Help to Buy: it's not only dangerous, it also misses the point

Listening again to George Osborne’s interview on the Today Programme yesterday I was struck by one thing he said to Evan Davis: essentially that the large part of the rationale for Help to Buy scheme was that the deposits being asked of homebuyers these days were unreasonably large.

“I suspect when you first bought a home, Evan, that you were not able to afford a 30% deposit,” said the Chancellor, “and yet people in their 20s and 30s and even their 40s are being asked for those kinds of deposits these days because of the impairment of the financial system…”

This rang a bit of an alarm bell for me, because anyone who listens to their parents will know that back in the day you did indeed have to save up for a bigger deposit to buy a home. That it was the recent decade and a half that were the aberration. So I went and looked at the Council of Mortgage Lenders’ figures on this and they did indeed bear this out.

avgdeposit copy

As you can see from the chart, the average deposit needed for a home purchase was actually a touch higher, as a percentage of the home value, back in the 1970s and even into the very start of the 80s than it is even now. The figures are similar, if a little more pronounced, for first-time buyers:



Here, again, deposit levels were high in the 1970s, came down to low levels in the late 80s and early 90s, then rose to 10% and then, after a spike in the financial crisis have settled back again at 20%. They are admittedly higher than they were in the 70s, but in some senses it’s that 5% period in the 80s and 90s that looks artificially odd.

This raises the question of whether the Government’s Help to Buy scheme (leaving aside the wisdom of putting potentially dodgy mortgage debt straight onto the Government’s balance sheet) is really tackling the real problem here. It’s not necessarily that the deposits themselves are too big (as a percentage of the total home purchase), it’s that they are not affordable. One final chart to explain, showing how many times a first-time buyer’s income the average deposit amounts to.


As you can see, whereas in the 1970s a deposit cost about two times a first-time buyer’s salary, these days it’s well over three times salary. It’s in this light that one ought to consider the problem of over-expensive housebuying. The explicit target of the Help to Buy program is to get deposits down to 5% of the home value. However, the real problem isn’t that deposit requirements are necessarily too high, it’s that first-time buyers (and bear in mind the FTBs these days are older than ever before) don’t have high enough incomes to afford them.

Surely the objective ought to be to try to raise average incomes rather than mechanically reducing the requirements of mortgage companies when lending out cash. That in turn comes back to the fundamental problem: that Britain’s GDP levels (the aggregated total of incomes across Britain) are still well below the pre-crisis peak, which leaves everyone – first-time buyers included – poorer as a result. Help to Buy won’t in and of itself do anything to help that.

More broadly, why is it that Governments spend so much money attempting to force people onto the housing ladder? Plenty of developed economies function perfectly well with home ownership levels well below those of the UK. Yet, like every Government for decades, this one is intent on doing whatever it can to increase home ownership.