks is collapsing the UK monetary system.

Absolutely right.

There is monumental denial going on in the heads of today's politicians. I can imagine, one day, historians will make documentaries about them, ridiculing their dangerous irresponsible policies. Unlike their predecessors in Weimar Germany etc, there is plenty of news footage of them talking rubbish. Their grandchildren will be shamed by it.

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