Is Help To Buy A Good Idea?
The Government is currently extending its assistance on the housing market from first time buyers to the wider market of aspiring homeowners. The Help to Buy scheme, which comes into effect from January 2014, effectively underwrites a loan of up to 20% of the value of the property, meaning that the potential buyer may only have to find 5% of the initial price as a deposit.
The programme has come under some extended criticism, as it represents a further stimulus to demand at a time when there is a real shortage of new homes. There is a danger that this will lead to several unintended and undesirable consequences; one, that housing becomes even more out of reach for the aspiring buyer; two, that it might lead to higher rents as the relative costs diverge, with landlords then taking advantage of the financial difference; and thirdly, that the Government should not be interfering so directly, effectively landing the taxpayer with a potentially chronic burden that may prove difficult to exit from. The experience in the USA with Fanny Mae and Freddy Mac shows how temporary intervention in the property market can quickly become a long-term commitment.
There is also a worry that highly leverage property purchases leave buyers much more exposed to changes in property values, with the spectre of 95 per pent loan-to-value mortgages in a much less predictable market, and resulting implications for domestic debt and repossessions.
However, the counter-arguments for are also quite compelling; the property market is essential to the UK economy, and more activity would be a timely boost for tens of thousands of workers. Construction represents just 6% of overall GDP, but adds 0.05 per cent to national growth. Secondly, there is a generation of frustrated buyers who may be resigned to decades of renting without some external intervention. Despite the significant reductions in volumes of property sales since 2007, prices have proven surprisingly robust and are now rising again in many parts of the UK, particularly London where home price inflation is touching eight percent.
However, perhaps the most powerful reasoning is that a powerful stimulus to help buyers would encourage developers and new builders to start to convert more of their landbanks into new homes, as they have more certainty of demand and therefore realising a profit. Without a significant increase in the rate of construction of new homes, then the fundamental imbalance between demand and supply cannot be addressed and matters just get worse for the next generation (rents and buying prices).
But for economists, perhaps the most important aspect to ponder is that the initiative should be introduced for sound, economic reasons – and not just to coincide with a forthcoming general election. For the cynics, there is clear evidence of how house price movements correlate with the Government’s electoral popularity, and research by MORI indicates that owner-occupiers have a higher propensity to make it to the ballot box on polling day. ‘Help To Buy’should win votes, but the jury is out in terms of the medium term benefits for the economy. Despite all the spin and chatter, this remains a roll of the dice.