Peter Geoghegan: Help-to-buy may cause price bubble

THE Chancellor claims Help-to-Buy will support first-time buyers, but it is likely to see even more people priced out of the market, writes Peter Geoghegan.

Chancellor George Osborne with construction workers at a development in London. Picture: Getty

In March last year, Chancellor George Osborne gave us his infamous “omnishambles” Budget. There was to be VAT on pasties and static caravans; tax relief on charitable donations would be capped; higher income tax allowance for pensioners would be scrapped. Inevitably, months of U-turns followed.

The reception that greeted this year’s Budget was far more muted. Conscious of the mistakes of 12 months previous, Osborne and his advisers steered clear of obvious own-goals. But nestled in it was a proposal that could do more economic and social damage than any number of tax hikes on sausage rolls or mobile homes: the Help-to-Buy scheme.

Helping first-time buyers and others with shared-equity schemes in not, in itself, a bad idea, but the way Osborne is going about it is.

Help-to-Buy offers prospective buyers of new properties interest-free loans worth up to 20 per cent of the purchase price. All they have to do is stump up a 5 per cent deposit. The government will extend £3.5 billion to financially-stretched buyers and make available £12bn to increase the supply of mortgages.

Announcing the proposals, Osborne said that he was supporting “a new generation in realising the dream of home ownership”. In reality, he is subsiding the banking sector once more, driving up house prices in the process.

That the construction industry has been the biggest champion of Help-to-Buy speaks volumes. Last week, Barrett, one of the UK’s largest housebuilders, announced that it was taking on 600 extra graduates and apprentices to cope with the expected increase in demand. Osborne’s proposals were jump-starting the property market, the firm said.

Not everyone has been so sanguine – and with good reason. In its report on the 2013 Budget, the cross-party Treasury Select Committee said: “There is a risk that if mortgage lenders begin to exercise reduced levels of forbearance, repossessions may rise and house prices subsequently lower than they would otherwise be.” Osborne’s flagship Budget policy could, it concluded, leave the UK Treasury “facing large losses on those mortgages it has guaranteed”.

Five years on from a financial crisis kick-started by sub-prime lending (the aftershocks of which are still being felt) the UK government is proposing to underwrite high loan-to-value mortgages. There is an obvious flaw in this logic, as Marian Bell, a former member of the Bank of England Monetary Policy Committee, pointed at a recent meeting of Fathom Consulting’s Monetary Policy Forum.

“I don’t know what Help-to-Buy is trying to achieve,” Ms Bell said. “They shouldn’t be helping to increase household debt, or encourage risky lending.”

Researchers at Fathom warned that the scheme could inflate house prices by as much as 30 per cent by 2015, by which stage the average house in the UK would be £300,000. Average annual earnings in the UK are £26,500.

In theory, Help-to-Buy will support first-time buyers and those trapped in negative equity – in practice, it will further inflate an already over-priced housing market. In London, the average house price last year was over £445,000. In Edinburgh, it was £212,607. In affluent Denmark, it was less than £180,000.

For decades house price rises in the UK have far outstripped inflation. Spiralling house prices and attendant bubbles can be a very dangerous thing – as anyone living in Ireland or Spain will attest.

Housing bubbles were a significant feature of three of Britain’s last four serious recessions. The ten years to the 2008 crash saw eye-watering double-digit annual increases in house prices and a slew of TV programmes dedicated to that most gauche of get-rich-quick schemes – “flipping” houses.

Now, at a time of little or no economic growth, the government itself is stepping in to pump hot air into the housing market bubble. As Kirstie Allsopp knows well, location is everything – the Help-to-Buy scheme will create the greatest distortions in those places where demand is already highest, namely London and the south-east of England.

Osborne is an acolyte of Margaret Thatcher and devotee of the free market, but his decision that the state should intervene in the market for housing is not as surprising as it might seem. Houses and owner-occupation have long been a quintessentially British obsession, particularly within the Conservative Party.

Writing on the UK banking sector in the latest issue of the London Review of Books, Donald MacKenzie, professor of sociology at Edinburgh University, correctly diagnoses “the fatal fascination of the British with property”. The root cause of this malaise lies in the popular belief that house prices rises are a good thing and should be encouraged.

It’s a view not commonly shared on the Continent. In Germany, for example, front-page headlines celebrating 10 per cent annual increases in house prices – as occurred here in the middle years of the last decade – would be met with a gnashing of teeth among politicians and demonstrations on the street, not the popping of champagne corks and celebratory press conferences.

The assumption that everyone benefits – or will benefit eventually – from spiralling house prices is a delusion. Instead, rising house prices force first-time buyers to take on far too much debt. Meanwhile, as your house increases in value so does everyone else’s – if you want to trade up, you need to take on more debt. It’s great for the small proportion that own their homes outright, but a drain on capital and resources for everyone else.

There are alternatives to tackling Britain’s housing crisis – and crisis it is, as we are not building anywhere near enough new homes. One is to strengthen the rental market. Renters are looked down on as the unfortunate plankton of the property pool – I speak from some experience. I have rented all my adult life, an admission that is still met with anguished crises of “You rent?” in polite society. But rent controls and long-term tenancy agreements, already common in many parts of Europe, would go a long way to improving both the perception and the reality of renting in Britain today.

As well as building affordable new homes, incentives also need to be created to renovate, refurbish and repair existing homes, and to bring empty properties back into use. One way of doing this is through a Land Value Tax. An LVT is a levy based only on the value of unimproved land, not on the value of the buildings and improvements to a site. This policy, which would help to dampen down house prices and discourage speculation, has been successfully adopted around the world and is a Scottish Green Party policy.

But the biggest obstacle to solving Britain’s housing problems is political. Help-to-Buy was designed more with aspirational “Mondeo man” in mind, than with any concern for its real world effects. Most voters are heavily invested in the notion that rising house prices are good for them – even when they are clearly not.

A policy that aims to bring house prices down might be politically impossible right now, but it’s unlikely to remain that way forever. For the generation in their 20s now, stagnant wages and poor employment opportunities make home ownership an increasingly unattractive option. What they, and many others, need are lower house prices and a more diverse market. Help-to-Buy will deliver neither.