Five reasons to get worried about Help to Buy

Britain has had a housing crisis for years. I’m afraid if you were hoping Help to Buy was going to solve it, you’re going to be very disappointed. That’s the gist of my piece in the Times this morning, which, if you have a subscription, you can read here.

For those who don’t, or who prefer their analysis in visual form, here’s the same argument using charts rather than words. Let’s start with the Chancellor’s comments to Sky News a few months back justifying the policy (under which the UK taxpayer will underwrite 20% of your deposit for a home purchase up £600,000):  “We’ve had a housing bust,” he said. “I want to get back to a normal level where first-time buyers can afford a home.” Let’s start with the question of whether there was a housing bust. It’s not borne out by the figures; in fact:

1. UK housing is still overvalued

Yes, even in spite of a circa 10% fall across the country, by most metrics house prices in Britain are still too expensive, both in comparison with wages and incomes. If you don’t believe this OECD chart above, check out this one from the IMF, which puts it in scatter-chart format:

The point being that it’s difficult to understand why you would want to inflate an already over-valued housing market even further. Unless this is merely a political tool to try to generate a temporary bubble of buoyancy between now and the 2015 election.

2. Britain is facing an unprecedented house price gulf 

In fact, the real problem in the UK housing market – as indeed in the broader economy – is a massive divergence in prices between London and the rest of the country. Some parts of London are booming like never before, fuelled in part by a lack of supply, in part by money flooding in from overseas and in part by the windfall from quantitative easing. The net result is that the gap in prices between London and everywhere else is wider than ever before.

3. Help to Buy won’t help narrow this disparity

If you’re making the (quite reasonable) argument that you want to narrow this regional gap, you might want to limit Help to Buy to the most price-depressed areas of the country. You could do that with a geographical limit or, even better, a price limit (given prices in London are so much higher than elsewhere). According to the Land Registry, the vast, vast majority of housing transactions last year (83%) were below £300,000.

However, the Government has chosen to put the limit for Help to Buy up at £600,000 – the equivalent of a million dollars. This is enough to buy a flat in Kensington & Chelsea. Quite why the Government sees it fit to subsidise homebuying here is beyond me. However, it’s an open invitation for soft abuse. What’s to stop wealthy bankers buying properties under their younger brother or sister’s name, helped out by the taxpayer? Answer: not much; in fact, it’s pretty rational for them to do so.

4. Deposits are not at record highs

Part of the Chancellor’s rationale behind Help to Buy is that it is impossible for young people to afford deposits these days. While deposits are certainly high at the moment, they were, in fact, significantly higher back in the 1970s.

True, deposits are close to a record high for first time buyers, but then Help to Buy is not a scheme which is limited to FTBs.

5. It’s unlikely to boost homebuilding

As I mentioned, the real problem facing the UK housing market is a dismal lack of supply. The best estimates suggest that there is a housing shortfall of approximately a million homes in the UK. This is largely a result of Britain’s ferocious planning laws, though it might also owe something to poor tax incentives. Either way, this is the real problem: any solution to the housing market’s current crisis must attempt to encourage extra homebuilding.

Help to Buy (especially the core part of it that will guarantee mortgages, as opposed to the new-build half) is designed to increase housing demand, not supply. Now, in an ideal world, this would encourage homebuilders to construct more houses. The problem is that this dynamic simply doesn’t exist in the UK. According to research from the OECD, Britain’s housing market is the least responsive in the world to any increase in demand (or, to put it in economese, it is extremely inelastic). So even if you did believe that demand creates its own supply, this is unlikely in the UK.

Britain desperately needs more homes to be built. As Nick Crafts pointed out in this article, that was precisely what happened in the 1930s (it also helped carry Britain through the Great Depression); but at that point there were hardly any planning restrictions in the UK (about 75,000 according to Crafts). The 1947 Town and Country Planning Act and countless formal and informal regulations added thereafter have made it astonishingly difficult to build in the UK. This needs to change – though that is, of course, far easier said than done.

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More broadly, there is a real problem in the UK (and, for that matter, other Anglo-Saxon economies) over the past 50 years: successive Governments have stopped at nothing to try to increase levels of home ownership. This is fine up to a point, but once the levels exceed around 60% of the population, past experience has shown that further housing subsidies only serve to create ever greater bubbles. I call it the housing hazard: Governments (of both political hues) are complicit in creating enormous moral hazard around the housing market. Help to Buy is the latest ugly episode in this story.