­Help to Buy isn’t the answer to the Conservative predicament

 
Allister Heath

WITH just 20 months to go before the general election, the Tories need to get their skates on. While many London-centric, private sector employed middle class professionals see Ed Miliband as an unelectable joke, the rest of the country disagrees. YouGov puts Labour 11 points ahead, suggesting a 100 seat majority for Miliband’s party, partly as a result of Ukip’s rise; there is massive support for most of Labour’s destructive ideas, including price controls and the hike in the main rate of corporation tax.

A Tory victory, while still possible, would need a dramatic shift of political fortunes and one of the best, most professional campaigns in British political history. The Tories are outsiders; Labour the rank favourites, a situation reinforced by the pro-Labour bias in constituency boundaries.

It is a shame, therefore, that David Cameron is pinning so much on Help to Buy, his preposterous subsidised mortgage scheme. He has, of course, lots of other policies, not least a typically fiddly tax cut for married couples from 2016 where one spouse earns less than £41,451 a year and the other less than £10,000, as well as a tightening of the rules for some people in receipt of unemployed benefits. But the housing subsidy is key.

The Tories have two answers for those of us who believe them to be an insane tool to bolster demand in an under-supplied market. Their first claim is that housing is not a bubble; their second that credit remains too difficult for first time buyers. Let’s take both of these in turn.

The Tory position regarding bubbles is a semantic one. Prices remain far too high and are rising again; and in some parts of the country the market has clearly gone mad. In nominal terms, the average UK house price peaked at £199,612 in August 2007 and is now at £170,231, down 14.8 per cent, a modest decline. Using Halifax data and the retail price index, in real terms the average house price has slumped 29.5 per cent from its peak and is back to December 2002 levels, a much bigger fall. The situation is different in the most prosperous parts of the London economic region; in many (but not all cases) prices are up in both nominal and real terms.

But despite this reduction in real prices, the national price to earnings (p/e) ratio remains too high, partly because real wages have also fallen, albeit not as far as house prices. That statistic is the real one to watch. The average home costs 4.63 times the mean male full-time earnings, a three-year high. The p/e ratio peaked at 5.83 in July 2007; it probably needs to fall to no more than four times (it will remain permanently higher than it once was because of foreign money propping up central London).

The average deposit required for first time buyers was 23 per cent last year, up from 12.4 per cent in 1988 and 18.1 per cent in 2002.

That is indeed a major problem. But 95 per cent mortgages were never the norm either: they were used sparingly, and handed to people with good prospects or special circumstances.

There are three reasons why required deposits are so high: rules and capital requirements have been tightened, in part to discourage high loan to value ratios; shockingly, one part of the government doesn’t know or understand what the other part is doing. Lenders are being prudent: house prices could easily fall further, and they want a cushion to protect themselves.

Banks are rightly refusing to increase loan sizes as a multiple of earnings: they know that this would be a recipe for disaster when interest rates eventually go up.

There is no problem in the housing market that this housing subsidy won’t make worse. The fact that Cameron cannot see that, or couldn’t care less, is truly astonishing.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath