On the face of it, the Help to Buy scheme doesn’t look like such a bad idea. After all, what is the point of Government collecting taxes and not putting the money to work? Why shouldn’t the Government help hard-pressed people to get onto the housing ladder, and in doing so, boost house building (create jobs) and reduce the burden on social housing?
The State takes in £620 billion a year in taxes, so £25 billion in notional loan guarantees doesn’t seem that much to inject stimulus. The problem is this: the availability of this subsidy (which is exactly what it is, for it is gifted rather than earned) will raise the aggregated housing stock value by at least that much, and will stretch those least able to repay their debt beyond their means, thereby leading to a higher than normal dereliction rate. Simply put, we will create a housing bubble fuelled by tax revenue that will hit the lower income earners the most.
Let us look at this in basic terms. We are told that house prices are too high and therefore we need more ‘affordable’ properties. Who is to say that current house prices are too high? The prices are the result of a supply/demand balance, not just of houses themselves, but also of 25 year debt.
The markets for both houses and mortgages are largely open, competitive, and efficient, so we cannot say empirically that prices are too high. All that we can say is that compared with previous observations between earnings and prices, the ratio has changed, but this fact does not make houses necessarily too expensive. The only way to know when, in any particular snapshot of time, property is too expensive is when private risk capital refuses to provide a mortgage.
Herein lies the fallacy of ‘affordable homes’. The post-modern world has confused, deliberately, rights and privileges. The term ‘affordable’ suggests that home ownership is a right, which it is not – it is a privilege afforded by private investment – and therefore the term is pejorative, and must be dismissed.
The State uses different tools to bridge this affordability gap and all have politica,l rather than economic, goals. By having political goals, i.e. designed to catch votes rather than prosperity, they are only concerned with the next election. In other words, the State is taking a financial position based upon a maximum five year return – the next election – rather than based upon the duration of the mortgage debt of twenty five years. Or put another way, the Government is buying votes and hang the long-term consequences.
Labour used a variety of methods to use property to buy votes; it introduced a scheme whereby a certain portion of new-builds had to be made available to ‘key workers’ in the public sector (whatever they might be), and then legislated for proportions of up to 35% of properties within new developments being made available to social housing or made ‘affordable’ (that term again). Why should these ‘key workers’ be given priority on housing?
This was a clear economic apartheid, as people doing certain jobs were deemed as ‘key’ and therefore given extra privileges, this time in the shape of property right. A rather creepy Soviet-style reward. The question here is, for how long does the property in question have to remain available for our ‘key worker’? The answer was no time at all. Our nurse / teacher / copper immediately became a property developer overnight as they could ‘flip’ the house overnight and sell it on to a non-‘key worker’ at something approaching the market rate.
Quotas for lower priced dwellings within developments similarly skewed the market by deterring investors, as this type of market interference was felt by many to make higher-end developments unsaleable. Hardly surprising then that there are a large number of undeveloped sites. Sites that Labour has proposed nationalising under their ‘use it or lose it’ policy announced in September.
Interestingly the Conservatives, Labour and Lib Dems all see the housing market as the key to economic recovery, despite the oversupply of loan capital and the inelastic supply of housing, combined with Government over-spending, being the causes of the 2008+ crash and crisis. All have policies and initiatives directed at the market entry point level, i.e. the tranche that is the most likely to default. Necessarily – those who cannot afford the deposits required by the private sector lenders are the ones who can least afford the repayments.
The problem is exacerbated by the Help to Buy Scheme, as this increased level of loan capital is not immediately increasing the available supply of housing. Consequently we will immediately have too much money chasing too few houses, and prices will have to rise leaving our lower end buyers having to buy at artificially inflated levels. Once rates begin to rise, which they will have to, our new buyers will face difficulties in repaying the mortgages, and we can expect higher rates of default.
Another sinister aspect of this scheme is that the £25 billion is not backed by anything, it is not real money moved away from another department and pointed at housing, it is altogether new money and designed to increase the money supply and create inflation – it is another £25 billion of Quantitative Easing. To demonstrate that this money is QE and not existing capital, the Government is offering these loans at zero interest. This increase in QE will result in higher prices in food and energy which will hit our lower end house buyers the hardest. This in turn will dramatically increase the mortgage dereliction rate, and we are back to Square One.
The Chancellor will probably know all of this, but he is only concerned about 2015 and re-election. As long as the inevitable crash comes after that he thinks that he will be in the clear. How desperately sad.